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This document is a confidential memorandum regarding an offering of shares in Axonic Credit Opportunities Overseas Fund, Ltd., a Cayman Islands exempted company. The memorandum provides details on the fund's structure, investment strategy, minimum investment amount, and regulatory status. It notes that the shares are speculative and intended for experienced investors, and that the fund has claimed exemption from US commodity pool operator registration requirements.
This document is a confidential memorandum regarding an offering of shares in Axonic Credit Opportunities Overseas Fund, Ltd., a Cayman Islands exempted company. The memorandum provides details on the fund's structure, investment strategy, minimum investment amount, and regulatory status. It notes that the shares are speculative and intended for experienced investors, and that the fund has claimed exemption from US commodity pool operator registration requirements.
This document is a confidential memorandum regarding an offering of shares in Axonic Credit Opportunities Overseas Fund, Ltd., a Cayman Islands exempted company. The memorandum provides details on the fund's structure, investment strategy, minimum investment amount, and regulatory status. It notes that the shares are speculative and intended for experienced investors, and that the fund has claimed exemption from US commodity pool operator registration requirements.
October 2013 THIS CONFIDENTIAL EXPLANATORY MEMORANDUM (THIS MEMORANDUM) IS SUBMITTED TO YOU ON A CONFIDENTIAL BASIS SOLELY IN CONNECTION WITH YOUR CONSIDERATION OF AN INVESTMENT IN COMMON SHARES OF AXONIC CREDIT OPPORTUNITIES OVERSEAS FUND, LTD., A CAYMAN ISLANDS EXEMPTED COMPANY (THE FUND). DUE TO THE CONFIDENTIAL NATURE OF THIS MEMORANDUM, ITS USE FOR ANY OTHER PURPOSE MIGHT INVOLVE LEGAL CONSEQUENCES. CONSEQUENTLY, THIS MEMORANDUM MAY NOT BE REPRODUCED IN WHOLE OR IN PART, AND MAY NOT BE DELIVERED TO ANY PERSON (OTHER THAN YOUR FINANCIAL ADVISOR) WITHOUT THE PRIOR WRITTEN CONSENT OF THE FUNDS DIRECTORS. Memorandum Copy Number:__________ OO238802 ii Offer for sale of one class of common shares, par value $0.01 (U.S.) per share (Common Shares or Shares) (such term includes all classes and series of Common Shares, unless otherwise indicated), of Axonic Credit Opportunities Overseas Fund, Ltd., an exempted company incorporated and existing under the laws of the Cayman Islands (the Fund). All Investable Assets of the Fund are invested through a master-feeder fund structure in Axonic Credit Opportunities Master Fund, L.P., a Cayman Islands exempted limited partnership. (Investable Assets are all assets other than short-term assets held for pending contribution or distribution.) The required minimum initial subscription (which is subject to change in the sole discretion of the Board of Directors of the Fund (the "Directors") but not below $100,000 (U.S.) or such other amount as may be specified under Cayman Islands law from time to time) is currently $1,000,000 (U.S.). Price: Initially, $1,000 (U.S.) per Common Share and thereafter at the then Offering Price (as defined in Section 13) per Common Share.
The Common Shares are speculative securities intended for a limited number of experienced and sophisticated investors. Common Shares will not be offered to persons who are members of the public in the Cayman Islands (which does not include an exempted or ordinary non-resident company in the Cayman Islands). Common Shares of the Fund are intended to be offered to persons who are neither citizens nor residents of the United States and to a limited number of U.S. investors, consisting primarily of qualified pension, profit sharing and other retirement trusts, charities and other tax-exempt investors. THIS CONFIDENTIAL EXPLANATORY MEMORANDUM (THE "MEMORANDUM") HAS BEEN PREPARED IN CONNECTION WITH THE OFFER AND SALE OUTSIDE OF THE UNITED STATES, ITS TERRITORIES OR POSSESSIONS OF COMMON SHARES OF THE FUND TO PERSONS WHO ARE NOT MEMBERS OF THE PUBLIC IN THE CAYMAN ISLANDS AND WHO ARE NEITHER CITIZENS NOR RESIDENTS OF THE UNITED STATES OF AMERICA AND WITHIN THE UNITED STATES TO A LIMITED NUMBER OF UNITED STATES INVESTORS CONSISTING PRIMARILY OF PENSION AND PROFIT SHARING TRUSTS, CHARITIES AND OTHER TAX-EXEMPT INVESTORS. THIS MEMORANDUM MAY NOT BE REPRODUCED. AXONIC CAPITAL LLC (THE INVESTMENT MANAGER) FILED A CLAIM OF EXEMPTION FROM REGISTRATION AS A COMMODITY POOL OPERATOR (CPO) WITH THE UNITED STATES COMMODITY FUTURES TRADING COMMISSION (CFTC) IN CONNECTION WITH PRIVATE INVESTMENT FUNDS WHOSE PARTICIPANTS ARE ACCREDITED INVESTORS, AS DEFINED IN REGULATION D UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), CERTAIN FAMILY TRUSTS AND CERTAIN PERSONS AFFILIATED WITH THE INVESTMENT MANAGER. AT ALL TIMES, THE FUND WILL UTILIZE FUTURES SUCH THAT EITHER (1) NO MORE THAN 5% OF ITS ASSETS ARE USED TO ESTABLISH COMMODITY INTEREST POSITIONS OR (2) THE NOTIONAL VALUE OF ITS COMMODITY INTEREST POSITIONS DOES NOT EXCEED 100% OF THE FUNDS LIQUIDATION VALUE. UNLIKE A REGISTERED CPO, THE INVESTMENT MANAGER IS NOT REQUIRED TO DELIVER A DISCLOSURE DOCUMENT AND A CERTIFIED ANNUAL REPORT TO PARTICIPANTS IN THE FUND. THE CFTC HAS NOT REVIEWED OR APPROVED THIS OFFERING OR ANY DISCLOSURE DOCUMENT FOR THE FUND.
NO REGISTRATION STATEMENT HAS BEEN FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES AUTHORITY WITH RESPECT TO THIS OFFERING. THE COMMON SHARES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE ACT, AND MAY ONLY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED DIRECTLY OR INDIRECTLY TO ANY UNITED STATES CITIZEN OR RESIDENT OR TO ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY CHARTERED OR ORGANIZED UNDER THE LAWS OF ANY J URISDICTION IN THE UNITED STATES OF AMERICA, ITS TERRITORIES OR POSSESSIONS IN PRIVATE PLACEMENTS EXEMPT FROM REGISTRATION PURSUANT TO REGULATION D OF THE ACT. OO238802 iii THE COMMON SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THESE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DISTRIBUTION OF THIS MEMORANDUM AND THE OFFER AND SALE OF THE COMMON SHARES IN CERTAIN J URISDICTIONS MAY BE RESTRICTED BY LAW. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY COMMON SHARES IN ANY J URISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN ANY J URISDICTION. NO ACTION HAS BEEN OR WILL BE TAKEN TO PERMIT A PUBLIC OFFERING IN ANY J URISDICTION WHERE ACTION WOULD BE REQUIRED FOR THAT PURPOSE. ACCORDINGLY, THE COMMON SHARES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, AND THIS MEMORANDUM MAY NOT BE DISTRIBUTED, IN ANY J URISDICTION, EXCEPT IN ACCORDANCE WITH THE LEGAL REQUIREMENTS APPLICABLE IN SUCH J URISDICTION. PURCHASERS SHOULD INFORM THEMSELVES AS TO THE LEGAL REQUIREMENTS WITHIN THEIR OWN COUNTRIES FOR THE PURCHASE OF COMMON SHARES AND TO ANY TAXATION OR EXCHANGE CONTROL LEGISLATION APPLICABLE TO THEM. AN INVESTMENT IN THE FUND MAY BE DEEMED SPECULATIVE AND IS NOT INTENDED AS A COMPLETE INVESTMENT PROGRAM. IT IS DESIGNED ONLY FOR EXPERIENCED AND SOPHISTICATED PERSONS WHO ARE ABLE TO BEAR THE RISK OF THE SUBSTANTIAL IMPAIRMENT OR LOSS OF THEIR INVESTMENT IN THE FUND. PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS LEGAL, INVESTMENT OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS PERSONAL COUNSEL, ACCOUNTANTS AND OTHER ADVISERS AS TO THE LEGAL, TAX, ECONOMIC AND RELATED ASPECTS OF THE INVESTMENT DESCRIBED HEREIN AND AS TO ITS SUITABILITY FOR SUCH INVESTOR. THE FUND AND AXONIC CREDIT OPPORTUNITIES MASTER FUND, L.P. (THE "MASTER FUND") ARE REGULATED MUTUAL FUNDS FOR THE PURPOSES OF THE MUTUAL FUNDS LAW (REVISED) OF THE CAYMAN ISLANDS. THE FUND AND THE MASTER FUND ARE REGISTERED WITH THE CAYMAN ISLANDS MONETARY AUTHORITY (THE MONETARY AUTHORITY) PURSUANT TO SECTION 4(3) OF THAT LAW AND THE PRESCRIBED DETAILS IN RESPECT OF, AND A COPY OF THIS MEMORANDUM HAVE BEEN FILED WITH THE MONETARY AUTHORITY. SUCH REGISTRATIONS DO NOT IMPLY THAT THE MONETARY AUTHORITY OR ANY OTHER REGULATORY AUTHORITY IN THE CAYMAN ISLANDS HAS APPROVED THIS MEMORANDUM OR THE OFFERING OF COMMON SHARES HEREUNDER. FOR A SUMMARY OF THE CONTINUING REGULATORY OBLIGATIONS OF THE FUND AND THE MASTER FUND AND A DESCRIPTION OF THE REGULATORY POWER OF THE MONETARY AUTHORITY, SEE SECTION 19 OF THIS MEMORANDUM. THE FUNDS MEMORANDUM OF ASSOCIATION PROVIDES THAT THE OBJ ECTS FOR WHICH THE FUND IS ESTABLISHED ARE UNRESTRICTED AND THE FUND SHALL HAVE FULL POWER AND AUTHORITY TO CARRY OUT ANY OBJ ECT NOT PROHIBITED BY ANY LAW AS PROVIDED BY SECTION 7(4) OF THE COMPANIES LAW (REVISED) OF THE CAYMAN ISLANDS. THE COMMON SHARES ARE OFFERED ONLY ON THE BASIS OF THE INFORMATION CONTAINED IN THIS MEMORANDUM. ANY FURTHER INFORMATION OR REPRESENTATIONS GIVEN OR MADE BY ANY DEALER, BROKER OR OTHER PERSON SHOULD BE DISREGARDED AND ACCORDINGLY SHOULD NOT BE RELIED UPON. NO PERSON HAS BEEN AUTHORISED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OF THE COMMON SHARES OTHER THAN THOSE CONTAINED IN THIS MEMORANDUM AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS OO238802 iv HAVING BEEN AUTHORISED BY THE FUND, THE DIRECTORS, THE INVESTMENT MANAGER, THE CUSTODIAN OR THE ADMINISTRATOR (ALL AS DEFINED HEREIN). NEITHER THE DELIVERY OF THIS MEMORANDUM NOR THE ISSUE OF COMMON SHARES WILL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION OR CONSTITUTE ANY REPRESENTATION THAT THE AFFAIRS OF THE FUND HAVE NOT CHANGED SINCE THE DATE HEREOF. THE DIRECTORS WHOSE NAMES APPEAR IN THIS MEMORANDUM ACCEPT RESPONSIBILITY FOR THE INFORMATION CONTAINED IN THIS DOCUMENT. TO THE BEST OF THE KNOWLEDGE AND BELIEF OF THE DIRECTORS (WHO HAVE TAKEN ALL REASONABLE CARE TO ENSURE THAT SUCH IS THE CASE) THE INFORMATION CONTAINED IN THIS DOCUMENT IS IN ACCORDANCE WITH THE FACTS AND DOES NOT OMIT ANYTHING LIKELY TO AFFECT THE IMPORT OF SUCH INFORMATION. WHENEVER THE MASCULINE OR FEMININE GENDER IS USED IN THIS MEMORANDUM, IT SHALL EQUALLY, WHERE THE CONTEXT PERMITS, INCLUDE THE OTHER, AS WELL AS INCLUDE ENTITIES. FOR CAYMAN ISLANDS PROSPECTIVE INVESTORS: THE FUND MAY NOT MAKE AN INVITATION TO THE PUBLIC IN THE CAYMAN ISLANDS TO SUBSCRIBE FOR THE COMMON SHARES UNLESS THE FUND IS LISTED ON THE CAYMAN ISLANDS STOCK EXCHANGE. "PUBLIC" FOR THESE PURPOSES SHALL HAVE THE SAME MEANING AS "PUBLIC IN THE ISLANDS", AS DEFINED IN THE MUTUAL FUNDS LAW (REVISED). HOWEVER, COMMON SHARES MAY BE BENEFICIALLY OWNED BY PERSONS RESIDENT, DOMICILED, ESTABLISHED, INCORPORATED OR REGISTERED PURSUANT TO THE LAWS OF THE CAYMAN ISLANDS. THE FUND, HOWEVER, WILL NOT UNDERTAKE BUSINESS WITH THE PUBLIC IN THE CAYMAN ISLANDS OTHER THAN SO FAR AS MAY BE NECESSARY FOR THE CARRYING ON OF THE BUSINESS OF THE COMPANY EXTERIOR TO THE CAYMAN ISLANDS. FOR FLORIDA, U.S.A. RESIDENTS: THE FOLLOWING NOTICE IS PROVIDED TO SATISFY THE NOTIFICATION REQUIREMENT SET FORTH IN SUBSECTION 11(A)(5) OF SECTION 517.061 OF THE FLORIDA STATUTES, 1987, AS AMENDED: IF THE FLORIDA INVESTOR IS NOT A BANK, A TRUST COMPANY, A SAVINGS INSTITUTION, AN INSURANCE COMPANY, A DEALER, AN INVESTMENT COMPANY AS DEFINED IN THE INVESTMENT COMPANY ACT, A PENSION OR PROFIT-SHARING TRUST, OR A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE ACT), THE FLORIDA INVESTOR ACKNOWLEDGES THAT ANY SALE OF AN INTEREST TO THE FLORIDA INVESTOR IS VOIDABLE BY THE FLORIDA INVESTOR EITHER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY THE FLORIDA INVESTOR TO THE ISSUER, OR AN AGENT OF THE ISSUER, OR WITHIN THREE (3) DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO THE FLORIDA INVESTOR, WHICHEVER OCCURS LATER. FOR NEW HAMPSHIRE, U.S.A. RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, OO238802 v CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
RESTRICTIONS ON SALES IN SELECTED J URISDICTIONS
Argentina This prospectus includes a private invitation to invest in securities. It is addressed only to you on an individual, exclusive, and confidential basis, and its unauthorised copying, disclosure, or transfer by any means whatsoever is absolutely and strictly forbidden. The Fund will not provide copies of this prospectus, or provide any kind of advice or clarification, or accept any offer or commitment to purchase the securities herein referred to from persons other than the intended recipient. The offer herein contained is not a publi c offering, and as such it is not and will not be regi stered with, or authorised by, the Comisin Nacional de Valores. The information contained herein has been compiled by the Investment Manager, who assumes the sole responsibility for the accuracy of the data herein disclosed. Brazil The shares in the Fund may not be offered or sold to the public in Brazil. Accordingly, the shares in the Fund have not been nor will be registered with the Brazilian Securities Commission - CVM nor have they been submitted to the foregoing agency for approval. Documents relating to the shares in the Fund, as well as the information contained therein, may not be supplied to the public in Brazil, as the offering of shares in the Fund is not a public offering of securities in Brazil, nor used in connection with any offer for subscription or sale of securities to the public in Brazil. Canada This confidential Canadian Offering Memorandum (this Canadian Offering Memorandum) pertains to the offering of the Shares described in this Canadian Offering Memorandum only in those jurisdictions and to those persons where and to whom they may be lawfully offered for sale, and only by persons permitted to sell such Shares. This Canadian Offering Memorandum is not, and under no circumstances is to be construed as, an advertisement or a public offering of the Shares described in this Canadian Offering Memorandum in Canada. No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the Shares described in this Canadian Offering Memorandum, and any representation to the contrary is an offence. Chile ESTA OFERTA PRIVADA SE INICIA EL DA DICIEMBRE 2010 Y SE ACOGE A LAS DISPOSICIONES DE LA NORMA DE CARCTER GENERAL N 336 DE LA SUPERINTENDENCIA DE VALORES Y SEGUROS; ESTA OFERTA VERSA SOBRE VALORES NO INSCRITOS EN EL REGISTRO DE VALORES O EN EL REGISTRO DE VALORES EXTRANJ EROS QUE LLEVA LA SUPERINTENDENCIA DE VALORES Y SEGUROS, POR LO QUE TALES VALORES NO ESTN SUJ ETOS A LA FISCALIZACIN DE STA; POR TRATAR DE VALORES NO INSCRITOS NO EXISTE LA OBLIGACIN POR PARTE DEL EMISOR DE ENTREGAR EN CHILE INFORMACIN PBLICA RESPECTO DE LOS VALORES SOBRE LOS QUE VERSA ESTA OFERTA; ESTOS VALORES NO PODRN SER OBJ ETO DE OFERTA PBLICA MIENTRAS NO SEAN INSCRITOS EN EL REGISTRO DE VALORES CORRESPONDIENTE. OO238802 vi Israel This Memorandum has not been approved by the Israel Securities Authority and will only be distributed to Israeli residents in a manner that will not constitute "an offer to the public" under sections 15 and 15a of the Israel Securities Law, 5728-1968 ("the Securities Law") or section 25 of the J oint Investment Trusts Law, 5754-1994 ("the J oint Investment Trusts Law "), as applicable. The Shares are being offered to a limited number of investors (35 investors or fewer during any given 12 month period) and/or those categories of investors listed in the First Addendum ("the Addendum") to the Securities Law, ("Sophisticated Investors") namely joint investment funds or mutual trust funds, provident funds, insurance companies, banking corporations (purchasing Shares for themselves or for clients who are Sophisticated Investors), portfolio managers (purchasing Shares for themselves or for clients who are Sophisticated Investors), investment advisors or investment marketers (purchasing Shares for themselves), members of the Tel-Aviv Stock Exchange (purchasing Shares for themselves or for clients who are Sophisticated Investors), underwriters (purchasing Shares for themselves), venture capital funds engaging mainly in the capital market, an entity which is wholly-owned by Sophisticated Investors, corporations, other than formed for the specific purpose of an acquisition pursuant to an offer, with a shareholders equity in excess of NIS 50 million, and individuals in respect of whom the terms of item 9 in the Schedule to the Investment Advice Law hold true investing for their own account, each as defined in the said Addendum, as amended from time to time, and who in each case have provided written confirmation that they qualify as Sophisticated Investors, and that they are aware of the consequences of such designation and agree thereto; in all cases under circumstances that will fall within the private placement or other exemptions of the J oint Investment Trusts Law, the Securities Law and any applicable guidelines, pronouncements or rulings issued from time to time by the Israel Securities Authority. This Memorandum may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Any offeree who purchases a Share is purchasing such Share for its own benefit and account and not with the aim or intention of distributing or offering such Share to other parties (other than, in the case of an offeree which is a Sophisticated Investor by virtue of it being a banking corporation, portfolio manager or member of the Tel-Aviv Stock Exchange, as defined in the Addendum, where such offeree is purchasing Share for another party which is a Sophisticated Investor). Nothing in this Memorandum should be considered investment advice or investment marketing as defined in the Regulation of Investment Counselling, Investment Marketing and Portfolio Management Law, 5755-1995. Investors are encouraged to seek competent investment counselling from a locally licensed investment counsel prior to making the investment. As a prerequisite to the receipt of a copy of this Memorandum a recipient may be required by the Fund to provide confirmation that it is a Sophisticated Investor purchasing Shares for its own account or, where applicable, for other Sophisticated Investors. This Memorandum does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Shares offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation. Venezuel a Under the laws of the Repblica Bolivariana de Venezuela (Venezuela), no offer of the securities described in this Memorandum may take place in Venezuela. This Memorandum may not be publicly distributed within the territory of Venezuela.
