Académique Documents
Professionnel Documents
Culture Documents
Aquamarine Zurich AG
18 Ramistrasse
8001, Zurich
Switzerland
Tel +41 44 210 1900
Fax +41 44 210 1901
Aquamarine Capital
1345 Avenue of the Americas, 2nd Floor
New York, NY 10105
United States
Tel +1 212 716 1350
Fax +1 212 716 1353
www.aquamarinefund.com
Aquamarine Fund
Annual Percentage Appreciation
Year
Aquamarine Fund
S&P 500 with
Relative Results
Class A Shares*
Dividends Included*
(1) - (2)
(1)
(2)
2013
34.9%
32.4%
2.5%
2012
27.8%
16.0%
11.8%
2011
-3.1%
2.1%
-5.2%
2010
19.2%
14.8%
4.4%
2009
39.3%
25.9%
13.4%
2008
-46.7%
-36.6%
-10.1%
2007
17.0%
5.5%
11.5%
2006
37.1%
15.6%
21.5%
2005
7.2%
4.8%
2.4%
2004
11.2%
10.7%
0.5%
2003
29.5%
28.4%
1.1%
2002
-1.6%
-22.0%
20.4%
2001
1.9%
-11.9%
13.8%
2000
21.4%
-9.0%
30.4%
1999
-6.7%
20.9%
-27.6%
1998
26.1%
28.3%
-2.2%
1997*
2.5%
6.0%
-3.5%
Notes:
*1997 is based on September 15 December performance.
*Represents the performance of Class A Shares. Performance may differ depending on Class and Series.
We have selected the S&P Index because it is a widely known, well understood, and commonly used benchmark
of performance. We could just as easily have selected the Dow Jones Industrial Average or the Morgan Stanley
World Index which would have given a more favorable comparison. The vast majority of professional investors
underperform the S&P Index. Similarly, we have ensured that the presentation of index returns includes the
dividends, to ensure an apples-to-apples comparison. By the same token, the returns in Aquamarine Fund are
calculated net of all fees.
Table of Contents
Managements Letter to Partners
Investing Principles
18
27
Financial Statements
28-78
28
50
66
Team Aquamarine
79
In 2013, the Aquamarine Fund returned 34.9%, versus 32.4% for the S&P
500. Since the funds inception in September 1997, our investors capital has
compounded at a rate of 11% annually, versus 6% annually for the S&P 500.
These figures are calculated net of all expenses and fees, so these are the
actual returns. The numbers for the S&P index include dividends, making
this an apples-to-apples comparison.
Commentary On These Results
When I started running this fund in 1997, I had dreams of delivering gains of
30% a year the kind of dazzling returns that Warren Buffett racked up when
he ran limited partnerships early in his career. I havent delivered an Omaha
number like that, but Ive outperformed the market by a decent margin. And,
thanks to the miracle of compounding, an outperformance of 5 percentage
points a year adds up to a lot over time. Indeed, we recently calculated that
$1 million invested in the Aquamarine Fund back in 1997 was worth $5.63
million as of March 31, 2014, versus $2.7 million if that money had been
invested in the S&P 500.
Its extraordinary for me to think that my family and fellow shareholders
who invested in the fund at inception have quintupled their money despite
the fact that the fund fell 46.7% in 2008 during the global financial crisis. I
mention this not in a spirit of self-congratulation, but simply to demonstrate
the power of compounding decent returns over a long period. This should
help to explain why I am not willing to take risks (such as leverage) that could
potentially damage our returns. In my view, long-term compounding is the
name of the game.
The wisdom of this patient approach comes directly from Warren Buffett
and Charlie Munger. When Mohnish Pabrai and I had our charity lunch with
Buffett in 2008, he told us: Charlie and I always knew we would become
very wealthy, but we werent in a hurry. He then explained: If youre even a
slightly above average investor who spends less than you earn, over a lifetime
you cannot help but get very wealthy if youre patient. Ive taken that
advice very much to heart.
Before we get into a couple of post mortems of stocks that we recently sold,
I wanted to share with you some analysis on the fund that we did in 2013.
The chart on the following page shows that we have held 96 money-making
positions since the funds inception in 1997. We sold these 96 stocks for a
total profit of $71 million. As you can see, we have also owned 30 moneylosing positions, which we sold for a total loss of $6.5 million. In other
words, for every $10 we made, we lost about $1.
We didnt make this money by darting in and out of stocks or trying to predict
where the market was headed. We made it by investing in good companies
that were mispriced and then holding them. I was also struck by the fact
that more than half of our returns came from seven of our investments. Of
these, the largest realized gain was from a Singaporean company, Raffles
Education, which helps to show the benefits of investing globally.
Meanwhile, our largest dollar loss was in Crosstex Energy. We also had
a 100% loss in Delta Financial, though the sum involved was relatively
modest. Still, its a healthy reminder that investing is not an exact science
and that I will inevitably continue to make mistakes.
Number
$ million
Profit
96
$70.8
Loss
30
$6.5
Post Mortems
In recent years, Ive found that it works better not to talk publicly about
current holdings in the fund. This is not a matter of guarding our secrets
to prevent other investors from stealing them. The real issue is that, once a
person has made a public statement, its psychologically difficult for them
to back away from it even if theyve realized that their stated opinion
was wrong. In his seminal book The Psychology of Influence, Robert Cialdini
called this the commitment and consistency principle.
but governments can do little about it because the cartel operates across
international boundaries. The potash market is basically controlled by two
alliances: one between a Russian company called Uralkali and a company
from Belarus called Belaruskali; another between the Belarus joint venture
and Canpotex Ltd, which is a joint venture among Saskatchewans potash
producers. Between them, these two groups control about 70% of the
potash market.
I began to wonder if the weak price of potash was a result of cheating by
cartel members. The dangers of investing in a market controlled by a cartel
became even clearer after I sold the stock: in 2013, the news broke that the
cartel had fallen apart. A disagreement had apparently caused Uralkali to
back out of its partnership with Belaruskali. Once the cartel had broken
down, the potash market was no longer tightly controlled and the expected
price fix could no longer be relied upon.
In retrospect, its clear that I hadnt sufficiently understood the idiosyncratic
economics or politics of the potash sector. Determined to learn from
my mistake, I decided that I didnt ever want to invest again in a market
where the profits depend upon collusion, even if it is legal, by a cartel that
can manipulate prices.
Indeed, one item on my investment checklist is a reminder that I only want
to invest in companies that are a win-win for their entire ecosystem in
other words, companies that benefit everyone from their customers to their
suppliers to their shareholders. Essentially, I want to invest in companies
that make society better, not worse.
There are sound financial reasons for this. But I also think its bad karma
to invest in companies that make society worse, regardless of whether
theyre acting legally. This has also kept me from owning stocks like Philip
Morris. Without wanting to sound sanctimonious, I think its better not to
hang around with people who have bad karma. Potash is a key agricultural
ingredient that does benefit society, but cartels distort the market and
operate in ways that can easily backfire.
In any case, there are plenty of attractive places to invest, so I can have
a successful career without ever having to invest in cartels again. Buffett
Essentially, I want to
invest in companies
that make society
better, not worse.
has done just fine investing in companies that benefit society, and Im
comfortable following his example.
Fortunately, this was not a costly mistake. I had invested $1.3 million in
Potash of Saskatchewan in 2008. By the time I cashed out a few years later,
it had risen to $2 million. In the end, it was a solid investment, not a great
one. But at least our low entry price had provided us with a healthy margin
of safety.
Potash of Saskatchewan
80
70
Sold $42.1
$2 million
Purchased $28.6
$1.3 million
60
50
40
32.10
30
20
2008
2009
2010
2011
2012
2013
Crosstex Energy (which has since changed its name following a merger)
owned and operated gas pipelines. This is a relatively low-tech business
with incredible economics. In the gas pipeline business, once youre
established in a particular location and own the rights of way, its hard to be
displaced and there are also extraordinary opportunities to reinvest at high
rates of return. The company also had exceptional management.
I had become familiar with the pipeline business as a result of an earlier
successful investment in Kinder Morgan. I saw an opportunity to repeat this
success by investing in Crosstex. The underlying assets held by Crosstex
Energy LP were extremely attractive. But I was even more attacted to the
parent company, Crosstex Energy Inc., which was entitled to a share of the
10
loss. So, in the end, this wasnt a successful investment but it wasnt nearly
as bad as it could have been. For me, it was a powerful reminder of the
importance of shutting out the noise of the marketplace and focusing on
the economics of the business itself.