OO238802 vii TABLE OF CONTENTS Page
1. SUMMARY OF TERMS ................................................................................................................... 1 2. DIRECTORY .................................................................................................................................... 6 3. INTRODUCTION .............................................................................................................................. 7 4. INVESTMENT PROGRAM .............................................................................................................. 7 5. MANAGEMENT ............................................................................................................................. 11 6. ORGANIZATIONAL STRUCTURE OF THE FUND ....................................................................... 11 7. INVESTMENT MANAGEMENT AGREEMENT; LIMITED PARTNERSHIP AGREEMENT ................................................................................................................................ 12 8. CERTAIN RISKS ............................................................................................................................ 16 9. BROKERAGE AND CUSTODY ..................................................................................................... 26 10. PAYMENTS TO SPONSORS OF THE FUND............................................................................... 27 11. EXPENSES .................................................................................................................................... 27 12. DESCRIPTION OF THE FUNDS COMMON SHARES ................................................................ 28 13. OFFERING OF COMMON SHARES ............................................................................................. 31 14. REDEMPTIONS ............................................................................................................................. 32 15. TAXATION AND ERISA MATTERS .............................................................................................. 36 16. BOARD OF DIRECTORS .............................................................................................................. 42 17. ADMINISTRATOR ......................................................................................................................... 43 18. FISCAL YEAR AND FISCAL PERIODS; FINANCIAL STATEMENTS; AUDITORS ..................... 44 19. GENERAL COMMENTS ................................................................................................................ 44 20. PROCEDURE TO PURCHASE COMMON SHARES ................................................................... 47
OO238802 1 1. SUMMARY OF TERMS The following is a summary of the more detailed information contained elsewhere in this Confidential Explanatory Memorandum (this Memorandum) and in other documents relating to Axonic Credit Opportunities Overseas Fund, Ltd. and is qualified in its entirety by reference to such information and other documents. The Fund Axonic Credit Opportunities Overseas Fund, Ltd. (the Fund) is an exempted company incorporated and existing under the laws of the Cayman Islands. The Fund invests all of its Investable Assets through a master-feeder fund structure in Axonic Credit Opportunities Master Fund, L.P. (the Master Fund), a Cayman Islands exempted limited partnership. Investable Assets are all assets other than short-term assets held for pending contribution or distribution. Concurrently with the offering of common shares of the Fund (the "Common Shares"), Axonic Credit Opportunities Fund, LP (the U.S. Partnership), a Delaware limited partnership, offers limited partnership interests. The U.S. Partnership was originally formed in October 2008 as a Delaware limited liability company with a private equity structure, and made investments directly outside of the Master Fund. As of J anuary 1, 2011, the U.S. Partnership was restructured such that it has substantially the same structure as the Fund and invests its assets in the Master Fund. Unless otherwise indicated, references in this Memorandum to the investment activities of the Fund mean the investment activities of the Fund through the Master Fund, and other references to the Fund may, to the extent appropriate, include both the Fund and the Master Fund. Investors in the Fund or the U.S. Partnership who were invested in the U.S. Partnership prior to J anuary 1, 2011 and initial investors who were invested in the Fund on or prior to March 1, 2011 are subject to a different Management Fee and Incentive Allocation (each as defined below). Investment Objective and Strategy The Funds principal investment objective is to achieve a positive return on capital by primarily investing in single credit and structured credit products, including public and private U.S. and non-U.S. mortgage-backed securities and consumer-receivable-backed securities including asset-backed securities (ABS), commercial mortgage securities (CMBS), collateralized debt obligations (CDO), collateralized loan obligations (CLO), insurance-linked securities (ILS), whole loans, whole loan mortgages, high-yield and corporate bonds, and various single-name and index credit default swaps. In addition, various over the counter and exchange traded derivatives, including various swaps, options, swaptions, futures and forward agreements (both listed and over-the-counter) on various financial instruments, equity securities, government securities, treasuries, currencies and commodities may be used for speculative or hedging purposes. Positions may be leveraged, and may be financed by various sources of funding, including bank lines, margin trading, short positions and repurchase arrangements. Investment Manager The investment manager of the Fund and the Master Fund is Axonic Capital LLC (the Investment Manager), a Delaware limited liability company that is registered as an investment adviser with the U.S. Securities and Exchange Commission. The Investment Manager is OO238802 2 responsible for managing the portfolios of the Fund and the Master Fund and for certain administrative matters. Clayton DeGiacinto is the managing member of the Investment Manager (the Managing Member). The Managing Member has made a significant investment in the Fund or the U.S. Partnership. The General Partner Axonic Capital GP LLC, a Delaware limited liability company, is the general partner (the "General Partner") of the U.S. Partnership and the Master Fund. The Managing Member is also the managing member of the General Partner. Risk Factors An investment in the Fund involves significant risks and is suitable only for persons who can bear the economic risk of the loss of their entire investment, who have a limited need for liquidity in their investment and who meet the conditions set forth in this Memorandum. There can be no assurances that the Fund will achieve its investment objective. Investment in the Fund carries with it the inherent risks associated with investments in structured credit securities and the credit markets in general, as well as additional risks including, but not limited to, the use of leverage and investing in securities and loans of high yield or distressed issuers. Each prospective shareholder should carefully review this Memorandum and the documents referred to herein before deciding to invest in the Fund. Expenses The Investment Manager is responsible for and pays all overhead expenses of an ordinary and recurring nature such as rent, its compliance expenses, supplies, secretarial expenses, stationery, charges for furniture and fixtures, employee insurance, payroll taxes and compensation of employees. The Investment Manager bore the Funds organizational expenses. The Fund bears all other expenses including the Management Fee (as defined below), legal, accounting (including third-party accounting services), audit, and other professional fees and expenses, administrator fees and expenses, research expenses (including research-related travel), expenses of third-party valuation agents (if any), investment expenses such as interest on margin accounts and other indebtedness, borrowing charges on securities sold short, commissions, custodial fees, bank service fees, directors fees and expenses, insurance (including D&O and E&O insurance), Fund compliance expenses (including expenses related to various filings (or portions thereof) the Investment Manager is required to make as a result of managing the Partnerships portfolio, including Form PF) and other expenses related to the purchase, sale, preservation or transmittal of Fund assets or to the operation or administration of the Fund. As noted above, the Fund invests its Investable Assets in the Master Fund. Each investment entity, including the Fund, that invests in the Master Fund indirectly bears the expenses of the Master Fund pro rata based on its interest in the Master Fund. It is anticipated that virtually all expenses will be incurred by the Master Fund and therefore expenses incurred by the Fund should be relatively small. The Offering The Fund is offering one class of common shares (the Common Shares), issuable in multiple series, although the Board of Directors reserves the right to issue additional classes and sub-classes of Common Shares, with different terms and conditions, and in different OO238802 3 currencies. The minimum initial investment is $1,000,000 (U.S.), subject to waiver in the sole discretion of the directors of the Fund (the Directors), but not below $100,000 (U.S.) or such other amount as may be specified under Cayman Islands law from time to time. Common Shares will be offered only to experienced and sophisticated investors who are neither citizens nor residents of the United States and to a limited number of United States tax-exempt investors. Common Shares will not be offered to persons who are members of the public in the Cayman Islands. The Fund may admit new shareholders or accept additional subscriptions from existing shareholders on the first day of each month and at such other times as the Directors will, in their sole discretion, permit. Management Fee; Incenti ve Al location Management Fee
The Master Fund will pay the Investment Manager a monthly management fee in arrears (the Management Fee), in an amount equal to a percentage (the Management Fee Percentage) of the net asset value of each Common Share (without accrual of the Incentive Allocation (defined below), if any). The Management Fee Percentage will be based on the net aggregate subscription made by each particular shareholder and will be determined as follows:
Shareholder s Net Aggregate Subscription Management Fee Percentage Less than $75 million 0.1667% (i.e., 2.00% per annum) Less than $150 million but greater than or equal to $75 million 0.1458% (i.e., 1.75% per annum) Greater than or equal to $150 million 0.1250% (i.e., 1.50% per annum)
Incentive Allocation
At the end of each fiscal year, an amount equal to a percentage (the Incentive Allocation Percentage) of the net profits (including realized and unrealized gains and losses) allocated to each Common Share will be reallocated to the applicable capital account of the General Partner in the Master Fund (the Incentive Allocation), subject to a loss carryforward provision. The Incentive Allocation Percentage will be based on the net aggregate subscription made by each particular shareholder and will be determined as follows:
Shareholder s Net Aggregate Subscription Incentive Allocation Percentage Less than $75 million 20.00% Greater than or equal to $75 million 17.50%
General
When determining the Management Fee Percentage, a shareholders net aggregate subscription will be measured as of the first Business Day of each month. When determining the Incentive Allocation Percentage, a shareholders net aggregate subscription will be OO238802 4 measured as of a shareholders initial subscription date and thereafter as of the first Business Day of J anuary and J uly of each year.
Solely for purposes of determining the amount of a shareholders net aggregate subscription, any redemption proceeds distributed to a shareholder will first reduce the amount of profits attributable to a shareholders Common Shares, and thereafter will reduce its subscription amounts.
Redemptions Upon at least 90 days prior written notice to the Fund, a shareholder may redeem any of its Common Shares as of the last day of each calendar quarter; provided, however, that any Common Shares redeemed within the first twelve months after such Common Shares were purchased will be subject to a redemption fee of up to 5% of the amount redeemed, payable to the Master Fund. For example, a shareholder that invests on J anuary 1, 2013 will first be able to redeem its Common Shares without a redemption fee on December 31, 2013. Notwithstanding the foregoing, a shareholder may redeem any of its Common Shares as of the last day of each calendar quarter upon 60 days prior written notice to the Fund; provided, however, that such redemption will be subject to an additional redemption fee of up to 5% of the amount redeemed, payable to the Master Fund. Redemptions will be processed on a first in first out basis. For the avoidance of doubt, a redemption of Common Shares requested on only 60 days prior written notice and within the first twelve months after such Common Shares were purchased will be subject to an aggregate redemption charge of 10%. Notwithstanding the foregoing, in the event aggregate redemption requests from shareholders in the Fund and limited partners in the U.S. Partnership (collectively, the Investors) as of any redemption date exceed 25% of the net asset value of the Master Fund (the Redemption Limit), the amount of each redeeming Investors redemption may, in the sole discretion of the Advisory Committee (as defined below), be reduced so that each such Investor will receive an amount (the Redeemable Amount) equal to (i) the Redemption Limit multiplied by (ii) a fraction, the numerator of which is the value of the Investors indirect interest in the Master Fund and the denominator of which is the aggregate amount invested by all Investors that have requested a redemption on such redemption date. If an Investors Redeemable Amount exceeds the amount requested by such Investor, the Investor will only receive the amount requested and each Investor whose requested redemption was reduced will receive an additional amount equal to (a) such excess multiplied by (b) a fraction, the numerator of which is the value of the Investors indirect interest in the Master Fund and the denominator of which is the aggregate amount invested by all Investors eligible to receive a portion of such excess that have requested a redemption on such redemption date. If an Investors redemption is reduced by the Redemption Limit, the balance will be paid as of the next redemption date (i.e., the last day of the next calendar quarter) subject again to the Redemption Limit, and in any event will be paid in full within four consecutive redemption dates (e.g., if an Investor submits a timely redemption request for a redemption on December 31, 2012 and its redemption is reduced by OO238802 5 the Redemption Limit, the Investor will be paid in full no later than September 30, 2013). Redemption requests carried over from previous redemption dates will not have priority over new redemption requests. The determination by the Advisory Committee as to the applicability of the Redemption Limit shall be made separately as of each redemption date in which the Redemption Limit is reached, based on whether imposition of the Redemption Limit as of the particular redemption date is in the best interest of the Fund, or if not doing so would prejudice the remaining Investors. A determination by the Advisory Committee for a particular redemption date will have no impact on its determination for other redemption dates. A partial redemption of a shareholders holding of Common Shares will generally be paid within 30 days after the redemption date. Upon a shareholders complete redemption of its holding of Common Shares, at least 95% of the amount of the estimated value of the redeemed Common Shares as of the redemption date will be paid within 30 Business Days after the redemption date. The balance, if any, will be paid promptly after the Fund has determined the final net asset value of the Common Shares as of the redemption date (which may be after the completion of the audit of the Fund for such year), with interest thereon as further described herein. A Business Day is any day on which banks are open in New York and the Cayman Islands. ERISA Matters It is anticipated that, at various times, the assets of the Fund and the Master Fund may be deemed plan assets subject to Section 4975 of the Internal Revenue Code of 1986, as amended, but not subject to Title I of the Employee Retirement Income Security Act of 1974, as amended. Reports Each shareholder will receive reports about the performance of the Fund quarterly and audited year-end financial statements annually. Fiscal Year December 31. OO238802 6 2. DIRECTORY Registered Office of the Fund Axonic Credit Opportunities Overseas Fund, Ltd. c/o Ogier Fiduciary Services (Cayman) Limited 89 Nexus Way Camana Bay Grand Cayman KY1-9007 Cayman Islands
Admini strator GlobeOp Financial Services (Cayman) Limited 45 Market Street, Suite 3205, 2nd Floor Gardenia Court, Camana Bay Grand Cayman KY1-9003 Cayman Islands
Investment Manager Axonic Capital LLC 390 Park Avenue,15 th Floor New York, New York 10022 United States of America
Auditors Rothstein Kass & Company (Cayman) 27 Hospital Road P.O. Box 1748 Grand Cayman KY1-1109 Cayman Islands
Prime Broker and Custodian J P Morgan 383 Madison Avenue New York, New York 10179 United States of America
United States Counsel Seward & Kissel LLP One Battery Park Plaza New York, New York 10004 United States of America
Cayman Islands Counsel Ogier 89 Nexus Way Camana Bay Grand Cayman KY1-9007 Cayman Islands
Written inquiries relating to the Fund should be addressed to Axonic Overseas Fund, Ltd. at the address of its Administrator set forth above. OO238802
7 3. INTRODUCTION Axonic Credit Opportunities Overseas Fund, Ltd. (the Fund) is an exempted company incorporated in the Cayman Islands on November 12, 2010 for the purpose of investing its assets in accordance with the investment program set forth in this Confidential Explanatory Memorandum (this Memorandum). The Fund invests all of its Investable Assets through a master-feeder fund structure in Axonic Credit Opportunities Master Fund, L.P. (the Master Fund), a Cayman Islands exempted limited partnership. Investable Assets are all assets other than short-term assets held for pending contribution or distribution. Axonic Capital LLC (the Investment Manager), a Delaware limited liability company, is the investment manager of the Fund and the Master Fund. The Investment Manager is responsible for managing the portfolios of the Fund and the Master Fund and for certain administrative matters. Other investment entities may be also formed in the future to invest in the Master Fund. Clayton DeGiacinto is the managing member of the Investment Manager (the Managing Member). GlobeOp Financial Services (Cayman) Limited is the administrator of the Fund and the Master Fund (the Administrator). Concurrently with the offering of common shares of the Fund (the "Common Shares"), Axonic Credit Opportunities Fund, LP (the U.S. Partnership), a Delaware limited partnership, offers limited partnership interests. The U.S. Partnership was originally formed in October 2008 as a Delaware limited liability company with a private equity structure and made investments directly outside of the Master Fund. As of J anuary 1, 2011, the U.S. Partnership has been restructured such that it has substantially the same structure as the Fund and will invest its assets in the Master Fund. Unless otherwise indicated, references in this Memorandum to the investment activities of the Fund mean the investment activities of the Fund through the Master Fund, and other references to the Fund may, to the extent appropriate, include both the Fund and the Master Fund. In addition, unless otherwise indicated, references in this Memorandum to the Common Shares include all classes, sub-classes and series of Common Shares. Investors in the Fund or the U.S. Partnership who were invested in the U.S. Partnership prior to J anuary 1, 2011 and initial investors who were invested in the Fund on or prior to March 1, 2011 are subject to a different Management Fee and Incentive Allocation (each as defined below). This Memorandum sets forth the investment program of the Fund, certain material terms of the Funds Memorandum and Articles of Association, services agreements and certain other pertinent information. However, this Memorandum is not a disclosure of all of the material provisions of those documents that may be significant to a particular prospective shareholder of the Fund. Each prospective shareholder should examine this Memorandum, the Funds Memorandum and Articles of Association, services agreements and the Subscription Agreement and Revocable Proxy (the Subscription Agreement) accompanying this Memorandum in order to assure itself that the Funds investment program is satisfactory to it. Prospective shareholders are invited to review any documents relating and available to the Fund and any other matters regarding this Memorandum. All such materials are available at the office of the Administrator of the Fund, at any reasonable hour, after reasonable prior notice to the Fund. The Fund will afford prospective shareholders the opportunity to ask questions of and receive answers from its representatives concerning the terms and conditions of the offering and to obtain any additional information to the extent that the Fund possesses such information or can acquire it without unreasonable effort or expense. Prospective shareholders should consider the Fund to be a speculative investment, as it is not intended to be a complete investment program. The Fund is designed only for sophisticated persons who are able to bear the loss of their entire investment in the Fund. 4. INVESTMENT PROGRAM Investment Objective and Strategy The Funds principal investment objective is to achieve a positive return on capital by primarily investing in single credit and structured credit products, including public and private U.S. and non-U.S. OO238802
8 mortgage-backed securities (MBS) and consumer-receivable-backed securities including asset-backed securities (ABS), commercial mortgage securities (CMBS) collateralized debt obligations (CDO), collateralized loan obligations (CLO), insurance-linked securities (ILS), whole loans, whole loan mortgages, high-yield and corporate bonds, and various single-name and index credit default swaps. In addition, various over the counter and exchange traded derivatives, including various swaps, options, swaptions, futures and forward agreements (both listed and over-the-counter) on various financial instruments, equity securities, government securities, treasuries, currencies and commodities may be used for investment or hedging purposes. Positions may be leveraged, and may be financed by various sources of funding, including bank lines, margin trading, short positions and repurchase arrangements. The Investment Managers investment strategy relies primarily on three primary components: (i) the Investment Managers ability to identify and purchase appropriate securities, (ii) an intensive analytical approach to risk management and portfolio construction, and (iii) the Investment Managers ability to construct a blended portfolio of risk-based assets and hedges with a return profile over time that demonstrates increased total return while mitigating discrete risks. The Investment Manager carries out the Funds investment process and risk control procedures by applying various valuation tools including the Investment Managers own risk and valuation pricing engine. In particular, the Investment Manager believes that attractive risk-adjusted returns can be produced by systematically discovering misvalued credit risk, structural nuances and other opportunities in single credit and structured credit products. The Investment Manager will attempt to take advantage of the inefficiencies that result from, among other things: (i) inconsistency of performance across deals, issuers, and sectors; (ii) heterogeneity of securities from both a collateral and structural perspective; and (iii) structural complexity. The Investment Manager will attempt to identify and capture these opportunities and apply appropriate hedging mechanisms as necessary so that the Fund will be in a position to be profitable in both rising and declining fixed income markets. Given the distressed and at times, illiquid nature of many of the assets contemplated by the Investment Manager, the investment performance of the Fund may be considerably more volatile than that of more conventional markets. The Fund will attempt to consistently achieve attractive risk-adjusted returns through a complex bottom-up evaluation process of individual securities as well as the top-down nature of optimal portfolio construction and hedging. Mortgage-Related Securities The mortgage-related securities in which the Fund may invest typically are securities representing interests in pools of mortgage loans made by lenders such as savings and loan associations, mortgage bankers and commercial banks. These pools of mortgage loans are acquired and packaged for resale as mortgage-related securities. Specifically, these securities may include pass-through mortgage-related securities, collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs), CMO residuals, adjustable-rate mortgage securities (ARMS), stripped mortgage-related securities (SMRS), including interest-only securities (IOs) and principal-only securities (POs), mortgage servicing rights (MSR), commercial mortgage-backed securities, to be announced (TBA) mortgage-backed securities, mortgage dollar rolls and other securities that directly or indirectly represent a participation in or are secured by and payable from mortgage loans on real property and other assets. Commercial Mortgage-Backed Securities. Commercial mortgage-backed securities are securities that represent an interest in, or are secured by, mortgage loans secured by multifamily or commercial properties, such as industrial and warehouse properties, office buildings, retail space and shopping malls, and cooperative apartments, hotels and motels, nursing homes, hospitals and senior living centers. Pass-Through Mortgage-Related Securities. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment consisting of both interest and principal payments. In effect, these payments are a pass-through of the monthly payments made by the individual borrowers on their residential mortgage OO238802
9 loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying residential property, refinancing or foreclosure, net of fees or costs that may be incurred. Some mortgage-related securities, such as securities issued by the Government National Mortgage Association (GNMA), are described as modified pass-through. These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, regardless of whether or not the mortgagor actually makes the payment. Collateralized Debt Obligations. The term CDO refers to a class of debt or equity securities issued by an entity that owns a pool of assets. The payments to the holders of those CDO securities depend primarily on the cash flows generated by the assets owned by the issuer of the CDO. Collateralized Mortgage Obligations. Each class of a CMO (often referred to as a tranche) is a debt obligation secured by a pool of mortgage loans pledged as collateral that is legally required to be paid by the issuer, regardless of whether payments are actually made on the underlying mortgages. In a CMO, bonds or certificates are issued in multiple classes. Each class of a CMO is issued at a specific coupon rate and has a stated maturity or final distribution date. Collateralized Loan Obligations. CLOs are limited recourse obligations of the issuer payable solely from the cashflow obligations of the corporate issuer that represent the underlying assets. Consequently, holders of the notes must rely solely on distributions of cashflows for the payment of principal and interest on their particular notes. If distributions of cashflows are insufficient to make full payment on a particular note, no other assets are available from which to pay any deficiencies. Synthetic CDOs. A synthetic CDO typically is backed by collateral in the form of an over-the- counter derivatives contract in which a portfolio of CDOs are the reference underlying securities. CMO Residuals. CMO residuals generally represent the interests in any excess cash flow from a CMO remaining after the CMO makes required payments of principal and interest to the CMO bondholders and has paid the CMOs administrative expenses. Adjustable-Rate Mortgage Securities. Adjustable-rate mortgage securities (ARMS) bear interest at a rate determined by reference to a predetermined interest rate or index. ARMS may be secured by fixed-rate mortgages or adjustable-rate mortgages. ARMS secured by fixed-rate mortgages generally have lifetime caps on the coupon rates of the securities. The adjustable-rate mortgages that secure ARMS will frequently have caps that limit the maximum amount by which the interest rate or the monthly principal and interest payments on the mortgages may increase. Stripped Mortgage-Related Securities. SMRS usually are collateralized by a pool of mortgages or a pool of mortgage backed bonds or pass-through securities. SMRS usually are structured with two classes that receive different proportions of the principal and interest payments from the underlying assets. A common type of SMRS has one class receiving some of the interest and most of the principal, while the other class receives most of the interest and some of the principal. In the most extreme case, one class of interest-only securities (IOs) receives all of the interest payments from the underlying assets and one class of principal-only securities (POs) receives all of the principal payments from the underlying assets. Mortgage Servicing Rights. MSR are agreements involving the sale of rights to service mortgage loans. Mortgage servicing is the activity of keeping a mortgage loan current, including collecting monthly mortgage payments, forwarding principal and interest payments to the current mortgage holder (if the loan has been sold to a third party), maintaining escrow accounts, paying taxes and insurance premiums, and taking steps to collect overdue payments. Mortgage servicing may be performed by the original lender or may be sold to a third party. OO238802
10 Other Mortgage-Related Assets. Whole loans involve the direct acquisition by the Fund of unsecuritized mortgage or consumer receivables. Unlike its investments in the mortgage-related securities described above, the Fund will have beneficial and record ownership of the whole loans purchased by it. The Fund may invest in whole loans bearing either fixed or adjustable interest rates. Credit Derivatives. Credit derivatives are contracts that transfer price, spread and/or default risks of debt and other instruments from one party to another. Such instruments may include one or more debtors or indices. Payments under credit derivatives may be made during the exercise period of the contracts. Payments under many credit derivatives are triggered by credit events such as bankruptcy, default, restructuring, failure to pay, cross default or acceleration, etc. Such payments may be for notional amounts, actual losses or amounts determined by formula. Leverage and Borrowing. The Fund may borrow funds and expects to do so when deemed to be appropriate by the Investment Manager, including to enhance the Funds returns, for cash management purposes, and/or to meet redemptions that would otherwise result in the premature liquidation of investments. Accordingly, securities of the Fund may be pledged in order to borrow additional funds via a repurchase transaction (Balance Sheet Leverage). It is anticipated that the Funds gross exposure (i.e., long positions plus short positions) via Balance Sheet Leverage will not exceed 400%. The investment return of the Fund may also be leveraged with options, commodity futures contracts, short sales, swaps, forwards and other derivative instruments. While leverage presents opportunities for increasing total return, it has the effect of potentially increasing losses as well. Accordingly, any event that adversely affects the value of an investment would be magnified to the extent the investment is leveraged. The cumulative effect of the use of leverage in a market that moves adversely to the Funds investments could result in a substantial loss to the Fund, which would be greater than if leverage were not employed. Flexibility The Investment Manager intends to pursue the investment objective described above and will generally follow the outlined investment strategy for so long as such strategy is in accordance with the Funds investment objective. The Investment Manager reserves the right to formulate new strategies to carry out the investment objective of the Fund. The Fund has broad and flexible investment authority. Accordingly, the Funds assets may at any time include U.S. and non-U.S. long or short positions in: publicly traded or privately issued common stocks, investment companies (e.g., exchange traded funds), currencies, forward contracts, preferred stocks, stock warrants and rights, bonds, notes or other debentures, convertible securities, bank loans, swaps, options (purchased and sold, covered and uncovered) and other securities or financial instruments. The Fund has invested a portion of its assets in Axonic Systematic Arbitrage Master Fund, L.P., a private investment fund also managed by the Investment Manager (the ASA Fund) and the Fund may invest in other private investment funds managed by the Investment Manager (together with the ASA Fund, the Other Axonic Funds) if the Investment Manager determines that such investment is in the best interest of the Fund. The Fund will not be subject to any additional management or performance fees as a result of its investment in the Other Axonic Funds; however, the Fund will pay its pro rata share of the Other Axonic Funds expenses. The investment in the Other Axonic Funds creates a potential conflict of interest for the Investment Manager. See discussion in Section 8 under Conflicts of Interest. There can be no assurance that the Fund will achieve its investment objective. OO238802
11 5. MANAGEMENT The Investment Manager of the Fund and the Master Fund is Axonic Capital LLC, a Delaware limited liability company that is registered as an investment adviser with the U.S. Securities and Exchange Commission (the SEC). Clayton DeGiacinto is the Managing Member of the Investment Manager. The Managing Member has made a significant investment in the Fund and/or the U.S. Partnership. The biographies of Mr. DeGiacinto and key employees of the Investment Manager are set forth below. Clayton DeGiacinto, Chief Investment Officer. Prior to forming the Investment Manager, Mr. DeGiacinto was the Head of Mortgage Trading for Tower Research Capital LLC from December 2008 through December 2010. From J uly 2002 through March 2008, he was a Vice President in the Fixed Income, Currency and Commodities group at Goldman Sachs & Co. with responsibility for the hybrid and adjustable rate mortgage trading businesses, in both primary and secondary markets. Mr. DeGiacintos duties at Goldman included securitization and retention of levered credit risk and convexity risk backed by adjustable rate and negatively amortizing residential mortgages. He was also responsible for running the RMBS credit book for all prime, alt-A and negatively amortizing structures. Mr. DeGiacinto received his MBA in Finance and Statistics from the Wharton School of Business in 2002. He served as a Captain in the U.S. Army in the 25th Infantry Division (Hawaii) from 1995 to 2000 after completing the U.S. Army Ranger School, Airborne School and Air Assault Course. He received a B.S. in Mechanical Engineering from the U.S. Military Academy at West Point in 1995. Jamshed Engineer, Portfolio Manager. Prior to being a Principal of the Investment Manager, Mr. Engineer was a Vice President in the Mortgage Fund at Tower Research Capital LLC from May 2009 through December 2010. From April 2006 to May 2009, he was in the Fixed Income, Currency and Commodities group at Goldman Sachs & Co. with responsibilities for structuring, valuing and advising on diverse securitization products for both principal and third party transactions. Prior to Goldman, Mr. Engineer was at KPMG where he structured various securitization transactions in the structured products group. Mr. Engineer was at Tata TD Waterhouse and Tata Finance in Mumbai from 1999 to 2002. He received a B. Comm. in Finance and Accounting from University of Mumbai in 1999 and an MBA in Finance from the University of Southern California in 2004. Labib S. Mahfouz, Chief Operating Officer. Mr. Mahfouz joined the Investment Manager in J uly 2012 and is the Investment Managers Chief Operating Officer. Prior to joining the Investment Manager, Mr. Mahfouz was the Chief Operating Officer at Tricadia Capital Management from April 2008 through J une, 2012. Prior to Tricadia, he was the Chief Operating Officer of Barclays Capital Credit Trading business. During his ten years with Barclays, Mr. Mahfouz held various positions within the credit derivatives group, ranging from P/L and risk analysis to Emerging Market and High Grade Corporate trading. As the Credit COO, he was responsible for developing and implementing a scalable infrastructure for Barclays' Credit Derivatives and CDO Trading business. Prior to Barclays, Mr. Mahfouz spent one year with Alpha Investments, a hedge fund/family office in New York, where he was responsible for overnight trading and the development of the middle and back office operations. Previously, Mr. Mahfouz was an Associate at Bankers Trust in New York and London where he worked for the Global Markets Proprietary Trading group, responsible for global execution. Mr. Mahfouz received a B.S. in Economics and Finance from Lehigh University in 1991. 6. ORGANIZATIONAL STRUCTURE OF THE FUND All Investable Assets of the Fund are invested in the Master Fund. The U.S. Partnership also invests its assets in the Master Fund, and other investment entities may in the future invest in the Master Fund. OO238802
12 The following chart outlines the organizational structure of the Fund:
7. INVESTMENT MANAGEMENT AGREEMENT; LIMITED PARTNERSHIP AGREEMENT General Under an investment management agreement among the Investment Manager, the Fund and the Master Fund (the Management Agreement), the Investment Manager is responsible for managing the Funds investment portfolio by investing and reinvesting the assets of the Fund and the Master Fund in accordance with the objectives and policies of the Fund set forth above. Under the terms of the Management Agreement, the Master Fund will pay to the Investment Manager, for its services as investment manager, a monthly Management Fee and, under the terms of the Limited Partnership Agreement of the Master Fund, an affiliate of the Investment Manager and the general partner of the Master Fund, Axonic Capital GP LLC (the General Partner), will be allocated an annual Incentive Allocation as described below. Axonic Capital LLC (Delaware limited liability company) (i.e., the Investment Manager) Axonic Credit Opportunities Fund, LP (Delaware limited partnership) (i.e., the U.S. Partnership) Non-U.S. Investors U.S. Taxable Investors U.S. Tax- Exempt Investors Axonic Credit Opportunities Overseas Fund, Ltd. (Cayman Islands exempted company)
Portfolio Investments Axonic Capital GP LLC (Delaware limited liability company) (i.e., the General Partner) OO238802
13 Management Agreement Management Fee The Master Fund will pay the Investment Manager a monthly management fee in arrears (the Management Fee), in an amount equal to a percentage (the Management Fee Percentage) of the net asset value of each Common Share (without accrual of the Incentive Allocation (defined below), if any). The Management Fee Percentage will be based on the net aggregate subscription made by each particular shareholder and will be determined as follows:
Shareholder s Net Aggregate Subscription Management Fee Percentage Less than $75 million 0.1667% (i.e., 2.00% per annum) Less than $150 million but greater than or equal to $75 million 0.1458% (i.e., 1.75% per annum) Greater than or equal to $150 million 0.1250% (i.e., 1.50% per annum)
When determining the Management Fee Percentage, a shareholders net aggregate subscription will be measured as of the first Business Day of each month. A Business Day is any day on which banks are open in New York and the Cayman Islands. Solely for purposes of determining the amount of a shareholders net aggregate subscription, any redemption proceeds distributed to a shareholder will first reduce the amount of profits attributable to a shareholders Common Shares, and thereafter will reduce its subscription amounts. The Management Fee will be payable promptly after the last day of each month. The Management Fee will be deducted in determining the net profit or net loss of the Fund for purposes of computing the Incentive Allocation. The Management Fee for any period that is less than a month will be prorated. If additional subscriptions or redemptions are made to the Fund during a month, the Management Fee will be prorated. For the avoidance of doubt, the net subscription amount will not be adjusted during a month. The Investment Manager may, in effect through rebates, waive or reduce the Management Fee for shareholders that are principals, employees or affiliates of the Investment Manager, relatives of such persons and for certain large or strategic investors. Other Provisions of the Management Agreement The Management Agreement provides that it will continue indefinitely, provided that the Investment Manager, the Fund or the Master Fund (the IMA Parties) may terminate the Management Agreement effective at the close of business on the last day of any fiscal year by giving the other parties not less than 60 days' prior written notice. The IMA Parties may also terminate the Management Agreement effective upon any of the IMA Parties liquidating. The Fund may not terminate the Management Agreement otherwise than with the unanimous approval of the holders of all the Common Shares then outstanding other than holders of Common Shares that are employees of the Investment Manager. The Investment Manager and its principals, employees and affiliates are associated with other investment entities and may engage in investment management for others. Except to the extent necessary to perform their obligations under the Management Agreement, the Investment Manager and its members, principals, employees and affiliates are not limited or restricted from engaging in or devoting time and attention to the management of any other business, whether of a similar or dissimilar nature, or rendering services of any kind to any other corporation, firm, individual or association. See discussion in Section 8 under Conflicts of Interest. OO238802
14 Under the Management Agreement, the Fund and the Master Fund will, to the fullest extent legally permissible under the laws of the Cayman Islands, indemnify and hold harmless the General Partner, the Investment Manager, and their respective principals, members, officers, employees, agents and affiliates (each, an Indemnitee) from and against any loss, liability or expense (including, without limitation, judgments, fines, amounts paid or to be paid in settlements and reasonable attorneys' fees and expenses) incurred or suffered by an Indemnitee in connection with the good faith performance by an Indemnitee of its responsibilities to the Fund or to its shareholders; provided, however, that an Indemnitee will not be indemnified for any liability arising from losses resulting from its own gross negligence (as defined and interpreted in accordance with the laws of the State of Delaware in the United States), willful misconduct or violations of applicable law. Limited Partnership Agreement of the Master Fund General The Master Fund is an exempted limited partnership formed and existing in the Cayman Islands. The rights and duties of the General Partner and the Fund (as a limited partner of the Master Fund) are governed by the limited partnership agreement of the Master Fund (the Partnership Agreement). Certain features of the Partnership Agreement are summarized below, but reference is made to the Partnership Agreement for the complete details of its terms and conditions. Notwithstanding registration of the Master Fund as an exempted limited partnership, the Master Fund is not an entity with separate legal status in the Cayman Islands but is simply a contractual arrangement between its constituent partners. All property that is conveyed into or vested in the name of the Master Fund will be held or deemed to be held by the General Partner, in its capacity as general partner upon trust as an asset of the Master Fund in accordance with the terms of the Partnership Agreement. Any debt or obligation incurred by the General Partner in the conduct of the business of the Master Fund will be a debt and obligation of the Master Fund and the General Partner will be liable for such debt to the extent that the Master Fund has insufficient assets.
As a general matter, limited partners (including the Fund) in an exempted limited partnership will not be liable for the debts and obligations of the Master Fund, except (i) to the extent of their contributions, (ii) if they become involved in the management or conduct of the business of the Master Fund, or (iii) if they are obligated pursuant to the Exempted Limited Partnership Law (Revised) of the Cayman Islands to return a payment, with interest, representing a return of any part of such limited partners contribution (i.e., a return on a capital contribution is received within a period of six months before an insolvency of the Master Fund). The General Partner must at all times act in good faith in the interests of the Master Fund in managing the Master Funds affairs and in resolving questions involving potential and actual conflicts of interest. This duty exists in addition to the various duties of and limitations on the General Partner as set forth in the Partnership Agreement. The General Partner will endeavor to conduct the affairs of the Master Fund in a manner fully consistent with its obligations. The Master Fund has established an advisory committee (the Advisory Committee) to make binding determinations with respect to the Redemption Limit and the Master Funds suspension of withdrawals and payments in kind, as further described in the Partnership Agreement. The Advisory Committee consists of Clayton DeGiacinto, Scott Dakers and Richard Ruffer, who also serve as the directors of the Fund. For the biography of Mr. DeGiacinto, see Section 5, Background of the Investment Manager above. For the biographies of Messrs. Dakers and Ruffer, see Section 16, Board of Directors below. One or more capital accounts will be established for each limited partner in the Master Fund. The initial balance of a limited partners capital account will be equal to the limited partners original capital contribution to the Master Fund. The capital account(s) of each limited partner will be adjusted in OO238802
15 accordance with capital contributions or withdrawals and to reflect the limited partners portion of the net profits or net losses of the Master Fund. Meetings of limited partners will not be held. All votes required or permitted to be taken by the limited partners will be taken by a consent in writing, setting forth the action so taken, signed by limited partners having not less than the aggregate percentage of interests that would be necessary to authorize or take such action. The Partnership Agreement may be amended by the General Partner, in its sole discretion, in any manner that does not materially adversely affect any Limited Partner or to effect any changes required by applicable laws or regulations. Neither the General Partner nor any person designated to wind up the affairs of the Master Fund will be liable for any loss, liability or expense (including, without limitation, judgments, fines, amounts paid or to be paid in settlements and reasonable attorneys fees and expenses) arising out of, or in connection with, any activity undertaken (or omitted to be undertaken) in connection with the Master Fund or to the limited partners, including any such loss sustained by reason of any investment or the sale or retention of any security or other asset of the Master Fund, except for any liability caused by its gross negligence, willful misconduct or violations of applicable law. The Master Fund will indemnify the General Partner and its principals, members, officers, employees, agents and affiliates, and each person designated to wind up the Master Fund for any liability resulting from the Master Fund's own gross negligence, willful misconduct or violations of applicable law. To the extent legally permissible, the Master Fund, will advance amounts and/or pay expenses as incurred in connection with the Fund's indemnification obligation.