Crosstex Energy
40
30
20
19.96
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Looking Forward
Im happy with the companies in our portfolio and their prospects for price
appreciation. Im also constantly assessing new opportunities. But I feel
no pressure at all to buy anything until the right stock comes along. In the
past several months, Ive invested in only one new company. As Charlie
Munger explained at Berkshire Hathaways most recent annual meeting,
one reason for Berkshires success is that he and Buffett are happy to sit
and wait until something makes sense.
11
I cant predict what other opportunities will arise in the future. But I can give
you a very clear sense of what to expect in terms of the Aquamarine Funds
approach to investing. The key characteristics and guiding principles of
the fund wont change, so its worth spelling them out explicitly. I have set
them out in the following section (see pages 20-25) for you to read and I
plan to reproduce them in each annual report. I hope they give you a helpful
understanding of what it really means to be a partner in the fund and why
we operate as we do.
Organizational and Regulatory Update
Service Providers:
Last year we engaged a team at the law firm Dentons Michael Froy, Walter
Van Dorn and Curtis Stefanak to update and rewrite our documents. I
met Mike Froy through Mohnish Pabrai five years ago. Mohnish had great
things to say about Mike who has helped the Pabrai Funds in all sorts of
ways. Our experience so far has been that the Dentons team is superb.
We also engaged Nadia Menezes at Appleby, a company in the British
Virgin Islands that provides offshore legal, fiduciary and administration
services. Nadia, who had done excellent work for us while at a previous
employer, moved to Appleby a couple of years ago and was restricted from
soliciting us. But having discovered where she went, I was happy to follow
her and welcome her back onto our team.
In 2013, our administrator, Prime Management, was acquired by SS&C
Technologies, which is a global leader in services to funds like ours. We
are still using the Prime Management Limited name as it is a division of
SS&C GlobeOp. I believe we are in very good hands with SS&C, although
I was sad to part company with Joe Kelly. Prime Management under Joe
was the best administrator I could have hoped for: his staff paid scrupulous
attention to detail and they were always true to their word.
That said, the sale to SS&C came at the right time: with increased compliance
requirements especially FATCA it was a good time to access the
deeper resources and technology of a larger firm. We have had no change
in our front line staff, but instead have benefited from the addition of
several people, including Patti Griffin, David Reid, Teresa Gallant and
Jonathan Gazzard, who have already provided first-rate support for Lorna
Nicolas-Bernier.
12
Custodians:
We have two custodians. One is Ajay Desai and his team at UBS in Chicago,
including Melissa Wilczak, Tim Dillow, Andrew Lindblom and Frank
Pellicori. I was introduced to Ajay by Mohnish Pabrai, who has an incredible
ability to select great people. Im only too happy to piggyback off him. Ajay
is a phenomenal guy who grew up in Omaha, Nebraska, so he certainly has
the right roots.
Our other custodian is Credit Suisse. One could argue that Ive concentrated
risk in Switzerland by using two Swiss banks as custodians. But I dont
believe thats the case. I think the quality of the relationship we have is more
important than the institution itself, and Im very happy with the group that
takes care of us at Credit Suisse.
There has been one other organizational change thats also worth
mentioning. Mark Chapman at Deloitte & Touche audited the funds
accounts for the last 16 years. But Mark has now retired from Deloitte. Our
new team at Deloitte consists of Mark Baumgartner, Tia Beckmann, Lewis
Lo and Tonya Guishard.
Foreign Account Tax Compliance Act (FATCA):
13
taxes as low as possible. Everybody does so, rich or poor; and all do right,
for nobody owes any public duty to pay more than the law demands: taxes
are enforced exactions, not voluntary contributions. To demand more in
the name of morals is mere cant.
The U.S. and other governments will not be going after people who seek
to arrange their affairs in a legal manner so as to keep their taxes as low as
possible. But they are looking to discourage people who seek to exploit grey
areas of the law as a means of not paying taxes.