Incentive Allocation At the end of each fiscal year, an amount equal to a percentage (the Incentive Allocation Percentage) of the net profits (including realized and unrealized gains and losses) allocated to each Common Share will be reallocated to the applicable capital account of the General Partner in the Master Fund (the Incentive Allocation), subject to a loss carryforward provision. The Incentive Allocation Percentage will be based on the net aggregate subscription made by each particular shareholder and will be determined as follows:
Shareholder s Net Aggregate Subscription Incentive Allocation Percentage Less than $75 million 20.00% Greater than or equal to $75 million 17.50%
When determining the Incentive Allocation Percentage, a shareholders net aggregate subscription will be measured as of the as of a shareholders initial subscription date and thereafter as of the first Business Day of J anuary and J uly of each year. Solely for purposes of determining the amount of a shareholders net aggregate subscription, any redemption proceeds distributed to a shareholder will first reduce the amount of profits attributable to a shareholders Common Shares, and thereafter will reduce its subscription amounts. A separate sub-account of the Funds capital account in the Master Fund will be established for each series of Common Shares. Under a loss carryforward provision contained in the Partnership Agreement, if a Common Share has a loss chargeable to it during any fiscal year, and during a subsequent fiscal year there is a profit allocable to such Common Share, there will be no Incentive Allocation payable with respect to such share until the amount of the loss previously allocated to such Common Share has been recouped. OO238802
16 In order to ensure that the Incentive Allocation is properly charged only to those Common Shares that have appreciated in value, Common Shares of each class will be issued in series, with Series One shares being issued on the first day of each fiscal year and further separate series issued on each separate subscription day during the fiscal year, all as further described in Section 12 below. The Fund, with the consent of the General Partner, may, in effect through rebates, waive or reduce the Incentive Allocation for shareholders that are principals, employees or affiliates of the Investment Manager, relatives of such persons and for certain large or strategic investors. When calculating the Incentive Allocation, all items of income, loss, profit and expense incurred directly by the Fund will be taken into account. The Partnership Agreement provides that the General Partner will be allocated the Incentive Allocation as of the end of each fiscal year and whenever Common Shares are redeemed. 8. CERTAIN RISKS Prospective shareholders should consider the Fund to be a speculative investment, as it is not intended to be a complete investment program. The Fund is designed only for sophisticated persons who are able to bear the risk of the loss of their entire investment in the Fund. Prospective shareholders should carefully evaluate the following risks before making an investment in the Fund. Commercial and Residential Mortgage-Backed Securities Investing in commercial and residential mortgage-backed securities involves the general risks typically associated with investing in traditional fixed-income securities (including interest rate and credit risk) and certain additional risks and special considerations (including the risk of principal prepayment and the risk of investing in real estate). Mortgage-backed securities generally provide for the payment of interest and principal on the mortgage-backed securities on a frequent basis and there also exists the possibility, particularly with respect to residential mortgage-backed securities, that principal may be prepaid at any time due to, among other reasons, prepayments on the underlying mortgage loans or other assets. As a result of prepayments, the Fund may be required to reinvest assets at an inopportune time, which may expose the Fund to a lower rate of return. The rate of prepayments on underlying mortgages affects the price and volatility of a mortgage-backed security, and may have the effect of shortening or extending the effective maturity beyond what was anticipated. Further, different types of mortgage- backed securities are subject to varying degrees of prepayment risk. Finally, the risks of investing in such instruments reflect the risks of investing in real estate securing the underlying loans, including the effect of local and other economic conditions, the ability of tenants to make payments, and the ability to attract and retain tenants. Asset-Backed Securities Asset-backed securities are subject to interest rate risk and, to a lesser degree, prepayment risk. Asset-backed securities are subject to additional risks in that, unlike mortgage-backed securities, asset- backed securities generally do not have the benefit of a security interest in the related collateral. Each type of asset-backed security also entails unique risks depending on the type of assets involved and the legal structure used. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Asset-backed securities typically experience credit risk. For example, there is an increasing supply of subordinated securities rated lower than AA (down to B or first loss) and senior securities that may be rated lower than AAA, as well. There is also the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities because of the inability to perfect a security interest in such collateral. OO238802
17 Structured Investments The Fund may invest in entities organized and operated for the purpose of restructuring the investment characteristics of other debt securities. These investments will typically consist of equity or subordinated debt securities issued by a private investment fund that invests, on a leveraged basis, in debt instruments, including primarily senior loans and high-yield bonds and mortgage-backed securities and asset-backed securities, directly or through total rate of return swaps or other credit derivatives. The cash flow on the underlying instruments may be apportioned among the newly issued security to create securities with different investment characteristics such as varying maturities, payment priorities and interest rate provisions, and the extent of the payments made with respect to such securities is dependent on the extent of the cash flow on the underlying instruments. Because the Fund will not own these assets directly, they will not benefit from rights that holders of the assets have, including indemnification and voting rights. Exposure to structured finance securities entails various risks: credit risks, liquidity risks, prepayment risks, interest rate risks, market risks, operations risks, structural risks, geographical concentration risks, basis risks and legal risks. Structured finance securities are also subject to the risk that the servicer fails to perform. Structured finance securities are subject to risks associated with their structure and execution, including the process by which principal and interest payments are allocated and distributed to investors, how credit losses affect the issuing vehicle and the return to investors in such structured finance securities, whether the collateral represents a fixed set of specific assets or accounts, whether the underlying collateral assets are revolving or closed-end, under what terms (including maturity of the structured finance instrument) any remaining balance in the accounts may revert to the issuing entity and the extent to which the entity that is the actual source of the collateral assets is obligated to provide support to the issuing vehicle or to the investors in such structured finance securities. Recent Developments in the Residential Mortgage Lending Market May Adversel y Affect the Fund The residential mortgage market has recently encountered difficulties which may adversely affect the performance or market value of the Fund. Therefore, although the Investment Manager believes that the recent dislocation in the residential mortgage market has created an attractive environment for finding value in securities, loans and other instruments, there is no assurance that the Investment Manager will be able to do so. Recently, delinquencies, defaults and foreclosures on residential mortgage loans have increased and may continue to increase, which may affect the performance of collateralized debt obligations, asset backed securities and other securities, in particular residential mortgage securities that are backed by mortgage loans. Mortgage loans are generally made to borrowers with lower credit scores and are generally made with higher loan-to-value ratios than mortgage loans made to more creditworthy home buyers. Accordingly, mortgage loans backing residential mortgage securities are more sensitive to economic factors that could affect the ability of borrowers to pay their obligations under the mortgage loans backing these securities. A portion of CDO and asset backed securities collateral may consist of residential mortgage securities. A deterioration in the assets collateralizing the CDO, asset backed or other securities held by the Fund would negatively affect the cash flows of the collateral securities, and consequently the performance or market value of the Fund. Therefore, the Fund will be sensitive to the same economic factors that affect residential mortgage securities. Further, a portion of the collateral securities may consist of securities which include or have significant exposure to residential mortgage securities which were originated or are serviced (or both) by mortgage companies which are currently in bankruptcy proceedings or which are experiencing financial difficulties or regulatory enforcement actions which have restricted the ability of the lender or its affiliates to originate mortgage loans and may affect its ability to service or subservice mortgage loans. Bank Debt The Fund may invest its assets in bank debt, which includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring or in connection with recapitalizations, OO238802
18 acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans that are designed to provide temporary or bridge financing to a borrower pending the sale of identified assets, the arrangement of longer-term loans or the issuance and sale of debt obligations. The Fund may also invest in collateral on financial instruments, including interests on whole commercial, consumer and other loans and lease contracts. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions (Lenders), including banks. The Funds investment may be in the form of participations in loans (Participations) or of assignments of all or a portion of loans from third parties (Assignments). In certain cases, the rights and obligations acquired by the Fund through the purchase of an assignment may differ from, and be more limited than, those held by the assigning selling institution. Assignments are sold strictly without recourse to the selling institutions, and the selling institutions will generally make no representations or warranties to the Fund about the underlying loan, the borrowers, the documentation of the loans or any collateral securing the loans. With respect to Participations, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. The Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan in which it has purchased a Participation, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. Thus, the Fund assumes the credit risk of both the borrower and the Lender that is selling the Participation. In addition, in connection with purchasing Participations, the Fund generally will have no role in terms of negotiating or effecting amendments, waivers and consents with respect to the loans underlying the Participations. In the event of the insolvency of the Lender, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. Investments in Participations and Assignments involves additional risks, including the risk of nonpayment of principal and interest by the borrower, the risk that any loan collateral may become impaired and that the Fund may obtain less than the full value for the loan interests sold because they may be illiquid. Purchasers of loans depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled interest or principal payments are not made, the value of the instrument may be adversely affected. Investments in loans through direct assignment of a financial institutions interests with respect to a loan may involve additional risks. For example, if a loan is foreclosed, the Fund could become part owner of any collateral, in which case it would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, the Fund could be held liable as a co-lender. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, the Fund has direct recourse against the borrower, the Fund may have to rely on the agent to apply appropriate credit remedies against a borrower. If assets held by the agent for the benefit of the Fund were determined to be subject to the claims of the agents general creditors, the Fund might incur certain costs and delays in realizing payment on the loan or loan participation and could suffer a loss of principal or interest. Interests in loans are also subject to additional liquidity risks. Loans are generally subject to legal or contractual restrictions on resale. Loans are not currently listed on any securities exchange or automatic quotation system, but are traded by banks and other institutional investors engaged in loan syndication. As a result, no active market may exist for some loans, and to the extent a secondary market exists for other loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Consequently, the Fund may have difficulty disposing of Assignments or Participations in response to a specific economic event such as deterioration in the creditworthiness of OO238802
19 the borrower, which can result in a loss. In such market situations, it may be more difficult for the Fund to assign a value to Assignments or Participations when valuing the Funds securities and calculating its net asset value. Loans The Fund will invest in corporate secured or unsecured loans acquired through Assignment or Participations. In purchasing Participations, the Fund will usually have a contractual relationship only with the selling institution, and not the borrower. The Fund generally will have no right directly to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of set-off against the borrower, nor will it have the right to object to certain changes to the loan agreement agreed to by the selling institution. The Fund may not directly benefit from the collateral supporting the related secured loan and may not be subject to any rights of set-off the borrower has against the selling institution. In addition, in the event of the insolvency of the selling institution, under the U.S. laws, the Fund may be treated as a general creditor of such selling institution, and may not have any exclusive or senior claim with respect to the selling institutions interest in, or the collateral with respect to, the secured loan. Consequently, the Fund may be subject to the credit risk of the selling institution as well as of the borrower. Certain of the secured loans or loan participations may be governed by the law of a jurisdiction other than the United States which may present additional risks as regards the characterization under such laws of such participation in the event of the insolvency of the selling institution or the borrower. Credit Derivatives Credit derivatives are contracts that transfer price, spread and/or default risks of debt and other instruments from one party to another. Such instruments may include one or more debtors. Payments under credit derivatives may be made during the exercise period of the contracts. Payments under many credit derivatives are triggered by credit events such as bankruptcy, default, restructuring, failure to pay, cross default or acceleration, etc. Such payments may be for notional amounts, actual losses or amounts determined by formula. The market for credit derivatives is somewhat illiquid and there are considerable risks that it may be difficult to either buy or sell the contracts as needed or at reasonable prices. Sellers of credit derivatives carry the inherent price, spread and default risks of the debt instruments covered by the derivative instruments. Buyers of credit derivatives carry the risk of non-performance by the seller due to inability to pay. There are also risks with respect to credit derivatives in determining whether an event will trigger payment under the derivative and whether such payment will offset the loss or payment due under another instrument. In the past, buyers and sellers of credit derivatives have found that a trigger event in one contract may not match the trigger event in another contract, exposing the buyer or the seller to further risk. Interest Rate Ri sk The Fund is subject to interest rate risk. Generally, the value of fixed income securities will change inversely with changes in interest rates. As interest rates rise, the market value of fixed income securities tends to decrease. Conversely, as interest rates fall, the market value of fixed income securities tends to increase. This risk will be greater for long-term securities than for short-term securities. The Fund may attempt to minimize the exposure of the portfolios to interest rate changes through the use of interest rate swaps, interest rate futures and/or interest rate options. However, there can be no guarantee that such hedges will be implemented and, if implemented, will be successful in mitigating the impact of interest rate changes on the portfolios. OO238802
20 Distressed Investments The Fund may invest in debt and equity securities, accounts and notes payable, loans, private claims and other financial instruments and obligations of troubled companies that may result in significant returns to the Fund, but which involve a substantial degree of risk. The Fund may lose its entire investment in a troubled company, may be required to accept cash or securities with a value less than the Fund's investment and may be prohibited from exercising certain rights with respect to such investment. Troubled company investments may not show any returns for a considerable period of time. Funding a plan of reorganization involves additional risks, including risks associated with equity ownership in the reorganized entity. Troubled company investments may be adversely affected by state and federal laws relating to, among other things, fraudulent conveyances, voidable preferences, lender liability and the Bankruptcy Court's discretionary power to disallow, subordinate or disenfranchise particular claims. Investments in securities and private claims of troubled companies made in connection with an attempt to influence a restructuring proposal or plan of reorganization in a bankruptcy case may also involve substantial litigation. The Fund may have significant investments in companies involved in (or the target of) acquisition attempts or tender offers or companies involved in work-outs, liquidations, spin-offs, reorganizations, bankruptcies and similar transactions. In any investment opportunity involving any such type of business enterprise, there exists the risk that the transaction in which such business enterprise is involved either will be unsuccessful, take considerable time or result in a distribution of cash or a new security, the value of which will be less than the purchase price to the Fund of the security, or other financial instrument in respect of which such distribution is received. Similarly, if an anticipated transaction does not in fact occur, the Fund may be required to sell its investment at a loss. Because there is substantial uncertainty concerning the outcome of transactions involving financially troubled companies in which the Fund may invest, there is a potential risk of loss by the Fund of its entire investment in such companies. High Yield Securiti es The Fund may invest in "high yield" bonds and preferred securities that are rated in the lower rating categories by the various credit rating agencies (or in comparable non-rated securities). Securities in the lower rating categories are subject to greater risk of loss of principal and interest than higher-rated securities and are generally considered to be predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. They are also generally considered to be subject to greater risk than securities with higher ratings in the case of deterioration of general economic conditions. Because investors generally perceive that there are greater risks associated with the lower-rated securities, the yields and prices of such securities may tend to fluctuate more than those for higher-rated securities. The market for lower-rated securities is thinner and less active than that for higher-rated securities, which can adversely affect the prices at which these securities can be sold. In addition, adverse publicity and investor perceptions about lower-rated securities, whether or not based on fundamental analysis, may be a contributing factor in a decrease in the value and liquidity of such lower- rated securities. Credit Default Swap Agreements The buyer of a credit default contract is obligated to pay the seller either a lump sum payment or a periodic stream of payments over the term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to an underlying reference obligation or entity. Generally, a credit event means bankruptcy, failure to pay, cross default/acceleration, obligation acceleration, repudiation/moratorium, restructuring, or rating decline. The Fund may be either the buyer or seller in a transaction. If the Fund is a buyer and no credit event occurs, the Fund will have made fixed payments and received nothing. However, if a credit event occurs, the Fund, as a buyer, typically will receive full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, which typically is between one month and five years, provided that no credit event occurs. If a credit event occurs, the seller may pay the buyer the full notional value of the reference obligation which may have little or no value. OO238802
21 In addition to general market risks, credit default swaps are subject to liquidity risk and credit risk. Swap contracts are not traded on exchanges and are not otherwise regulated, and as a consequence investors in such contracts do not benefit from regulatory protections. The selling of credit default swaps involves greater risks than if the Fund had invested in the reference obligation directly. If a credit event were to occur, the value of the reference obligation received by the seller, coupled with the periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value. The buyer of credit default swaps will incur a loss if the seller fails to perform on its obligation should a credit event occur. In certain circumstances, the buyer can receive the notional value of a credit default swap only by delivering a physical security to the seller, and is at risk if deliverable security is unavailable or illiquid. Leverage As noted in Section 4 above, the Fund may utilize leverage. Leverage increases returns to investors if the Fund earns a greater return on leveraged investments than the Funds cost of such leverage. However, the use of leverage exposes the Fund to additional levels of risk including (i) greater losses from investments than would otherwise have been the case had the Fund not borrowed to make the investments, (ii) margin calls or changes in margin requirements may force premature liquidations of investment positions, (iii) losses on investments where the investment fails to earn a return that equals or exceeds the Funds cost of leverage related to such investments and (iv) fluctuations in interest rates on the Funds borrowings, which may have a negative effect on the Funds profitability. In case of a sudden, precipitous drop in the value of the Funds assets, the Fund might not be able to liquidate assets quickly enough to repay its borrowings, further magnifying the losses incurred by the Fund. In the current unsettled credit environment, the Investment Manager may find it difficult or impossible to obtain leverage. Since leveraging its assets is part of the investment strategy of the Fund, in such event, the Investment Manager could find it difficult to fully implement its strategy. In addition, any leverage obtained, if terminated on short notice by the lender, could result in the Investment Manager being forced to unwind positions quickly and at prices below what the Investment Manager deems to be fair value for the positions. Concentrated Portfolio At times, the Fund may have a concentrated portfolio. Accordingly, the Funds portfolio may not be diversified among a wide range of issuers, industries, geographic areas, capitalizations or types of securities and may have relatively significant, concentrated positions. As a result, the investment portfolio of the Fund may be subject to more rapid changes in value than would be the case if the Fund were required to maintain a wide diversification among issuers, industries, geographic areas, capitalizations or types of securities. Short Sales Short selling, or the sale of securities not owned by the Fund, necessarily involves certain additional risks. Such transactions expose the Fund to the risk of loss in an amount greater than the initial investment, and such losses can increase rapidly and without effective limit. There is the risk that the securities borrowed by the Fund in connection with a short sale would need to be returned to the securities lender on short notice. If such request for return of securities occurs at a time when other short sellers of the subject security are receiving similar requests, a short squeeze can occur, wherein the Fund might be compelled, at the most disadvantageous time, to replace borrowed securities previously sold short with purchases on the open market, possibly at prices significantly in excess of the proceeds received earlier. OO238802
22 Options The purchase or sale of an option involves the payment or receipt of a premium by the investor and the corresponding right or obligation, as the case may be, either to purchase or sell the underlying security, commodity or other instrument for a specific price at a certain time or during a certain period. Purchasing options involves the risk that the underlying instrument will not change price in the manner expected, so that the investor loses its premium. Selling options involves potentially greater risk because the investor is exposed to the extent of the actual price movement in the underlying security rather than only the premium payment received (which could result in a potentially unlimited loss). Over-the-counter options also involve counterparty solvency risk. Non-U.S. Securities Investing in securities of foreign governments and companies that are generally denominated in currencies other than the U.S. dollar, and utilization of foreign currency forward contracts and options on foreign currencies involve certain considerations comprising both risks and opportunities not typically associated with investing in securities of United States issuers. These considerations include changes in exchange rates and exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than are generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Currency Ri sks The Fund's investments that are denominated in a foreign currency are subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments.
Counterparty and Settlement Risk To the extent the Fund invests in swaps, derivatives or "synthetic" instruments, repurchase agreements, other over-the-counter transactions or non-U.S. securities or engages in securities lending, the Fund may take a credit risk with regard to parties with which it trades and may also bear the risk of settlement default. These risks may differ materially from those entailed in exchange-traded transactions, which generally are backed by clearing organization guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered directly between two counterparties generally do not benefit from such protections and expose the parties to the risk of counterparty default. Any such default by a trading counterparty could result in losses to the Fund due to the delay of settlement of a transaction, loss of market gains or, in certain circumstances, loss of a portion or the full amount of the notional value of the transaction. Custody and Prime Brokerage Risk There are risks involved in dealing with the custodians or prime brokers who settle Fund trades. Under certain circumstances, including certain transactions where the Fund's assets are pledged as collateral for leverage from a non-broker-dealer custodian or a non-broker-dealer affiliate of the prime broker, or where the Fund's assets are held at a non-U.S. prime broker, the securities and other assets deposited with the custodian or broker may not be clearly identified as being assets of the Fund and hence the Fund could be exposed to a credit risk with regard to such parties. In addition, there may be practical or time problems associated with enforcing the Fund's rights to its assets in the case of an insolvency of any such party. OO238802
23 The Fund maintains custody accounts with its prime broker, J P Morgan (the "Prime Broker") or, at any time, with an affiliate of the Prime Broker. Although the Investment Manager monitors the Prime Broker and believes it or its affiliate is an appropriate custodian, there is no guarantee that the Prime Broker, or any other custodian that the Fund may use from time to time, will not become insolvent. While both the Bankruptcy Code and the Securities Investor Protection Act of 1970 seek to protect customer property in the event of a failure, insolvency or liquidation of a broker-dealer, there is no certainty that, in the event of a failure of a broker-dealer that has custody of Fund assets, the Fund would not incur losses due to its assets being unavailable for a period of time, ultimately less than full recovery of its assets, or both. The Fund and/or the Prime Broker may appoint sub-custodians in certain non-U.S. jurisdictions to hold the assets of the Fund. The Prime Broker may not be responsible for cash or assets which are held by sub-custodians in certain non-U.S. jurisdictions, nor for any losses suffered by the Fund as a result of the bankruptcy or insolvency of any such sub-custodian. The Fund may therefore have a potential exposure on the default of any sub-custodian and, as a result, many of the protections which would normally be provided to a Fund by a custodian will not be available to the Fund. Custody services in certain non-U.S. jurisdictions remain undeveloped and, accordingly, there is a transaction and custody risk of dealing in certain non-U.S. jurisdictions. Given the undeveloped state of regulations on custodial activities and bankruptcy in certain non-U.S. jurisdictions, the ability of the Fund to recover assets held by a sub-custodian in the event of the sub-custodian's bankruptcy would be in doubt. Lack of Liquidity of Fund Assets, Valuation Fund assets may, at any given time, include securities and other financial instruments or obligations that are thinly traded or for which no market exists and/or which are restricted as to their transferability under applicable securities laws. The sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value accurately any such investments. Limited Redemption and Transfer Rights A shareholder generally will be permitted to redeem its Common Shares with respect to a particular subscription on a quarterly basis without payment of a redemption fee after a one-year holding period, subject to the Redemption Limit (as defined below). Shareholders may only transfer their Common Shares with the written consent of the Investment Manager. Accordingly, only investors willing to give up some access and control over their funds should acquire Common Shares. ERISA Ri sks The Investment Manager anticipates that, at various times, assets of the Fund and the Master will be deemed to be plan assets subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the Code). During these periods, the Investment Manager will be a fiduciary with respect to accounts subject to Section 4975 of the Code (but not subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA)) investing in the Fund directly or indirectly through a Benefit Plan Investor (as defined below) and will be prohibited from causing the Fund to engage in certain transactions. While the Investment Manager believes that it can effect the Funds investment strategy utilizing various statutory and class exemptions to the Codes prohibited transaction regime, there may be particular transactions which the Code will prevent the Master Fund from entering into or investments which the Master Fund must sell before it might otherwise do so. (See ERISA and Retirement Plan Matters.) Incentive Allocation The allocation by the Master Fund of a percentage of the Fund's net profits to the General Partner, an affiliate of the Investment Manager, may create an incentive for the Investment Manager to cause the Fund to make investments that are riskier or more speculative than would be the case if this OO238802
24 allocation were not made. Since the Incentive Allocation is calculated on a basis that includes unrealized appreciation of assets, such allocation may be greater than if it were based solely on realized gains.
No Separate Counsel Seward & Kissel LLP represents the Investment Manager, the Fund and the Master Fund as U.S. counsel. Ogier acts as Cayman Islands counsel to the Fund and the Master Fund. Neither Seward & Kissel LLP nor Ogier represents investors in the Fund, and no independent counsel has been retained to act on behalf of investors in the Fund. Neither Seward & Kissel LLP nor Ogier is responsible for any acts or omissions of the Investment Manager, the Fund, or any administrator, accountant, custodian/prime broker or any other service provider. This Memorandum was prepared based on information furnished by the Investment Manager; neither Seward & Kissel LLP nor Ogier has independently verified such information. Accounting for Uncertainty in Income Taxes The Financial Accounting Standards Board has released Accounting Standards Codification Topic 740 (ASC 740) (formerly known as FIN 48) to provide consistent guidance on the recognition of uncertain tax positions. ASC 740 prescribes, among other things, the minimum recognition threshold that a tax position is required to meet before being recognized in an entitys financial statements. Prospective shareholders should be aware that, among other things, ASC 740 could have a material adverse effect on the periodic calculations of the net asset value of the Fund, including reducing the net asset value of the Fund to reflect reserves for income taxes that may be payable in respect of prior periods by the Fund. This could adversely affect certain shareholders, depending upon the timing of their purchase and redemption of Common Shares.
Directors are also Service Providers Clayton DeGiacinto is a Director of the Fund as well as a principal of the Investment Manager. Scott Dakers is an employee of, and is to be regarded as interested in any contract or other arrangement with, Ogier Fiduciary Services (Cayman) Limited (which is a member of the Ogier Group) and any other members of the Ogier Group, including Ogier, Cayman Islands counsel to the Fund. The duties of the Directors to the Fund may compete with or be different from the interests of its service providers. Conflicts of Interest The Investment Manager serves as the investment manager to the Fund, the Master Fund and the U.S. Partnership. The General Partner, an affiliate of the Investment Manager, serves as the general partner to the U.S. Partnership and the Master Fund. Further, the Investment Manager and its respective affiliates, principals, members and employees (hereinafter referred to as the Affiliated Parties) may serve as the investment adviser or the investment manager to other clients and conduct investment activities for their own accounts. Such other clients may have investment objectives or may implement investment strategies similar to those of the Fund, and such other clients may pay higher investment management fees than those paid by shareholders in the Fund. Specifically, the General Partner and the Investment Manager serve as the general partner and the investment manager, respectively, to the ASA Fund. The ASA Fund is a private investment fund that utilizes a quantitative approach and a focus on agency mortgage-backed securities and global fixed income derivative markets. The Fund has made the initial investment in the ASA Fund and is currently a significant investor in the ASA Fund. As a fiduciary to both the Fund and the ASA Fund, the investment in the ASA Fund by the Fund creates potential conflicts of interest for the Investment Manager, including, but not limited to, the following: OO238802
25 (i) the Fund is currently, and may continue to be in the future, a large investor in the ASA Fund. Any withdrawal by the Fund from the ASA Fund could therefore have an adverse effect on the ASA Fund both in terms of decreasing the asset base of the ASA Fund (and therefore increasing the expense ratio) as well as having a disruptive effect on the portfolio of the ASA Fund by compelling the ASA Fund to liquidate securities at what may be a disadvantageous time, (ii) in making a decision to withdraw assets of the Fund from the ASA Fund, the Investment Manager will have more, and a more thorough understanding of, portfolio data on which to base such decision than do other investors in the ASA Fund and therefore the Fund will follow all redemption policies and procedures of the ASA Fund that the other investors in the ASA Funds are required to follow, and (iii) the Investment Manager, as a fiduciary to the Fund, will make each decision regarding the allocation of assets of the Fund to or away from the ASA Fund based solely on what it perceives to be the best interests of the Fund. The Investment Manager is also a fiduciary to the ASA Fund regarding portfolio management decisions such as when and how much leverage to use, when to liquidate investments, when to suspend redemptions and similar decisions. As a result, the interests of the Fund and the ASA Fund, and therefore the fiduciary obligations of the Investment Manager to the Fund and the ASA Fund, may often be in conflict. Further, while the Fund is not subject to a management fee or incentive allocation as a result of its investment in the ASA Fund, the Fund pays its pro rata share of the ASA Funds expenses. The portion of the ASA Funds expenses paid by the Fund may be significant. The Affiliated Parties may also give advice or take action with respect to the other clients that differs from the advice given with respect to the Fund. To the extent a particular investment is suitable for both the Fund and the other clients, such investments will be allocated between the Fund and the other clients pro rata based on assets under management or in some other manner in which the Affiliated Parties determine is fair and equitable under the circumstances to all of their clients, including the Fund. From the standpoint of the Fund, simultaneous identical portfolio transactions for the Fund and the other clients may tend to decrease the prices received and increase the prices required to be paid by the Fund, respectively, for its portfolio sales and purchases. Where less than the maximum desired number of shares of a particular security to be purchased is available at a favorable price, the Affiliated Parties will allocate the shares purchased among the Fund and the other clients in an equitable manner. Clayton DeGiacinto is the Managing Member of the Investment Manager and a Director of the Fund, and may have a conflict of interest with regard to his fiduciary duties to the Fund and to the Investment Manager. Clayton DeGiacinto, Scott Dakers and Richard Ruffer, as discussed in Section 16 below, may each serve as a director of other investment vehicles. Accordingly, to the extent that the interests of the Fund and such other investment vehicles are inconsistent, such directors may have a conflict of interest. As a result of the foregoing, the Affiliated Parties may have conflicts of interest in allocating their time and activities between the Fund and the other clients, in allocating investments among the Fund and the other clients and in effecting transactions between the Fund and the other clients, including ones in which the Affiliated Parties may have a greater financial interest. The Investment Manager will use its best efforts in connection with the purposes and objectives of the Fund and will devote so much of its time and effort to the affairs of the Fund as may, in its judgment, be necessary to accomplish the purposes of the Fund. The Management Agreement specifically provides that the Affiliated Parties may conduct any other business, including any business within the securities industry, whether or not such business is in competition with the Fund. Without limiting the generality of the foregoing, the Affiliated Parties may act as the investment adviser or investment manager for others, may manage funds or capital for others, may have, make and maintain investments in their own name or through other entities, and may serve as officers, directors, consultants, partners or stockholders of one or more investment funds, partnerships, securities firms or advisory firms. OO238802
26 It may not always be possible or consistent with the investment objectives of the various persons or entities described above and of the Fund for the same investment positions to be taken or liquidated at the same time or at the same price. 9. BROKERAGE AND CUSTODY The Investment Manager is authorized to determine the broker or dealer to be used for each securities transaction for the Fund. In selecting brokers or dealers to execute transactions, the Investment Manager need not solicit competitive bids and does not have an obligation to seek the lowest available commission cost. The Investment Manager will take into account the financial stability and reputation of brokerage firms, and the research, brokerage or other services provided by such brokers. It is not the Investment Manager's practice to negotiate "execution only" commission rates, thus the Fund may be deemed to be paying for research, brokerage or other services provided by the broker which are included in the commission rate. However, all transactions will be made on a "best execution" basis. Section 28(e) of the U.S. Securities Exchange Act of 1934, as amended, is a "safe harbor" that permits an investment manager to use commissions or "soft dollars" to obtain research and brokerage services that provide lawful and appropriate assistance in the investment decision-making process. Except for services that would be a Fund expense or as otherwise described below, the Investment Manager will limit the use of "soft dollars" to obtain research and brokerage services to services which constitute research and brokerage within the meaning of Section 28(e). Research services within Section 28(e) may include, but are not limited to, research reports (including market research); certain financial newsletters and trade journals; software providing analysis of securities portfolios; corporate governance research and rating services; attendance at certain seminars and conferences; discussions with research analysts; meetings with corporate executives; consultants advice on portfolio strategy; data services (including services providing market data, company financial data and economic data); advice from brokers on order execution; and certain proxy services. Brokerage services within Section 28(e) may include, but are not limited to, services related to the execution, clearing and settlement of securities transactions and functions incidental thereto (i.e., connectivity services between an investment manager and a broker-dealer and other relevant parties such as custodians); trading software operated by a broker-dealer to route orders; software that provides trade analytics and trading strategies; software used to transmit orders; clearance and settlement in connection with a trade; electronic communication of allocation instructions; routing settlement instructions; post trade matching of trade information; and services required by the SEC or a self regulatory organization such as comparison services, electronic confirms or trade affirmations. The use of commissions arising from the Fund's investment transactions for services other than research and brokerage will be limited to services that would otherwise be a Fund expense. The use of commissions to obtain such other services would be outside the parameters of Section 28(e). In some instances, the Investment Manager may receive a product or service that may be used only partially for functions within Section 28(e) (e.g. an order management system, trade analytical software or proxy services). In such instances, the Investment Manager will make a good faith effort to determine the relative proportion of the product or service used to assist the Investment Manager in carrying out its investment decision-making responsibilities and the relative proportion used for administrative or other purposes outside Section 28(e). The proportion of the product or service attributable to assisting the Investment Manager in carrying out its investment decision-making responsibilities will be paid through brokerage commissions generated by client transactions and the proportion attributable to administrative or other purposes outside Section 28(e) will be paid for by the Investment Manager from its own resources. Research and brokerage services obtained by the use of commissions arising from the Fund's portfolio transactions may be used by the Investment Manager in its other investment activities and thus, the Fund may not necessarily, in any particular instance, be the direct or indirect beneficiary of the research or brokerage services provided. OO238802
27 Although the Investment Manager will make a good faith determination that the amount of commissions paid is reasonable in light of the products or services provided by a broker, commission rates are generally negotiable and thus, selecting brokers on the basis of considerations that are not limited to the applicable commission rates may result in higher transaction costs than would otherwise be obtainable. The receipt of such products or services and the determination of the appropriate allocation in the case of "mixed use" products or services creates a potential conflict of interest between the Investment Manager and its clients. Notwithstanding anything to contrary herein, during any period when the assets of the Fund and the Master Fund are deemed to be plan assets subject to Section 4975 of the Code, the Investment Manager will limit the use of soft dollars to research and brokerage services within the meaning of Section 28(e). The Investment Manager may place transactions with a broker or dealer that (i) provides the Investment Manager (or an affiliate) with the opportunity to participate in capital introduction events sponsored by the broker-dealer or (ii) refers investors to the Fund or other products advised by the Investment Manager (or an affiliate), if otherwise consistent with seeking best execution; provided the Investment Manager is not selecting the broker-dealer in recognition of the opportunity to participate in such capital introduction events or the referral of investors. When appropriate, the Investment Manager may, but is not required to, aggregate client orders to achieve more efficient execution or to provide for equitable treatment among accounts. Clients participating in aggregated trades will be allocated securities based on the average price achieved for such trades. The Fund will maintain an account at J P Morgan, its Prime Broker, through which the Fund may execute trades, borrow securities and maintain custody of its securities. The Fund reserves the right, in its sole discretion, to change or add prime brokers and/or custodians without further notice to shareholders. 10. PAYMENTS TO SPONSORS OF THE FUND The Investment Manager may pay fees to persons (whether or not affiliated with the Investment Manager) who are instrumental in the sale of Common Shares of the Fund. Any such fees will in no event be payable by or chargeable to the Fund or any shareholder or prospective shareholder. 11. EXPENSES The Investment Manager is responsible for and pays all overhead expenses of an ordinary and recurring nature such as rent, its compliance expenses, supplies, secretarial expenses, stationery, charges for furniture and fixtures, employee insurance, payroll taxes and compensation of employees. The Investment Manager will pay the Funds organizational expenses. The Fund bears all other expenses including the Management Fee, legal, accounting (including third-party accounting services), audit and other professional fees and expenses, administrator fees and expenses, research expenses (including research-related travel), expenses of third-party valuation agents (if any), investment expenses such as interest on margin accounts and other indebtedness, borrowing charges on securities sold short, commissions, custodial fees, bank service fees, Directors' fees and expenses, insurance (including D&O and E&O insurance), Fund compliance expenses (including expenses related to various filings (or portions thereof) the Investment Manager is required to make as a result of managing the Partnerships portfolio, including Form PF) and other expenses related to the purchase, sale, preservation or transmittal of Fund assets or to the operation or administration of the Fund. As noted above, the Fund invests all of its Investable Assets in the Master Fund. Each investment entity, including the Fund, that invests in the Master Fund indirectly bears the expenses OO238802
28 of the Master Fund pro rata based on its interest in the Master Fund. It is anticipated that virtually all expenses will be incurred by the Master Fund and therefore expenses incurred by the Fund should be relatively small. 12. DESCRIPTION OF THE FUNDS COMMON SHARES The authorized share capital of the Fund consists of 5,000,000 Common Shares having a par value of $0.01 (U.S.) per share. The Fund is offering one class of Common Shares. The Fund may, in the sole discretion of the Directors, issue additional classes and sub-classes of Common Shares to reflect, without limitation, terms and conditions that differ from the Common Shares being offered hereunder (including the offering of Common Shares with a different functional currency). Common Shares of each class are generally issuable monthly in series. The first series of each such class (the Series One Shares) will be issued at the end of the Funds initial offering for that class and at the beginning of each fiscal year thereafter (provided there is no loss carryforward then existing in respect of such Series One shares) and the remaining series will generally be sold on a monthly basis during a fiscal year. The reason for the different series is to reflect equitably the differing Incentive Allocations attributable to each series (because of the differing issue dates throughout the fiscal year). At the end of each fiscal year the other series will be converted into Series One shares so that at the beginning of the following fiscal year all Common Shares will be Series One shares unless a loss carryforward attributable to the Series One shares or the Common Shares being converted remains outstanding, in which case such series will not be converted until the end of the year during which its loss carryforward was recouped. If a loss carryforward attributable to the Series One shares remains outstanding, Common Shares of all the outstanding series, other than Series One shares and the Common Shares of any series with a loss carryforward attributable to it, will be converted into the first series that does not have a loss carryforward attributable to it (the First Profitable Series). The Fund may, in the sole discretion of the Directors, issue additional series of Common Shares if needed in connection with additional issuance dates or for other reasons. Except as set forth below, each series, sub-class and class of Common Shares has equal voting rights and within each class, sub-class and series has equal dividend, distribution and liquidation rights. The Fund does not anticipate paying any dividends on its Common Shares. Speci al Designation as Non-Voting Common Shares While the Funds Common Shares generally have voting rights (Voting Common Shares), the Fund, at its discretion, may designate certain Common Shares as non-voting (Non-Voting Common Shares) in order to avoid certain adverse tax or filing requirements (shareholders may also request to be issued Non-Voting Common Shares). In particular, Non-Voting Common Shares will be issued for new subscriptions by U.S. shareholders if at the time of the subscription the Directors determine, in their sole discretion, that issuing the shares as Non-Voting Common Shares is necessary or advisable to avoid these possible adverse consequences. The status of the shares as non-voting will be fully disclosed to the investor at the time of its subscription and any such investor will be allowed to revoke its subscription upon notification of such classification. In addition, existing shareholders who have been issued Voting Common Shares may have such shares converted to Non-Voting Common Shares if the Directors determine, in their sole discretion, that such conversion is necessary or advisable; provided that the shareholder will be granted the right to redeem such shares prior to conversion. Except with regard to voting rights, Non-Voting Common Shares will be identical in all respects to Voting Common Shares and, accordingly, references herein to Common Shares will mean both Voting Common Shares and Non- Voting Common Shares unless otherwise indicated. Although Non-Voting Common Shares will not have the right to vote at general meetings of the Fund or class meetings, in the event of any proposed materially adverse variation or abrogation of rights affecting Non-Voting Common Shares as a class, each holder of Non-Voting Common Shares will receive notice of the proposed change and an opportunity to redeem its Common Shares prior to the change taking effect. Common Shares that are designated as Non-Voting Common Shares will constitute a separate class of Common Shares. Due to the Fund's interpretation of ERISA, the Fund will treat any Non-Voting OO238802
29 Common Shares as a class of equity securities when calculating the 25% test described in Section 15 (Taxation and ERISA Matters) of this Memorandum. Rights of Shareholders All shareholders are entitled to the benefit of, are bound by and are deemed to have notice of the provisions of the Memorandum and Articles of Association of the Fund. Under the terms of the Memorandum and Articles of Association, the liability of the shareholders is limited to any amount unpaid on their Common Shares. As the Common Shares can only be issued if they are fully paid, the shareholders will not be liable for any debt, obligation or default of the Fund beyond their interest in the Fund. The Articles of Association have been drafted in broad and flexible terms to allow the Directors (a) the flexibility to reorganize the Fund at any time to eliminate the master-feeder structure such that the assets of the Fund will be directly invested, if they consider it advantageous to do so; and (b) the authority to, in their discretion, determine a number of issues, including the period of notice to be given for redemptions and whether or not to charge subscription or redemption fees, generally or in any particular case. In approving the offering of Common Shares on the terms set out in this Memorandum, the Directors have exercised a number of these discretions. General meetings of the voting shareholders may be called by the Directors and will be called at the request of the shareholders holding a simple majority of the outstanding voting Common Shares. All shareholders meetings will be held in such location as the Directors will determine. All shareholders meetings require 7 clear days prior notice. Notice may be sent by hand, mail, fax or email, or alternatively, where the recipient has agreed, by posting the notice on a secure nominated website. Subject to the exceptions set forth below and except where a special resolution is otherwise required by the Cayman Islands Companies Law, all decisions of the Shareholders will be made by the holders of a simple majority of the outstanding Voting Common Shares represented at a meeting, provided that a quorum of the holders of outstanding Voting Common Shares representing one third of the net asset value of all voting Common Shares is present by proxy or in person. At any meeting of the Shareholders, each Shareholder shall have one vote. At a meeting, any Shareholder may demand a poll, and on a poll, the voting rights attributable to each Common Share shall be calculated by reference to the net asset value per Common Share (calculated as at the most recent valuation day) and not on the basis of one Common Share, one vote. Notwithstanding the foregoing, (i) the dismissal of a Director must be adopted by an affirmative vote of two-thirds of the votes cast at a meeting of Shareholders at which more than one-half of the total number of Voting Common Shares then issued and outstanding are represented; (ii) any investment management contract entered into by the Fund (other than an investment advisory or investment management contract which the Investment Manager is authorized to enter into pursuant to the Management Agreement) may not be terminated by the Fund unless such termination is approved by a unanimous vote cast at a meeting at which all the issued and outstanding Voting Common Shares are represented; (iii) amendments to the Memorandum of Association and the Articles of Association must be approved by three-quarters of the votes cast at a meeting at which not less than one-half of the issued and outstanding Voting Common Shares are represented, except that any amendment to decrease the vote required in (i) and (ii) above and (iv) below requires the same increased approval set out therein; and (iv) the merger or consolidation of the Fund with another corporation or the winding-up of the Fund requires the affirmative vote of the holders of three-quarters of the Voting Common Shares outstanding. Any matter referred to herein may also be adopted by resolution in writing of all the voting. Subject to the Companies Law (Revised) of the Cayman Islands, all or any of the rights for the time being attached to any class of Common Shares in issue may from time to time (whether or not the Fund is being wound up) be modified; provided, however, that any materially adverse modifications require the consent in writing of the holders of Common Shares of that class representing two-thirds of the votes of that class which could be cast on a poll at a general meeting, or with the sanction of a OO238802
30 resolution of such shareholders holding not less than two-thirds of the votes which could be cast by such shareholders on a poll at a separate meeting of the holders of Common Shares of such class. To any such meeting all the provisions of the articles of association as to general meetings will apply (with the necessary changes being made), and the quorum for any such meeting will be shareholders holding not less than one third by net asset value of the issued Common Shares of the relevant class. For such purposes the Directors may treat two or more or all the classes of Common Shares as forming one class if the Directors consider that such classes would be affected in the same way by the proposals under consideration, but in any other case will treat them as separate classes. The rights conferred upon the holders of the Common Shares of any class or sub-class issued with preferred or other rights shall not, subject to any rights or restrictions for the time being attached to the Common Shares of that class or sub-class, be deemed to be materially adversely varied or abrogated by, among other things, the creation, allotment or issue of further Common Shares ranking equally with or subsequent to them, the redemption or purchase of any Common Shares, by the passing of any Directors resolution to change or vary any investment objective, investment technique and strategy and/or investment policy in relation to a class or sub-class of Common Shares or any modification of the fees payable to any service provider to the Fund. Additionally, the Fund may, subject to applicable law and without the approval of any shareholders, amend this Memorandum to vary the offering terms applicable to any Common Shares (as distinct from the modification of class rights attaching to Common Shares, as discussed above) as follows: (a) make any change that does not, in the opinion of the Directors in their sole and absolute discretion, adversely affect the shareholders in any material respect; (b) make a change that is necessary or desirable to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, statute, ruling or regulation of any applicable regulator, court of competent jurisdiction, government or government entity (including any tax authority), so long as such change is made in a manner that minimizes to the extent practicable as determined by the Directors, in their sole and absolute discretion, any adverse effect on the shareholders; or (c) make any change that will, in the opinion of the Directors in their sole and absolute discretion, likely adversely affect the shareholders in a material respect, provided that such amendment does not become effective until after the affected shareholders have been given prior written notice of such change and have had the right following receipt of such notice to request the redemption of their Common Shares so affected, and any Common Shares subject to such requested redemption will have been redeemed. Furthermore, the Fund may amend this Memorandum to vary the offering terms applicable to Common Shares with the consent of the shareholders owning a majority by value of all outstanding Common Shares at the time of the amendment provided that such amendment does not discriminate amongst shareholders. A meeting so convened will generally follow the provisions of the Funds articles of association relating to general meetings amended as necessary by the Directors, as they may, in their absolute discretion, determine, notwithstanding that the articles of association will not govern such meetings. If the Fund seeks such approval from shareholders, then following the giving of notice of the proposed amendment, the Fund will request a response for or against the proposed amendment. The Fund will deem a lack of response from a shareholder to constitute the consent of such shareholder to the amendment.