These regulations will require us to keep a complete set of information on our
investors and to provide summary information to the IRS (and, potentially,
other tax revenue authorities) as and when they require it. For our books to
be complete, we may have to follow up with you to get extra information, and
I want to thank you in advance for your co-operation in this. We dont enjoy
doing this, but it is necessary in order to run a fund like Aquamarine. Not
to provide the information would result in us becoming non-compliant with
FATCA, thereby incurring all manner of unpleasant consequences.
The Swiss Financial Market Supervisory Authority (FINMA):
14
This legislation has not been thought out clearly, and it does not take
into account how we work or that we have a long history of scrupulous
compliance with the law.
I had hoped for a private equity exemption for the Aquamarine Fund. But
this exemption appears not to be available to us. In any case, we are moving
forward with an application and hope that FINMA will grant us the relevant
exemptions.
If we do not get the requisite FINMA license, I may have to move the
primary base of my operations out of Switzerland. Our Swiss legal counsel,
Bratschi Wiederkehr & Buob, represented by Ingmar Snijders and Thomas
Iseli are helping us with this.
These issues are, of course, part of a broader, unfolding debate about
the best way to regulate the financial industry. I agree wholeheartedly
with the perspective of my friend Nick Sleep, who runs a renowned firm
called Nomad Investment Partners. Discussing regulation in a letter to his
investors, he wrote the following:
It seems to us that the regulatory landscape is not supportive of small, simple
investment boutiques that are not part of whatever problem the regulation
seeks to solve. We might wish otherwise, but the halcyon days of the budding
stock picker running his friends and family partnership from the sunroom at
home at 5505 Farnam Street, Omaha (an image so important to Zak and me)
are long gone. In our opinion, given time, the barrier to entry presented by the
new rules may cause considerable industry consolidation (a desired outcome
from a regulatory standpoint lets face it, regulation is expensive to do) but
consolidation will, in the end, bring with it an unintended, concomitant
increase in market fragility, to paraphrase Nassim Taleb. It also seems to
us, on an anecdotal basis, that those who increasingly populate the industry
are the types who pay others to do their work for them (just witness the
Cambrian explosion of service providers offering to act as intermediaries).
As some complex financial institutions may be discovering today, if the
proprietor has abdicated responsibility to the point of not knowing what is
going on, then that is not healthy either.
All this has come about because other people have lied and stolen. In
essence we are required to now prove that we are not Bernard Madoff but,
15
unlike Mr. Madoff, there is no potential for us to earn our way to a lighter
regime through good behaviour. Nor is any allowance made for the fact
that we invest for the very long term or that we are a simple fund. Indeed,
Nomad is treated the same as a leveraged, long/short hedge fund complex
that deals in exotica and trades constantly. Like traffic speed limits, the
regulation seeks to moderate all behaviour for the general good, and we
have lived with those restrictions quite happily (well, almost). Even so, in
our opinion, what is really required in order to bear down on the liars and
cheats are empowered, detectives-cum-regulators asking questions of
those whose practices dont sniff right. And if you really want to change
industry behaviour, Ill whisper this, tax short term investing. Instead, we
get more blanket rules for everyone.
Partnership Meetings
All that remains is for me to thank you for your investment and your trust.
Your steadfast support makes it possible for me to focus on compounding
value over the long term, and I am sincerely grateful. I could not have a
better set of partners.
Sincerely,
Guy Spier
16
S&P 500
$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$ 50,000
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997*
$0
S&P 500
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$ 50,000
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$0
17
Investing Principles
In 1996, Berkshire Hathaway issued its shareholders with a booklet entitled
An Owners Manual. Psychologically, this was a great move on Berkshires part,
since a number of studies have shown that by writing something down we increase
the probability of it happening. I wanted to set down a similar set of principles and
share them with our partners in the Aquamarine Fund. The goal here is not to
be complete or comprehensive; rather, it is to emphasize parts of the body of
worldly wisdom that I see as particularly relevant to me and the funds investors
at this point.
Worldly wisdom is a phrase used by Charlie Munger. How best to acquire it
and use it effectively for a life well lived is the subject of the book Poor Charlies
Almanack, which is a compilation of Mungers teachings. In his search for worldly
wisdom, Munger has drawn from many sources, including Ben Graham, Warren
Buffett, and Robert Cialdini.