Except for such rights of conversion as are set forth in Section 14, Redemptions, the Common Shares have no conversion or pre-emptive rights. By subscribing for Common Shares other than Series One shares, a subscriber will have irrevocably authorized and directed the Fund to convert such shares (insofar as they are not redeemed) into Series One shares (or, if applicable, the First Profitable Series) as set forth in the paragraph in Section 14 entitled Conversion of Shares. OO238802
31 Common Shares will generally be issued in registered form only. A shareholder may elect to receive a certificate representing its Common Shares only if it demonstrates to the Directors that it is legally required to hold certificated shares. From time to time the Fund, by a resolution passed by a simple majority of the voting shareholders, may increase its authorized share capital in order to have a substantial number of Common Shares available at all times for issuance. Transfers Common Shares may be transferred only if the proposed transferee of the Common Shares obtains the prior written approval of the Investment Manager. A proposed transferee will be required to make the same representations and warranties required of any subscriber to the Fund. The Investment Manager will have full discretion to approve or disapprove any proposed transferee (primarily to ensure that only eligible investors become shareholders), and such approval will not be unreasonably withheld, and no proposed transfer will be recognized until the documents relating to such transfer (including, but not limited to, the Subscription Agreement) have been received and approved by the Investment Manager. Side Letters The Fund may enter into agreements (sometimes referred to as "Side Letters") with certain prospective, founding, initial or existing shareholders whereby such shareholders may be subject to terms and conditions that are more advantageous than those set forth in this Memorandum. For example, such terms and conditions may provide for special rights to make future investments in the Fund, other investment vehicles or managed accounts; special redemption rights relating to frequency, notice, a reduction or rebate in fees or redemption fees to be paid by the shareholders and/or other terms; rights to receive reports from the Fund on a more frequent basis or that include information not provided to other shareholders (including, without limitation, more detailed information regarding portfolio positions) and such other rights as may be negotiated by the Fund and such shareholders. The modifications are solely at the discretion of the Fund and may, among other things, be based on the size of the shareholders investment in the Fund or affiliated investment entity, an agreement by a shareholder to maintain such investment in the Fund for a significant period of time, or other similar commitment by a shareholder to the Fund. 13. OFFERING OF COMMON SHARES The Fund is conducting an offering of its Common Shares to a limited number of experienced and sophisticated investors who are neither citizens nor residents of the United States and to a limited number of United States investors consisting primarily of qualified pension, profit sharing and other retirement trusts, charities and other tax-exempt entities. Admission as a shareholder in the Fund is not open to the general public and Common Shares will be privately offered to investors who meet the requirements set forth in the Subscription Agreement accompanying this Memorandum. The minimum initial subscription is $1,000,000 (U.S.), subject to waiver in the sole discretion of the Directors (or their delegate), but not below $100,000 (U.S.) or such other amount as may be specified under Cayman Islands law from time to time. Subscriptions for Common Shares must be made in cash by wire transfer unless the Directors, in their sole discretion, permit subscriptions in securities or partly in cash and partly in securities. Common Shares may be purchased on the first day of each month and at such other times as the Directors will, in their sole discretion, permit. The number of Common Shares to be purchased will be based on the offering price per Share (the Offering Price). For Common Shares of a new series purchased during and after the initial offering, the Offering Price is $1,000 (U.S.) per Share. The Offering Price for Common Shares of an existing class OO238802
32 and series is the prevailing net asset value per share for a Common Share of the relevant class and series as determined on the last day of the immediately preceding month. Notwithstanding the foregoing, the Directors will have the absolute discretion to agree with a shareholder to waive or modify the application of any provision of the offering terms herein with respect to such shareholder (including those relating to the Management Fee, the Incentive Allocation and redemptions) without obtaining the consent of any other shareholder. Any variation to the Management Fee or the Incentive Allocation will require the prior written consent of the Investment Manager and no other variations will be agreed without full prior consultation with the Investment Manager. For administrative convenience, the Fund may issue a separate class or sub-class of Common Shares for such shareholder. Such shareholders may be principals, employees or affiliates of the Investment Manager, relatives of such persons and for certain large or strategic investors. Investors interested in subscribing for Common Shares should follow the procedures set forth in Section 20, Procedure to Purchase Common Shares. 14. REDEMPTIONS Upon at least 90 days prior written notice to the Fund, a shareholder may redeem any of its Common Shares relating to a particular subscription as of the last day of each calendar quarter; provided, however, that any Common Shares redeemed within the first twelve months after such Common Shares were purchased will be subject to a redemption fee of up to 5% of the amount redeemed, payable to the Master Fund. For example, a shareholder that invests on J anuary 1, 2013 will first be able to redeem its Common Shares without a redemption fee on December 31, 2013. Notwithstanding the foregoing, a shareholder may redeem any of its Common Shares as of the last day of each calendar quarter upon 60 days prior written notice to the Fund; provided, however, that such redemption will be subject to an additional redemption fee of up to 5% of the amount redeemed, payable to the Master Fund. For the avoidance of doubt, a redemption of Common Shares requested on only 60 days prior written notice and within the first twelve months after such Common Shares were purchased will be subject to an aggregate redemption charge of 10%. Notwithstanding the foregoing, in the event aggregate redemption requests from shareholders in the Fund and limited partners in the U.S. Partnership (collectively, the Investors) as of any redemption date exceed 25% of the net asset value of the Master Fund (the Redemption Limit), the amount of each redeeming Investors redemption may, in the sole discretion of the Advisory Committee, be reduced so that each such Investor will receive an amount (the Redeemable Amount) equal to (i) the Redemption Limit multiplied by (ii) a fraction, the numerator of which is the value of the Investors indirect interest in the Master Fund and the denominator of which is the aggregate amount invested by all Investors that have requested a redemption on such redemption date. If an Investors Redeemable Amount exceeds the amount requested by such Investor, the Investor will only receive the amount requested and each Investor whose requested redemption was reduced will receive an additional amount equal to (a) such excess multiplied by (b) a fraction, the numerator of which is the value of the Investors indirect interest in the Master Fund and the denominator of which is the aggregate amount invested by all Investors eligible to receive a portion of such excess that have requested a redemption on such redemption date. If an Investors redemption is reduced by the Redemption Limit, the balance will be paid as of the next redemption date (i.e., the last day of the next calendar quarter) subject again to the Redemption Limit, and in any event will be paid in full within four consecutive redemption dates (e.g., if an Investor submits a timely redemption request for a redemption on December 31, 2012 and its redemption is reduced by the Redemption Limit, the Investor will be paid in full no later than September 30, 2013). Redemption requests carried over from previous redemption dates will not have priority over new redemption requests. The determination by the Advisory Committee as to the applicability of the Redemption Limit shall be made separately as of each redemption date in which the Redemption Limit is reached, based on whether imposition of the Redemption Limit as of the particular redemption date is in the best interest of OO238802
33 the Fund, or if not doing so would prejudice the remaining Investors. A determination by the Advisory Committee for a particular redemption date will have no impact on its determination for other redemption dates. A redeeming shareholder will redeem its Common Shares at net asset value as of the close of business on the redemption date (the Redemption Value) (as determined in accordance with the Articles of Association of the Fund and the valuation principles described below under the heading Net Asset Value). The net asset value is computed after deduction of any accrued Incentive Allocation attributable to the Common Shares redeemed. A redemption notice must indicate (i) the shareholders intention to make such redemption and (ii) the amount of such redemption or the manner in which such redemption is to be determined. A redemption request, once given, may not be revoked without the consent of the Directors, except upon the suspension of the determination of net asset value. Common Shares will be redeemed on a first-in, first-out basis unless the shareholder requests otherwise in writing to the Fund. The Directors, in their sole discretion, may waive or modify the conditions relating to redemptions for some or all shareholders pursuant to a written agreement with such shareholders. Upon a partial redemption of a shareholder's holding of Common Shares, a shareholder will be paid the Redemption Value, generally within 30 days of the redemption date. Upon the complete redemption of a shareholder's holding of Common Shares, at least 95% of the amount of the estimated Redemption Value will be paid in U.S. dollars within 30 days after the redemption date. Promptly after the Fund has determined the final net asset value of the Common Shares as of the date of redemption (which in the Directors' sole discretion may be after the annual audit of the Fund), the Fund will pay to such shareholder the balance, if any, of the amount to which such shareholder is entitled, or such shareholder will be obligated to repay to the Fund the excess, if any, of the amount previously paid over the amount to which such shareholder is entitled, in each case with interest thereon calculated at a rate equal to the Monthly U.S. dollar London Interbank Offered Rate (LIBOR) as of the first day of each month starting immediately after the redemption date, as published on the relevant day in the Wall Street J ournal, minus 0.25%. Payment of the Redemption Value to a shareholder on redemption will be made in cash by wire transfer or, in the discretion of the Directors (following consultation with the Investment Manager), in securities selected by the Directors or partly in cash and partly in securities selected by the Directors (following consultation with the Investment Manager). In-kind distributions may be made directly to the redeeming shareholder or distributed into a liquidating trust or other special purpose entity, series, class or account) and sold for the benefit of such shareholder, in which case (i) payment to such shareholder of that portion of his redemption attributable to such securities will be delayed until such time as such securities can be liquidated and (ii) the amount otherwise due such shareholder will be (a) increased or decreased to reflect the performance of such securities through the date on which the liquidation of such securities is effected, and (b) subject to the Management Fee, the Incentive Allocation and applicable expenses. Payment of the Redemption Value to a shareholder, in the sole discretion of the Directors, may be subject to the retention of a reserve for Fund liabilities and for other contingencies in such amounts as will be determined by the Directors in their sole discretion. If the reserve (or a portion thereof) is later determined by the Directors to have been in excess of the amount required, the proportionate amount of such excess will be returned to the shareholder promptly, with interest thereon calculated at a rate equal to Monthly LIBOR as of the first day of each month starting immediately after the redemption date, as published on the relevant day in the Wall Street J ournal, minus 0.25%. Neither the Fund nor the Administrator shall be responsible for any mis-delivery or non-receipt of any redemption request, whether sent by facsimile or mail. The Administrator will confirm via phone and in writing all faxed redemption requests that are received in good order. Shareholders failing to receive verbal confirmations within five Business Days should contact the Administrator to confirm receipt. Failure by a Shareholder to ensure the receipt of a redemption request may render faxed instructions or orders invalid. OO238802
34 Speci al Redemptions Notwithstanding the foregoing, if Mr. DeGiacinto dies, becomes incapacitated such that he is unable to participate in the management of the Fund's portfolio in the same manner as immediately before the onset of his incapacity, or ceases to be involved in the management of the Fund's portfolio, each for more than 45 consecutive days, the Fund shall promptly notify shareholders. Upon 30 days prior written notice to the Fund after the date of such notice from the Fund, shareholders will be permitted to redeem from the Fund (in whole or in part) as of the last day of the calendar quarter that occurs 30 days after the date such notice is received by the Fund. Upon invocation of such special redemption right, all redemption fees and the Redemption Limit will be waived; however, all other terms regarding redemptions will remain in effect. Mandatory Redemptions The Directors, in their sole discretion, may redeem any or all of a shareholders Common Shares at any time on not less than 10 days notice, such redemptions to be effective on the date specified in such notice. If the Directors, in their sole discretion, deem it to be in the best interests of the Fund to do so because the continued participation of any shareholder in the Fund might cause the Fund to violate any law, rule or regulation or expose the Fund to the risk of litigation, arbitration, administrative proceedings or any similar action or proceeding, the Directors may redeem any or all of such shareholders Common Shares at any time on not less than 5 days' notice, such redemption to be effective on the date specified in such notice. Payment pursuant to mandatory redemptions will be made in accordance with the procedure applicable to Common Shares that are redeemed at the request of a shareholder. Suspension of Redempti ons The Directors may suspend the determination of net asset value, the right of shareholders to require the Fund to redeem Common Shares and/or suspend or limit the distribution of redemption proceeds during any period when: (a) any market through which a substantial part of securities owned by the Fund are traded is closed, otherwise than for ordinary holidays, or dealings thereon are restricted or suspended; (b) there exists any state of affairs that constitutes a state of emergency or period of extreme volatility or illiquidity as a result of which (i) disposal of investments of the Fund would not be reasonably practicable or cannot be completed in a timely fashion and might seriously prejudice the shareholders or the Fund or (ii) it is not reasonably practicable for the Fund to determine fairly the value of its net assets; or (c) the Master Fund suspends the determination of the value of its net assets, withdrawals of its interests and/or the payment of withdrawal proceeds for any of the above reasons.
Conversion of Shares Any series of any class or sub-class of Common Shares, other than Series One shares, issued during any fiscal year will be converted immediately after the close of business on the last day of such fiscal year to Series One shares on the basis of the relative net asset value per share of the particular series being converted and of Series One shares; provided, however, that if a loss carryforward attributable to the Series One shares remains outstanding, Common Shares of all the outstanding series, other than Series One shares and the class or sub-class of Common Shares of any series with a loss carryforward attributable to it, will be converted into the first series without a loss carryforward attributable to it (the First Profitable Series). Such conversion will be effected by the Fund redeeming the shares to OO238802
35 be converted from the holder of such Common Shares and applying the proceeds of such redemption in paying for the relevant class or sub-class of new Series One shares or shares of the First Profitable Series, as the case may be. Net Asset Value The net asset value of a Common Share at any date will be the total net assets of the Fund attributable to the relevant series within the relevant class or sub-class divided by the number of Common Shares of that series within the relevant class or sub-class then outstanding. The total net assets of the Fund at any date will be determined on the accrual basis of accounting using United States generally accepted accounting principles ("GAAP") as a guideline and in accordance with the following: (a) No value will be assigned to goodwill; (b) Accrued Management Fees and Incentive Allocations and other fees will be treated as liabilities; (c) Dividends payable on the Common Shares, if any, after the date as of which the total net assets are being determined to shareholders of record prior to such date will be treated as liabilities; (d) The value of the Funds interest in the Master Fund will be valued based on the latest financial statements or interim net asset value report of the Master Fund and the Master Fund will value its investments as follows: (1) Securities that are listed on an exchange (including equities, options and futures) and are freely transferable shall be valued at the price supplied by an approved pricing source employing its then-current methodology either directly with the pricing service or via the prime broker or via the most recent available closing quotation on such exchange. (2) Foreign currency forward contracts shall be valued based on forward foreign exchange rates at the close of business on the date of determination. If the Investment Manager determines that such closing price does not accurately reflect the market value due to price limit constraints, such contract will be valued by using trade counterparty statements (or average of counterparty statements) as of the relevant close of business.; (3) Derivatives (excluding credit default swaps and total return swaps) shall be valued based on trade counterparty statements (or average of trade counterparty statements) as of the relevant close of business. (4) Index, over-the-counter single name and sovereign credit default swaps (CDS) shall be valued using the applicable closing price available from a third party valuation service (e.g., Financial Information Services (markit.com)). In the event a market quotation is not readily available or the pricing service is not deemed to be reliable by the Investment Manager, such contract will be valued by using trade counterparty statements (or average of counterparty statements) as of the relevant close of business. (5) Over-the-counter total return swaps shall be valued by the Investment Manager on the basis of the asset underlying such total return swaps, as determined by the Investment Manager. OO238802
36 (6) Debt securities (corporate bonds) shall be valued at the bid or average bid supplied by approved pricing sources. (7) Government bonds shall be valued at the price supplied by an approved pricing source or via the prime broker. (8) Residential and Commercial Mortgage Backed Securities (RMBS and CMBS) shall be valued at the bid or average bid provided by approved pricing sources that are known to actively trade or value RMBS or CMBS, as applicable, or quote or otherwise give valuations concerning such securities. In the event the difference between the maximum bid and the minimum bid is greater than 10% when divided by the median bid (the average of all bids received) the market value of such securities will be deemed Level 3 assets under Fair Value Measurements and Disclosures-Overall Subtopic (Subtopic 820-10) of the Financial Accounts Standards Board Accounting Standards Codification (ASC820-10). If pricing from the above described sources is unavailable or not deemed to be reliable, the Investment Manager may utilize prices based upon yields or prices of securities of comparable quality, collateral base, coupon, maturity and type. Mortgage assets used for comparison purposes should be substantially the same, as determined by the Investment Manager, in its sole discretion. If neither quotations nor observable inputs are available, the Investment Manager will then revert to mark-to-model pricing verification, where inputs will be constructed from the Investment Managers expectation and assumptions the market participants may use for prepayments, defaults, severities and discount rates to develop asset cash flows and corresponding price quotations even if the market participant assumptions are different than the Investment Managers expectations. The market value of such priced securities will be deemed Level 3 assets under ASC820-10. (9) The Investment Manager will determine, in its sole discretion, the manner of valuing all other assets and liabilities of the Master Fund. (10) Notwithstanding the foregoing, if in the reasonable judgment of the Directors, the listed price for any securities held by the Master Fund, or any securities in which the Master Fund sells short, does not accurately reflect the value of such securities, the Directors may value such securities at a price that is more or less than the quoted market price for securities. The Fund has retained the Investment Manager, pursuant to the Management Agreement, to determine the value of the Funds assets in accordance with the principles set out above and has also retained the Administrator, pursuant to the Administration Agreement (as defined below), to, amongst other things, calculate the net asset value of the Common Shares and to disseminate that information to the Fund and its shareholders. In connection with the determination of the value of the assets of the Fund, the Investment Manager may consult with and is entitled to rely upon the advice of the Fund's brokers, custodians or other advisers and in calculating the net asset value of the Common Shares, the Administrator is entitled to rely on the advice of the Investment Manager, the Funds brokers, custodians or other advisers. To the extent permissible under applicable law, in no event and under no circumstances will the Board of Directors, the Administrator or the Investment Manager incur any individual liability or responsibility for any determination made, advice given or other action taken or omitted by them in good faith with respect to the determination of the value of the Funds assets or the net asset value of the Common Shares of the Fund, as the case may be. 15. TAXATION AND ERISA MATTERS The tax status of the Fund and its shareholders under the tax laws of the Cayman Islands and the United States is summarized below. The summary is based on the assumption that the Fund is owned, managed and operated as contemplated. The summary is considered in the opinion of the attorneys indicated below to be a correct interpretation of existing laws as applied at the date of this Memorandum, OO238802
37 but no representation is made or intended by the Fund (i) that changes in such laws or their application or interpretation will not be made in the future or (ii) that the United States Internal Revenue Service (the IRS) will agree with the above-described interpretation as applied to the method of operation of the Fund. Persons interested in subscribing for the Funds Common Shares should consult their own tax advisers with respect to the tax consequences, including the income tax consequences, if any, to them of the purchase, holding, redemption, sale or transfer of the Common Shares. Pursuant to IRS regulations, the Fund and its tax advisors hereby inform you that: (i) any tax advice contained herein is not intended and was not written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed on the taxpayer; (ii) any such advice was written to support the promotion or marketing of the Common Shares described in this Memorandum; and (iii) each taxpayer should seek advice based on the taxpayers particular circumstances from an independent tax advisor. The following statements are based on advice received by the Fund as to United States taxes and ERISA matters from Seward & Kissel LLP, New York, New York, and as to Cayman Islands taxes and the European Union Savings Directive from Ogier, Grand Cayman, Cayman Islands. Cayman Islands Taxes
There is, at present, no direct taxation in the Cayman Islands and interest, dividends and gains payable to the Fund will be received free of all Cayman Islands taxes. The Fund is registered as an "exempted company" pursuant to the Companies Law (Revised). The Fund has received an undertaking from the Governor in Cabinet of the Cayman Islands to the effect that, for a period of twenty years from such date, no law that thereafter is enacted in the Cayman Islands imposing any tax or duty to be levied on profits, income or on gains or appreciation, or any tax in the nature of estate duty or inheritance tax, will apply to any property comprised in or any income arising under the Fund, or to the Shareholders thereof, in respect of any such property or income. The Master Fund is registered as an "exempted limited partnership" pursuant to the Exempted Limited Partnership Law (Revised). The Master Fund has received an undertaking from the Governor in Cabinet of the Cayman Islands to the effect that, for a period of 50 years from such date, no law that thereafter is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations, shall apply to the Master Fund, or to any partner thereof, in respect of the operations or assets of the Master Fund or the partnership interest of a partner therein. Shareholder Level. Shareholders will not be subject to any income, withholding or capital gains taxes in the Cayman Islands, with respect to the Common Shares of the Fund owned by them and dividends received on such Common Shares, nor will they be subject to any estate or inheritance taxes in the Cayman Islands. United States Taxes Fund Level - Capital Gains. Section 864(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), provides a safe harbor (the Safe Harbor) pursuant to which a foreign corporation that engages in the United States in trading securities for its own account will not be deemed to be engaged in a United States trade or business. Proposed Treasury Regulations interpreting the Safe Harbor further provide that a foreign corporation (other than certain dealers in stocks, securities or commodities) that engages in trading in derivatives for its own account will not be deemed to be engaged in a United States trade or business. Although the proposed regulations are not final, the IRS has indicated in the preamble to the proposed regulations that for periods prior to the effective date of the proposed regulations, taxpayers may take any reasonable position with respect to the application of Code Section 864(b)(2) to derivatives, and that a position consistent with the proposed regulations will be considered a reasonable position. The Fund intends to conduct its activities in a manner so as to meet the requirements of the Safe Harbor. Thus, the Fund's securities and derivatives trading activities should not constitute a United States trade or business, and the Fund generally should not be subject to the OO238802
38 regular United States federal income tax on its trading profits. However, if certain of the Fund's activities (for example, making loans or investments in credit default swaps) were determined not to be of the type described in the Safe Harbor, the Fund may be considered to be engaged in a United States trade or business, in which case the Fund would be subject to United States federal income tax and branch profits tax on some or all of its income and profits. Assuming that the Fund qualifies for the Safe Harbor, the Fund will not be subject to any United States federal income tax on its capital gains from the sale of securities to the extent that such securities are not classified as "United States real property interests" within the meaning of Code section 897. The Fund will be subject to United States federal income tax on any gain realized from the sale of a "United States real property interest", which term generally includes, among other things, stock of a "United States real property holding corporation". Fund Level - Interest and Dividend Income. Assuming that the Fund qualifies for the Safe Harbor, the only United States federal income taxes which will be payable by the Fund on its income from dividends and interest is the 30% withholding tax applicable to dividends and certain interest income considered to be from sources within the United States. This tax will apply even if the Fund complies with its obligations under the Hiring Incentives to Restore Employment Act (the HIRE Act) (as discussed below).Generally, interest received upon obligations issued after J uly 18, 1984 that are in registered form is exempt from this withholding tax. Shareholder Level. Shareholders, as long as they are neither citizens nor residents of the United States nor engaged in a trade or business in the United States, are not subject to any United States federal income, withholding, capital gains, estate or inheritance taxes with respect to the Common Shares owned by them or dividends received on such Common Shares. Non-U.S. shareholders may be required to make certain certifications as to the beneficial ownership of the Common Shares and the non-U.S. status of such beneficial owner in order to be exempt from United States information reporting and backup withholding tax. The HIRE Act provides that, beginning on J anuary 1, 2013, the Fund and the Master Fund must enter into an agreement with the IRS to disclose the name, address and taxpayer identification number of certain United States persons that own, directly or indirectly, an interest in the Fund or the Master Fund, as well as certain other information relating to any such interest. If the Fund and the Master Fund fail to enter into such an agreement, then a 30% withholding tax will be imposed on payments to the Fund or the Master Fund of United States source income and proceeds from the sale of property that could give rise to United States source interest or dividends. In J uly 2011, the IRS announced that implementation of the withholding tax provisions of the HIRE Act will be postponed to J anuary 1, 2014 (J anuary 1, 2015, in the case of proceeds from the sale of property). Although the Fund and the Master Fund will attempt to satisfy any obligations imposed on them to avoid the imposition of this withholding tax, no assurance can be given that the Fund and the Master Fund will be able to satisfy these obligations. If the Fund or the Master Fund becomes subject to a withholding tax as a result of the HIRE Act, the value of Common Shares held by all shareholders may be materially affected. Other Taxes Depending on the tax laws of any other jurisdiction, there may be income taxes or withholding taxes imposed on dividends, interest income or capital gains received by the Fund on securities issued by governments or corporations of those jurisdictions.
U.S. Shareholders - Speci al Considerations PFIC Status. As noted above, Common Shares may be sold to a limited number of United States investors that are pension and profit sharing trusts or other tax-exempt organizations (U.S. Exempt Shareholders). The Fund is a passive foreign investment company (PFIC) as defined in Code section 1297. The Fund is not required to furnish information necessary for a United States person to treat the Fund as a qualified electing fund in the event that a United States person that is not a U.S. Exempt OO238802
39 Shareholder is considered to own Common Shares under the constructive ownership rules of Code section 1298. Unrelated Business Taxable Income. While the Fund may purchase securities on margin, borrow money and otherwise utilize leverage in connection with its investments, under present law that leverage should not be attributed to U.S. Exempt Shareholders in the Fund. Accordingly, assuming a U.S. Exempt Shareholder does not borrow money or otherwise utilize leverage to purchase its Common Shares, the U.S. Exempt Shareholder generally should not realize unrelated debt-financed income as defined in Code section 514 or unrelated business taxable income as defined in Code section 512 with respect to its investment in the Fund and should generally not be subject to United States federal income tax under the PFIC provisions of the Code with respect to its investment in the Fund. Controlled Foreign Corporation Status. The Funds Administrator will monitor its shareholders in an attempt to ensure that at all times the ownership of the Fund by U.S. Exempt Shareholders is below the threshold amounts set forth in Code section 957 and therefore that the Fund will not be classified as a "controlled foreign corporation" as defined in Code section 957, although there can be no assurance that the Administrator will be able to do so. Information Reporting. U.S. Exempt Shareholders may be subject to certain IRS filing requirements. For example, pursuant to Code section 6038B, a United States person which transfers property (including cash) to a foreign corporation in exchange for stock in the corporation is in some cases required to file an information return with the IRS with respect to such transfer. Accordingly, a U.S. Exempt Shareholder may be required to file an information return with respect to its investment in the Fund. Additional reporting requirements may be imposed on a U.S. Exempt Shareholder that acquires Common Shares with a value equal to at least 10% of the aggregate value of all of the Common Shares. U.S. Exempt Shareholders also may be required to file other information returns with the U.S. Treasury Department or the IRS with respect to their investment in the Fund. Shareholders should consult their own tax advisers with respect to any applicable filing requirements. ERISA and Retirement Pl an Matters The following is a summary of certain aspects of laws and regulations applicable to retirement plan investments as in existence on the date hereof, all of which are subject to change. This summary is general in nature and does not address every issue that may be applicable to the Fund or a particular investor. The Fund may accept subscriptions from pension and profit-sharing plans maintained by U.S. corporations and/or unions, individual retirement accounts and Keogh plans, entities that invest the assets of such accounts or plans and other entities investing plan assets (all such entities are herein referred to as Benefit Plan Investors) as well as subscriptions from plans maintained by governmental entities, churches and non-U.S. companies. It is anticipated that, at various times, participation in the Fund by Benefit Plan Investors that are subject to Section 4975 of the Code but that are not subject to Title I of ERISA (IRA Investors) may be significant and result in the Funds assets being subject to Section 4975 of the Code. It is also anticipated that, at various times, participation by IRA Investors in the Fund and the Master Fund may be significant and result in the Master Funds assets being subject to Section 4975 of the Code. In order to prevent the assets of the Fund or Master Fund from becoming subject to Title I of ERISA, during any period when participation by IRA Investors in the Fund or the Master Fund is significant, the Fund and/or the Master Fund, as applicable, will not knowingly accept further contributions from Benefit Plan Investors that are subject to Title I of ERISA (ERISA Investors) and will also require the withdrawal of the interests of its existing ERISA Investors. Furthermore, it is anticipated that the assets of the Fund and the Master Fund will not be subject to any other law or regulation specifically applicable to governmental, church or non-U.S. plans (Similar Law). Certain duties, obligations and responsibilities are generally imposed on persons who serve as fiduciaries with respect to employee benefit plans or accounts; for example, ERISA and the Code prohibit OO238802
40 acts of fiduciary self-dealing and certain transactions between a plan and parties-in-interest or disqualified persons (as such terms are defined in ERISA and the Code). In the Funds Subscription Agreement, each plan investor will be required to represent that the person who is making the decision to invest in the Fund and thereby in the Master Fund (its Fiduciary) is independent and has not relied on any advice from the Fund, the Investment Manager, any placement agent associated with the Fund, or any of their affiliates with respect to the investment in the Fund and thereby in the Master Fund. Fiduciaries will also be asked to determine (i) that the investment in the Fund and thereby in the Master Fund is prudent, (ii) that the structure, incentives and operation of the fee arrangements have been adequately disclosed, further the interests of the investor and provide reasonable compensation for the services provided, (iii) that the calculation of the net asset value of the Common Shares as described in this Memorandum represents the fair market value of the Common Shares; (iv) that the investors current and anticipated liquidity needs will be met, given the limited rights to redeem or transfer the Common Shares, (v) that the investment in the Fund and thereby in the Master Fund and investment program described in this Memorandum are permitted under the laws, rules and documents governing the investor; (vi) that the investment will permit the investors overall portfolio to remain adequately diversified; and (vii) with respect to any plans maintained by governmental entities, churches and non-U.S. companies, that their investment will not subject the Funds assets to any other law or regulation specifically applicable to governmental, church or non-U.S. plans (Similar Law). Accordingly, Fiduciaries should consult their own investment advisors and their own legal counsel regarding the investment in the Fund and thereby in the Master Fund and its consequences under applicable law, including ERISA, the Code and any Similar Law. Generally, when a benefit plan invests in another entity, the plans assets include its investment, but do not, solely by reason of its investment, include any of the underlying assets of the entity. However, the U.S. Department of Labor issued a regulation, at 29 CFR 2510.3-101, as modified in application by Section 3(42) of ERISA (the "Plan Assets Regulation"), which defines the circumstances under which this general rule does not apply. In those circumstances, an investment in an entity, such as the Fund or the Master Fund, by a plan or account subject to Title I of ERISA or Section 4975 of the Code includes both its investment in the entity and an undivided interest in each of the underlying assets of the entity. Therefore, any person who exercises authority or control regarding the management or disposition of the underlying assets of that entity is a fiduciary to each account investing in the entity and is subject to the laws and regulations applicable to each plan or account invested in the Fund or the Master Fund. Under the Plan Assets Regulation, the underlying assets of the Fund will be deemed to be plan assets when participation by IRA Investors in the Fund is significant. Participation is significant if IRA Investors interests in the Fund equals or exceeds 25% or more of any class of equity interests, excluding from this calculation any non-IRA Investor interests held by the Investment Manager and certain affiliated persons and entities (the 25% Threshold). Similarly, the underlying assets of the Master Fund will be deemed to be plan assets subject to Section 4975 of the Code if the Master Fund equals or exceeds the 25% Threshold. This 25% Threshold is mechanical and is calculated after each contribution or redemption of an equity interest. The Investment Manager anticipates that participation by IRA Investors in the Fund and the Master Fund will at various times equal or exceed the 25% Threshold. During these periods, the Investment Manager will be a fiduciary to each IRA Investor investing in the Fund and/or the Master Fund directly or indirectly through a Benefit Plan Investor. In the Subscription Agreement, the Investment Manager acknowledges its status as a fiduciary with respect to each IRA Investor during any period when the Fund (or the Fund and the Master Fund) equals or exceeds the 25% Threshold. During any period when it is a fiduciary to an IRA investor, the Investment Manager, under Section 4975(c)(1) of the Code, will be prohibited from causing the Fund to engage in certain transactions with or "disqualified persons". The definition of the term "disqualified person" includes an IRA Investors fiduciaries and service providers and other parties having relationships to such persons. Among the transactions that are prohibited are sales or leasing of property, extensions of credit and the furnishing of services between the Fund and a disqualified person to an IRA Investor. In addition, the Code prohibits fiduciaries from engaging in acts of self-dealing in transactions involving IRA Investor assets. However, as the Investment Manager is obligated to invest all of the Funds Investable Assets in the Master Fund, OO238802
41 the fiduciary responsibilities and potential for prohibited transactions are extremely limited unless the Master Fund also equals or exceeds its 25% Threshold. During any period when the Investment Manager, acting in its capacity as the investment manager of the Master Fund, is a fiduciary to an IRA Investor directly or indirectly investing in the Master Fund, the Investment Manager, under Section 4975(c)(1) of the Code, will be prohibited from causing the Master Fund to engage in certain transactions with disqualified persons or from engaging in acts of self- dealing in transactions involving IRA Investor assets. In order to enable the Master Fund to comply with the prohibited transaction rules the Code, each IRA Investor is required to deliver to the Investment Manager, in writing, all of the information that the Investment Manager may require or request in order to avoid violations of any provisions of Section 4975 of the Code or any other laws applicable to the investor, and promptly to notify the Investment Manager, in writing, of any change in the information so furnished. While the prohibited transaction rules may restrict the Fund and the Master Fund from engaging in certain transactions in which it might otherwise engage if it were not subject to such rules, the Code contains various exemptions from the prohibited transaction rules which will permit the Investment Manager to conduct the business of the Fund and the Master Fund. Among these prohibited transaction exemptions are an exemption for reasonable arrangements with a disqualified person for necessary services and an exemption for transactions with service providers for adequate consideration. If the Internal Revenue Service determines that any transaction entered into by the Fund or the Master Fund constitutes a non-exempt prohibited transaction, the disqualified person involved in the transaction would be liable to pay an excise tax and the Investment Manager would be required to correct the prohibited transaction by rescinding the transaction and restoring to IRA Investors any loss resulting from such prohibited transaction. All Plans subject to Title I of ERISA (ERISA Plans) are required to file annual reports (Form 5500) with the U.S. Department of Labor setting forth the fair market value of all ERISA Plan assets. Under ERISAs general reporting and disclosure rules, ERISA Plans are required to include information regarding their assets, expenses and liabilities. To facilitate a plan administrators compliance with these requirements, it is noted that the descriptions of the fees and expenses contained in this Memorandum, including but not limited to any incentive or management fees payable to the Investment Manager, as supplemented annually by the Funds audited financial statements and the notes thereto, are intended to satisfy the alternative reporting option for eligible indirect compensation on Schedule C of Form 5500. In addition, the Code requires that all IRA assets be held in trust or by an approved custodian. Accordingly, the Subscription Agreement requires each IRA Investors trustee or custodian to execute the IRA Investors Subscription Agreement. European Union Savings Directive The EU member states have adopted a Savings Directive (2003/48/EC) (Directive), which came into effect on J uly 1, 2005. The Directive requires that paying agents in one member state provide to the tax authorities of another member state details of payments of interest or other similar income (including income, by way of distribution or redemption, made by or on behalf of certain investment funds) paid by them to or for the benefit of an individual resident in that other member state. (Instead of providing that information, certain states operate a withholding system in relation to payments of that kind.) The implementation of the Directive affects certain dependencies and territories of EU member states, including the Cayman Islands, which have voluntarily agreed to apply the same or equivalent measures to those contained in the Directive. In the Cayman Islands, those measures came into effect on J uly 1, 2005. In common with the Directive, the Cayman Islands legislation applies to interest payments made by a paying agent to an individual resident in the EU. Under the Cayman Islands legislation, interest payment includes income paid (by way of distribution or redemption) by or on behalf OO238802
42 of certain UCITS or equivalent undertakings for collective investment established in the Cayman Islands (called a UCITS equivalent). For the purpose of the Directive, the Administrator will make the payments to investors and will usually be the paying agent. However, an investor may become a paying agent for purpose of the Directive if (a) that investor is based in the EU or certain states that have agreed to implement measures equivalent to those contained in the Directive (including Switzerland, the Channel Islands and Monaco); and (b) that investor makes an investment in the Fund on behalf of other underlying investors who are individuals or certain unincorporated entities resident in the EU. In those circumstances, under implementing legislation in that investors country of residence, the investor may be required to (i) obtain all relevant information relating to its underlying investors and their indirect investment in the Fund; and (ii) make returns to the appropriate tax authorities, or withhold tax at applicable rates from any distribution made to underlying investors in respect of a payment received from the Fund. An investor of this kind should seek tax advice from an independent tax advisor, based on its own circumstances. 16. BOARD OF DIRECTORS The Directors are responsible for the overall management and control of the Fund in accordance with the Funds Memorandum and Articles of Association. However, the Directors do not take part in the day-to-day operations and administration of the Fund or the Master Fund, or the making or approving of any investment decisions, having delegated such responsibilities to the Investment Manager pursuant to the Management Agreement and the day-to-day administrative functions to the Administrator pursuant to the Administration Agreement in accordance with its power of delegation as set out in the Articles of Association. Every Director shall be indemnified and secured harmless out of the assets and funds of the Fund against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such Director, other than by reason of such Directors own gross negligence (as such term is interpreted in accordance with the laws of the State of Delaware), willful default or violation of applicable laws, in or about the conduct of the Funds business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such Director in defending (whether successfully or otherwise) any civil proceedings concerning the Fund or its affairs in any court whether in the Cayman Islands or elsewhere. The Directors of the Fund are Clayton DeGiacinto, Scott Dakers and Richard Ruffer. Mr. DeGiacinto serves in his capacity as Director without compensation. Messrs. Dakers and Ruffer are paid a fee for their services. The Directors may also be paid all reasonable travel, hotel and other related expenses properly incurred by them in attending meetings of the Directors or any committee of the Directors or any general meeting or any meeting held in connection with the business of the Fund. A Director is not required to retire upon reaching a certain age. If additional Directors are elected, the Fund may compensate such Directors (other than persons affiliated with the Investment Manager or General Partner) with respect to services rendered in that capacity. Messrs. DeGiacinto, Dakers and Ruffer may serve as directors of other investment vehicles. For the biography of Mr. DeGiacinto see Section 5, Background of the Investment Manager above. The biographies of Messrs. Dakers and Ruffer are set forth below. OO238802
43 Scott Dakers joined Ogier Fiduciary Services (Cayman) Limited in 2005 and is a Director with and Head of Ogier Fund Services, Cayman Islands. Before joining Ogier Fiduciary Services, he spent two years in Scotland with Aviva plc, a global leading insurer and 5 years with UBS (Cayman Islands) Ltd in Cayman. Prior to this, Mr. Dakers worked with Lazard Brothers in London, Coopers & Lybrand in Bahamas and Touche Ross in Scotland. Mr. Dakers qualified as a Chartered Accountant in 1993 and is a member of the Institute of Chartered Accountants in Scotland and the Cayman Islands Directors Association. Richard Ruffer is a Senior Vice President of Intertrust Global Holdings (Cayman) Limited and is a resident of Grand Cayman. Mr. Ruffer serves as an independent director on hedge funds, private equity funds and special purpose vehicles. Prior to joining Intertrust in 2008, Richard co-founded an opportunity fund focused on commercial real estate debt investments, both cash and synthetic, and asset-based lending. Until 2007, Richard was a Senior Managing Director at Bear, Stearns & Co. Inc. in New York City where he was Head of Commercial Mortgage Securitization and Co-Head of Commercial Real Estate CDO Banking. Richard also sat on the Bear Stearns commercial mortgage loan credit committee. After graduating from law school in 1990, Richard practiced as a tax attorney in New York City at Brown & Wood (which has since merged with Sidley Austin) and at Rogers & Wells (which has since merged with Clifford Chance), where he specialized in investment funds and structured finance. In 1994, he joined Moodys Investors Service as a Senior Analyst in their mortgage finance group. Richard received a BA, magna cum laude, from Hamilton College, a J D, cum laude, from Cornell Law School and an LLM in Taxation from New York University School of Law. Richard is a retired member of the New York and New J ersey Bars and is a member of the Cayman Islands Directors Association. 17. ADMINISTRATOR The Fund has entered into an agreement with GlobeOp Financial Services (Cayman) Limited pursuant to which the Fund has engaged the Administrator to perform certain day-to-day administrative services on its behalf and an agreement with the Administrator pursuant to which the Fund has engaged the Administrator to perform certain middle-office and/or back-office support activities on its behalf (together, the Services Agreements).