Table of Contents
1. The Miracle of Compound Interest
20
20
3. Avoid Leverage
21
21
22
23
23
8. Use a Checklist
25
25
26
18
19
Rate of Return
7%
12%
20
10
40
15
93
60
58
898
Initial Loss
20
25%
33%
40%
67%
50%
100%
18%
27
750
20,555
As this chart illustrates, the more you lose, the harder it is to get back to where you
started. Big losses are a real killer. Or, as Warren Buffett has said:
Rule number one: do not lose money.
Rule number two: do not forget rule number one.
3. Avoid Leverage
The fastest and most effective way to violate the previous rule is to take risks with capital
that we do not already own. Thus, I do not lever the portfolio, and I also avoid overly
leveraged investments. There is nothing wrong with getting rich slowly especially if
trying to do it fast could end badly, which it often does.
21
incentives can be damaging. For example, I can take with a pinch of salt a barbers
comment that I need a haircut. Similarly, I can steer clear of the sell-side broker who
wants to churn my account.
However, here is something much harder to spot: consider an advisor who is honest,
hard-working, and truly desires the best for the Aquamarine Fund and its partners.
While the course of action that he counsels is generally sound and well-considered,
it contains unnecessary complications that in most states of the world should be fine,
but in extreme states of the world could lead to problems. In such circumstances he
will tend to discount the downside (hey, its not his downside, and it might even lead
to more work down the road). My job is not to discount that downside: the advisor
would certainly survive the hidden but fatal flaw, but I might not. Indeed, someone
with good intentions and deep knowledge is still capable of giving imperfect advice.
While I might catch the egregiously imperfect advice, I also need to be on guard for
this kind of subtly imperfect advice.
In addition to becoming more attuned to these factors, I have learned that a very valuable
source of input on important business decisions is that of my peers, and I have
become active in a number of organizations that have helped me to acquire this input.
22
that horse is unlikely to be the best bet, since the probability of its winning will typically
already be factored into the odds offered by the bookmakers.
The real skill is to find the mispriced bet: the horse whose chances of winning are much
greater than the odds suggest. This is much harder, and the opportunities to place such
bets are much rarer than most people think.
While time is the friend of a great business, if the business was purchased when it was
priced to perfection it has as much potential to impair returns as a much less decent
business. Thus, the focus of my investment research is now more oriented towards
finding businesses that are mispriced, rather than identifying great businesses and trying
to justify paying a high price for them.
During the financial crisis, several people redeemed their partnership interests in the
Aquamarine Fund at the worst possible time, thereby reducing our ability to buy stocks
at extraordinarily cheap prices. This experience taught me a lot about the importance
of having the right sort of partners. One way to achieve this is to create the best possible
structure for the fund, since this affects the quality of the investors the fund attracts. In
our case, this means:
1. Allow only annual redemptions.
2. No management fee only a performance fee.
3. Communicate infrequently, but substantively, rather than communicating frequently
with nothing more than rewarmed market commentary.
4. Do not participate in roadshows or beauty contests designed to attract more assets.
Here is the explanation for these rules: with only annual redemptions and no management
fee, the fund is attracting a group of people who have already thought carefully about
equities and about what they are looking for in a money manager. By putting the above
rules in place, I have succeeded in attracting a phenomenal group of investors who
23
Similarly, when it comes to investment research, I also work hard at developing great
relationships with a broad group of people who can help me to evaluate investment
ideas. As with attracting a great set of investors, there are a few ground rules that are key:
1. Keep confidential the ideas that are shared with me.
2. Do not trade investment ideas sourced elsewhere until there is clear permission to
do so from the originator.
3. Never tell anyone what to do, but give thoughtful and value-added feedback on ideas.
4. Always give credit when and where possible.
These are really just applications of Hillels advice: What is hateful to you, do not do
to your neighbor. The benefits of behaving in this way are cumulative.
One of the great lessons Ive learned throughout my career is that all business is
personal. The vast majority of the time, whenever I have gone beyond the call of duty
regarding someones well-being, it has resulted in all sorts of remarkable, unexpected
and fortuitous results for me. To paraphrase Hillel, perhaps the best way to find a great
partner is to be a great partner. That has been true for me in all areas of my life.
8. Use a Checklist
This subject is discussed in Atul Gawandes excellent book The Checklist Manifesto.