The Administrator will, among other things, (i) assist with the preparation of, and distribute, communications to shareholders including the Funds quarterly and annual reports; (ii) maintain the principal company records and books of account of the Fund; (iii) disburse all legal fees, accounting fees, advisory fees and other expenses; (iv) assist with processing certain trades and investments; (v) distribute funds to shareholders; and (vi) compute and publish the Funds net asset value on a monthly basis based on the values of the Funds assets provided by the Investment Manager. The Administrator may consult with the Investment Manager in connection with the performance of any of its duties with respect to the Fund. The Administrator may delegate any of its duties to a sub-contractor, including to an affiliate of the Administrator. The Fund will indemnify and hold harmless the Administrator, its affiliates and any of their respective officers, directors, members, shareholders, employees, and agents, or any of their successors or assigns (each, an Administrator Indemnified Party), from and against any and all losses, judgments, liabilities, expenses (including, without limitation, attorneys fees) and amounts paid in settlement of any claims arising out of, or in connection with, any action taken or omitted by any of the foregoing Administrator Indemnified Parties, unless such action or omission is found by a final determination of an arbitrator, mediator, or court of competent jurisdiction to have resulted solely from the fraud, gross negligence or willful misconduct by such Administrator Indemnified Party in connection with the performance of its duties and obligations under the Services Agreements.
The Administrator will receive a monthly fee from the Fund, subject to a monthly minimum fee. Certain other out-of-pocket expenses of the Administrator, as well as applicable data, communication and technology-related charges may also be charged to the Fund or its Investment Manager in accordance with the Services Agreements.
OO238802
44 The Services Agreements may generally be terminated at any time without penalty by the Fund on 90 days notice or by the Administrator on 180 days notice, except that it may be terminated upon less notice in certain instances.
The Administrator may have relationships with providers of technology, data or other services to the Fund and/or Investment Manager, and the Administrator may receive economic and/or other benefits as a result.
The Administrator does not act as a guarantor of the Common Shares. The Administrator is not responsible for any of the trading or investment decisions of the Fund (all of which are made by the Investment Manager), or the effect of such trading decisions on the performance of the Fund.
18. FISCAL YEAR AND FISCAL PERIODS; FINANCIAL STATEMENTS; AUDITORS The fiscal year of the Fund will end on December 31 of each year. Since Common Shares may be sold by the Fund and dividends declared on Common Shares during the course of a fiscal year, the Funds Articles of Association provide for fiscal periods, which are portions of a fiscal year, for the purpose of allocating net profits and net losses to the Common Shares. A new fiscal period will commence on the first day of each fiscal year, the date next following the date of any redemption of Common Shares, the date of any new subscription for Common Shares and the date next following the date established by the Directors for determining the record ownership of Common Shares for the payment of dividends, and the prior fiscal period will terminate on the date immediately preceding the first day of a new fiscal period. Each shareholder will receive reports regarding the performance of the Fund quarterly and audited year-end financial statements annually. In general, the Funds financial statements will be prepared in accordance with GAAP. Rothstein Kass & Company (Cayman) is the auditor for the Fund. The Directors may change the Funds auditor without prior notice to the shareholders. 19. GENERAL COMMENTS The summary set forth herein does not purport to be and should not be constituted as a complete description of the Memorandum and Articles of Association of the Fund, the Administration Agreement or the Management Agreement, copies of which will be furnished on request made to the Fund at its principal office. Prevention of Money Laundering United States: In order to comply with applicable laws aimed at the prevention of money laundering and terrorist financing, each prospective investor that is an individual will be required to represent in the Subscription Agreement that, among other things, he is not, nor is any person or entity controlling, controlled by or under common control with the prospective investor, a Prohibited Person as defined in the Subscription Agreement (generally, a person involved in money laundering or terrorist activities, including those persons or entities that are included on any relevant lists maintained by the U.S. Treasury Departments Office of Foreign Assets Control, any senior foreign political figures, their immediate family members and close associates, and any foreign shell bank). Further, each prospective investor which is an entity will be required to represent in the Subscription Agreement that, among other things, (i) it has carried out thorough due diligence to establish the identities of its beneficial owners, (ii) it reasonably believes that no beneficial owner is a Prohibited Person, (iii) it holds the evidence of such identities and status and will maintain such information for at least five years from the date of its complete redemption from the Fund, and (iv) it will make available such information and documentation and any additional information that the Fund and the Administrator may require upon request that is required under applicable regulations. OO238802
45 Cayman Islands: To ensure compliance with applicable statutory requirements relating to anti- money laundering and anti-terrorism initiatives, the Fund or the Administrator will require verification of identity, address and source of funds from all prospective investors. Depending on the circumstances of each application and the anti-money laundering policies and procedures of the Administrator, a detailed verification might not be required where (1) the applicant is a qualified financial institution; or (2) the applicant makes the payment by electronic funds transfer from an account held in the applicants name at a qualified financial institution, and such institution provides an instruction letter or copy of SWIFT notification on behalf of the applicant in a form acceptable to the Company and Administrator; or (3) a qualified financial institution provides an introducers letter on behalf of the applicant. Such exceptions will only apply if the financial institution or intermediary referred to above is within a country recognized as having sufficient anti-money laundering regulations. In the case of (1) above, the applicant should ensure that its remitting bank includes the applicant s full name and account number in any confirmation sent to avoid any delays. As mentioned above, the Fund, or the Administrator reserves the right to request such information and documentation and any additional information as is necessary to verify the identity, address and source of funds of a prospective investor. The Fund or the Administrator also reserves the right to request such verification evidence in respect of a transferee of Common Shares. In the event of delay or failure by the prospective investor or transferee to produce any evidence required for verification purposes, the Fund or the Administrator may refuse to accept or process (in case of the Administrator) the application or (as the case may be) to register the relevant transfer, and (in the case of a subscription of Common Shares) any funds received will be returned without interest to the account from which such funds were originally debited. The Fund or the Administrator also reserves the right to refuse to make or process (in case of the Administrator) any redemption payment or distribution to a Shareholder if any of the Directors of the Fund or the Administrator suspects or is advised that the payment of any redemption or distribution moneys to such Shareholder might result in a breach or violation of any applicable anti-money laundering or other laws or regulations by any person in any relevant jurisdiction, or such refusal is considered necessary or appropriate to ensure the compliance by the Fund, its Directors or the Administrator with any such laws or regulations in any relevant jurisdiction. The Fund and the Administrator also reserve the right to request such verification evidence in respect of a redemption request. If, as a result of any information or other matter which comes to his attention, any person resident in the Cayman Islands or elsewhere (including the Fund, its Directors, its compliance officer, its money laundering reporting officer and/or the Administrator) knows or suspects that payment to the Fund (by way of subscription or otherwise) is the proceeds of criminal conduct, such person is required to report such information or other matter pursuant to the Proceeds of Crime Law, 2008 of the Cayman Islands and such report shall not be treated as a breach of any restriction upon the disclosure of information imposed by law or otherwise. Regulation The Fund falls within the definition of a mutual fund in terms of the Mutual Funds Law (Revised) of the Cayman Islands (the Mutual Funds Law) and accordingly, is regulated under the Mutual Funds Law. However, the Fund is not required to be licensed or to employ a licensed mutual fund administrator since the minimum interest purchasable by a prospective investor in the Fund is at least $100,000 (U.S.). Accordingly, the obligations of the Fund are (a) to register the Fund with the Cayman Islands Monetary Authority (the "Monetary Authority"), (b) to file with the Monetary Authority prescribed details of this Memorandum and any changes to it, (c) to file annually with the Monetary Authority accounts audited by an approved auditor, (d) to file annually with the Monetary Authority a fund annual return and (e) to pay a prescribed initial registration fee and annual fee. The Fund is subject to the supervision of the Monetary Authority and the Monetary Authority has wide supervisory powers under the Mutual Funds Law in that regard, including the power to instruct the Fund to have its accounts audited and to submit them to the Monetary Authority within such time as the OO238802
46 Monetary Authority specifies. In addition, the Monetary Authority may ask the Directors to give the Monetary Authority such information or such explanation in respect of the Fund as the Monetary Authority may reasonably require to enable it to carry out its duty under the Mutual Funds Law. The Monetary Authority shall, whenever it considers it necessary, examine, including by way of on-site inspections or in such other manner as it may determine, the affairs or business of the Fund for the purpose of satisfying itself that the provisions of the Mutual Funds Law and applicable anti-money laundering regulations are being complied with. The Directors must give the Monetary Authority access to or provide at any reasonable time all records relating to the Fund and the Monetary Authority may copy or take an extract of a record it is given access to. Failure to comply with these requests by the Monetary Authority may result in substantial fines on the part of the Directors and may result in the Monetary Authority applying to the court to have the Fund wound up. The Monetary Authority may take certain actions if it is satisfied that a regulated mutual fund: (a) is or is likely to become unable to meet its obligations as they fall due; (b) is carrying on or is attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors; (c) is not being managed in a fit and proper manner; or (d) has persons appointed as Director, manager or officer that is not a fit and proper person to hold the respective position. Failure to comply with any supervisory requests by the Monetary Authority may result in substantial fines. In addition, the Monetary Authority has wide powers to take action if certain events occur, such as the Fund not being able to meet its obligations when they come due or the Fund carrying on its business in a manner that is prejudicial to its investors or creditors. The powers of the Monetary Authority in these circumstances include the power to require the substitution of a Director and, at the expense of the Fund, to appoint a person to advise the Fund on the proper conduct of its affairs; and, at the expense of the Fund, to appoint a person to assume control of the affairs of the Fund including, but not limited to, having the ability to terminate the business of the Fund. There are other remedies available to the Monetary Authority including the ability to apply to the courts of the Cayman Islands for approval of other actions, to cancel the registration of the Fund or to require the Fund to reorganize its affairs in a manner specified by the Monetary Authority. The Monetary Authority may, on request, provide information about the Fund to an overseas regulator exercising regulatory functions against the Fund. The Mutual Funds Law stipulates the considerations that the Monetary Authority must have regard to before complying with an information request. The Master Fund is also a regulated mutual fund under the Mutual Funds Law and is subject to similar obligations as set forth above for the Fund.
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47 20. PROCEDURE TO PURCHASE COMMON SHARES Persons interested in purchasing Common Shares of the Fund should inform themselves as to (i) the legal requirements within their own countries for the purchase of Common Shares and (ii) any foreign exchange restrictions that they might encounter. Any person desiring to subscribe for Common Shares of the Fund is requested to complete and execute the Subscription Agreement furnished by the Fund, offering in the Subscription Agreement to purchase a specified dollar amount of Common Shares, and to send a copy of the completed and executed Subscription Agreement by facsimile to the Administrator at 914-729-9500 at least five Business Days prior to the relevant subscription date by 5:00 pm Cayman Islands time, with all original documents to follow by mail to Axonic Credit Opportunities Overseas Fund, Ltd., c/o GlobeOp Financial Services (Cayman) Limited, 45 Market Street, Suite 3205 2nd Floor, Gardenia Court, Camana Bay, Grand Cayman KY1-9003, Cayman Islands. Wired funds must be received one Business Day prior to the subscription date. The completed and executed copy of the Subscription Agreement, including adequate anti-money laundering documentation, must be received by the Fund at least five Business Days prior to the date of subscription. Payment of the amount of all subscriptions for a particular opening of the Fund must be received by the Fund two Business Days prior to the date on which the Fund is accepting subscriptions. The Fund will advise each subscriber promptly of the Funds acceptance of an offer to subscribe for Common Shares. Payment in the amount of the subscription in United States dollars should be made in accordance with the terms of the Subscription Agreement. The acceptance or nonacceptance of any subscription is solely at the discretion of the Fund and no reason need be given for the nonacceptance of any subscription. Any subscription amounts not accepted by the Fund will be promptly returned without interest to the account from which the monies were originally debited. The Fund and the Administrator or its respective subsidiaries, affiliates, directors, officers, shareholders, employees, agents, and permitted delegates reserve the right to request such documentation as any of them deems necessary to verify the identity and source of funds of the applicant and to verify the source of the relevant money. Prospective shareholders who are existing investors in one or more funds managed by the Investment Manager and believe they have supplied documentation verifying their identity to the Fund or an affiliate in the past may contact the Administrator to determine whether any additional information is necessary. Failure to provide the necessary evidence may result in applications being rejected by the Fund or in delays in processing of redemption or in the dispatch of documents and the issuance of Common Shares. Prospective investors should note that withdrawal proceeds will not be paid to a third party account. The Subscription Agreement to be executed and delivered by prospective shareholders contains the prospective shareholders agreement to indemnify and hold harmless the Fund, the Investment Manager, the Administrator and their respective affiliates, directors, members, partners, shareholders, officers, employees and agents against any and all losses, liabilities, damages, penalties, costs, fees and expenses (including legal fees and disbursements) that may result, directly or indirectly, from any inaccuracy in or breach of any representation, warranty, covenant or agreement set forth therein or in any other document delivered by the prospective shareholder to the Fund. The form of Subscription Agreement grants a proxy to Ogier Fiduciary Services (Cayman) Limited or any successor, with full power of substitution (the Proxy Agent), authorizing it or its successor or designee to vote the Common Shares subscribed for on behalf of the subscriber at any meeting of shareholders. Such proxy may be revoked by the shareholder by giving written notice to the Proxy Agent at Ogier Fiduciary Services (Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9007, Cayman Islands. Any such revocation shall be effective upon its receipt by the Proxy Agent. The Proxy Agent shall exercise no discretion in casting votes for which it has been given proxy power. In the absence of instructions from the shareholders, the Proxy Agent will vote on recommendation of the Directors. Each shareholder will be requested to acknowledge and consent that the Fund, the OO238802
48 Administrator and/or the Investment Manager may disclose to each other, to any regulatory body, to a delegate, agent or any other service provider in any jurisdiction, including those outside of the U.S., Cayman Islands or the European Economic Area, copies of the shareholders subscription application and any information concerning the shareholder provided by the shareholder to the Fund, the Administrator and/or the Investment Manager. Any such disclosure will not be treated as a breach of any restriction upon the disclosure of information imposed on such person by law or otherwise. AXONIC CREDIT OPPORTUNITIES OVERSEAS FUND, LTD.