The human mind is filled with all sorts of evolutionary quirks that seriously degrade
the rational decision-making ability of even the most intelligent investors.
Before making an investment I run the idea through a checklist that summarizes as
24
many known investment mistakes as possible mistakes made in the past either by
me or by other money managers. I ask myself whether I might be committing the
same mistakes again. Using a checklist acts as a circuit breaker, and this has prevented
me from making a number of bad investments. This method isnt foolproof, but my
experience in the past few years is that it has reduced my error rate dramatically. Most
of the work on the checklist was done by Mohnish Pabrai, and I am deeply grateful to
him for the collaboration.
25
$160
$140
$120
$100
$80
$60
$40
$20
26
12/13
12/12
12/11
12/10
12/09
12/08
12/07
12/06
12/05
12/04
12/03
12/02
12/01
12/00
12/99
12/98
12/97
$0
Financial Statements
Aquamarine Master Fund, L. P.
28
50
66
Table of Contents
Independent Auditors Report
30
31
32-34
Statement of Operations
35
36
37
28
38-49
29
We have audited the accompanying financial statements of Aquamarine Master Fund, L.P. (the Master Fund), which comprise the
statement of assets and liabilities, including the condensed schedule of investments as of December 31, 2013, and the related statements of
operations, changes in partners capital and cash flows for the year then ended (all expressed in United States dollars), and the related notes
to the financial statements.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Master
Funds preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Funds internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Master Fund as
of December 31, 2013, and the results of its operations, changes in partners capital and its cash flows for year then ended, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche
Tohmatsu Limited and its member firms.
Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte
Touche Tohmatsu Limited.
30
For the year ended December 31, 2013 (Expressed in United States dollars)
Notes
Assets
160,283,187
11,468,823
210
Total assets
171,752,220
Liabilities
1,202,830
954,106
55,786
Total liabilities
2,212,722
169,539,498
Partners Capital
31
For the year ended December 31, 2013 (Expressed in United States dollars)
Principal
amount of
shares
Description
Percentage of
partners
capital
Fair value
3.24%
5,493,150
272,430
14.58
24,717,574
Consumer Finance
5.42
9.53
9,186,300
16,151,445
Total Consumer Finance
14.95
25,337,745
140,600
30
16,669,536
5,337,000
590,000
Insurance
9.83
3.15
Total Insurance
12.98
Media
2.04
22,006,536
3,453,000
Mining
11.66
3.20
5,428,000
Pipelines
0.02
25,999
1,220,000
(cost $62,089,847)
62.67%
32
19,776,200
106,238,204
For the year ended December 31, 2013 (Expressed in United States dollars)
Principal
amount of
shares
Description
Percentage of
partners
capital
Fair value
China
Italy
2,000,000
Auto Manufacturers
Fiat Spa Eur5, at fair value (cost: $9,979,267)
5,844,872
7,596,177
9.64%
$16,340,427
0.24%
$ 404,526
$ 872,454
Jordan
Singapore
Switzerland
Food, at fair value (cost: $4,297,360)
4.75%
Total Common Stocks,
at fair value
(cost: $91,014,092)
85.73%
$ 8,050,885
145,347,545
33
For the year ended December 31, 2013 (Expressed in United States dollars)
Principal
amount of
shares
Description
Percentage of
partners
capital
Fair value
Switzerland
521,963
Food, at fair value (cost: $65,699)
0.09%
$ 152,699
0.40%
674,662
Warrants
United States of America
Agriculture
0.01%
19,580
Auto Manufacturers
450,000
General Motors Co 07/2019
Call 18.33 (cost: $3,122,206)
6.15
10,422,000
2.25
Financial
Total United States, at fair value
(cost: $5,308,933)
8.41%
Total Warrants,
at fair value (cost: $5,308,933)
8.41%
Total Investments In Securities,
at fair value (cost: $97,734,784)
94.54%
34
3,819,400
14,260,980
14,260,980
160,283,187
For the year ended December 31, 2013 (Expressed in United States dollars)
Notes
Investment Income
557,807
Expenses
Management fee
7
Administration fee
8
Brokerage and bank expenses
Professional fees
Other expenses
2,024,564
164,146
48,078
33,507
11,116
2,281,411
(1,723,604)
Net Investment loss
Net realized loss and net change
in unrealized appreciation
from investments
and foreign currencies:
Net realized loss from:
Investments in securities
Foreign currency transactions
(1,739,621)
(157,008)
(1,896,629)
Net change in unrealized appreciation:
Investments in securities
4, 5
Foreign exchange
53,618,618
136,982
(53,755,600)
Net realized loss and net change
in unrealized appreciation
from investments
and foreign currencies
Net increase in partners capital
resulting from operations
51,858,971
50,135,367
35
For the year ended December 31, 2013 (Expressed in United States dollars)
Special
General Limited Limited
Partner
Partner
Partners
Partners Capital,
January 1, 2013
Total
Increase/(Decrease)
in Partners Capital:
From operations
Net increase in partners capital
Incentive allocation
From capital transactions
Capital contributions
Capital withdrawals
Partners Capital,
December 31, 2013
36
-
1,936,520
1,656,365
7,029,186
48,479,002
(8,965,706)
50,135,367
-
-
(1,936,520)
-
-
9,886,288
(3,640,000)
9,886,288
(5,576,520)
- 10,507,259
159,032,239
169,539,498
For the year ended December 31, 2013 (Expressed in United States dollars)
50,135,367
Financing Activities
Capital contributions received
9,886,288
37
For the year ended December 31, 2013 (Expressed in United States dollars)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results
could differ from those estimates and the differences could be material.
Investments valuation
The Master Fund values its investments in accordance with Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820)
which defines fair value, establishes a framework for measuring value, and requires certain disclosures about fair
value measurements. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in
an orderly transaction between market participants at the measurement date. See note 4, Fair Value Measurements
for further discussion relating to the Master Funds investments.
Securities listed on national securities exchanges are valued at their last sales price on the day of valuation. If no
sales occurred on that day, such securities shall be valued at the last closing bid prices for investments if held long
and their last closing asked prices for securities sold short. If no bid or asked prices are quoted on such date, the
38
For the year ended December 31, 2013 (Expressed in United States dollars)
security shall be fair valued by certain methods as the Investment Manager shall determine in good faith to reflect
its fair market value. The change in unrealized loss on investments in securities is reflected in the statement of
operations.
39
For the year ended December 31, 2013 (Expressed in United States dollars)
Foreign currency
Investment in securities and other assets and liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at the date of valuation. Purchases and sales of investment securities and income and expense
items denominated in foreign currencies are translated into US dollar amounts on the respective dates of such
transactions.
The Master Fund does not isolate that portion of the results of operations resulting from changes in foreign
exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from investments in the statement of
operations.
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the Master Funds books and the US
dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gain and loss arise from changes in the fair values of assets and liabilities, other
than investments in securities at fiscal year end, resulting from changes in exchange rates.
Income taxes
Under the current laws of the BVI, the Master Fund is not subject to income taxes. The Master Fund intends to
40
For the year ended December 31, 2013 (Expressed in United States dollars)
conduct its affairs such that it will not be subject to taxation in any jurisdiction, other than withholding taxes on
investment income and capital gains, where applicable.
The Master Fund reviews and evaluates tax positions in its major jurisdictions and determines whether or not there
are uncertain tax positions that require financial statement recognition. In determining the major tax jurisdictions,
the Master Fund considers where it is organized and where it makes investments. The Master Funds US Federal
and state tax returns for 2010 to 2013 remain open for examination by tax authorities and tax positions associated
with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations.
Based on its review, the Master Fund has determined that ASC 740, Income Taxes (ASC 740) has not impacted
the Master Funds financial statements for the year ended December 31, 2013 and therefore no provision for
income taxes was recorded.
The Master Fund is additionally not aware of any tax positions for which it is reasonably possible that the total
amounts of unrecognized tax benefits will change materially in the next twelve months. The determination of
income taxes is based on complex analyses of many factors, including matters that are subject to interpretation.
Individual partners of the Onshore Feeder, General Partner and Special Limited Partner of the Master Fund are
taxed on their proportionate share of the Master Funds income.
41
For the year ended December 31, 2013 (Expressed in United States dollars)
each hierarchical level as well as valuation techniques used by the Master Fund for components of its financial
instrument inventory. Investments measured and reported at fair value are classified and disclosed in one of the
following categories:
Level 1 Inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for
identical and unrestricted assets or liabilities. The types of investments included in Level 1 are exchange traded
equities and derivatives. Level 1 investments are primarily securities that are listed or traded on a national or global
exchange.
Level 2 Inputs are inputs that are observable, either directly or indirectly, but do not qualify as Level 1 inputs and
may include:
Quoted prices in markets that are not considered to be active for identical or similar assets or liabilities,
quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are
observable or can be corroborated by observable market data, or price quotations vary substantially either
over time or among market makers (e.g., some brokered markets), or in which little information is released
publicly (e.g., a principal-to-principal market)
Inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves
observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and
default rates)
Inputs that are derived principally from or corroborated by observable market data through correlation or by
other means (market-corroborated inputs)
Level 3 Inputs that are inputs both significant to the fair value measurement and unobservable, including inputs
that are not derived from market data or cannot be corroborated by market data. The inputs into the determination
of fair value require significant management judgment or estimation. Level 3 inputs reflect the Master Funds
assumptions that it believes market participants would use in pricing the asset or liability. Level 3 inputs are based
on the best information available in the circumstances, which may include indirect correlation to a market value,
combinations of market values or proprietary data.
At December 31, 2013, all of the Master Funds investments were valued using Level 1 inputs.
42
For the year ended December 31, 2013 (Expressed in United States dollars)
on a certain date. As the expiration date of a warrant approaches, the time value of a warrant will decline. In
addition, if the stock underlying the warrant declines in price, the intrinsic value of an in the money warrant will
decline. Further, if the price of the stock underlying the warrant does not exceed the strike price of the warrant on
the expiration date, the warrant will expire worthless. As a result, there is the potential for the Master Fund to lose
its entire investment in a warrant.
Master Fund traded warrants in equity securities which were listed on a major stock exchange. The warrants are
reported in investment in securities at fair value in the statement of assets and liabilities with the resulting net
unrealized gains and losses in investment in securities reflected in the statement of operations. Any gains and
losses realized from the purchase and sale of these securities were computed on a first-in, first-out basis. For the
year ended December 31, 2013, the Fund did not have any transaction in equity warrants.
The following table identifies the fair value amounts of derivative instruments included in the Statement of assets
and liabilities as well as in the Condensed schedule of investments, categorized by primary underlying risk. The
following table also identifies the net realized gain/(loss) and net unrealized appreciation/(depreciation) amounts
included in investment in securities in the Statement of operations, categorized by primary underlying risk.
Underlying Risk Type
Equity warrants
Statement of assets
and liabilities
location
Derivative
assets
Derivative
liabilities
$ 14,260,980
gains/(losses) appreciation/(depreciation)
on derivatives
on derivatives
Underlying Risk Type recognized in income recognized in income
Equity warrants
$ 5,768,189
Total
$ 5,768,189
As of December 31, 2013, the derivatives held by the Master Fund were not subject to any master netting or similar
agreements.
43
For the year ended December 31, 2013 (Expressed in United States dollars)
6. Partners Capital
Capital contributions
The Master Fund GP may admit new limited partners and permit limited partners to make additional capital
contributions on the first business day of each calendar month or at any other time in the Master Fund GPs sole
discretion. The minimum initial and additional contribution to the Master Fund by each investor shall be such
minimum as determined by the Master Fund GP from time to time.
Capital withdrawals
A limited partner has the right upon five days prior written notice to the Master Fund GP to make a partial or
total withdrawal from its capital account as of the last business day of each calendar quarter or such other date as
determined by the Master Fund GP.
44
For the year ended December 31, 2013 (Expressed in United States dollars)
Incentive allocation
Offshore Feeder
Incentive allocation is calculated on the Offshore Feeder in accordance with the confidential information
memorandum dated October 1, 2008 as amended in July 2010.
Subject to the loss recovery account provisions discussed below, the following amounts will be reallocated (in
the aggregate) from the Offshore Feeders capital account in the Master Fund collectively to the Master Fund GPs
and Special LPs capital accounts in the Master Fund:
(i) at the end of each calendar quarter of the Master Fund, 20% of the Class A/B aggregate net increase, in excess
of the Class A/B hurdle return;
(ii) at the end of each calendar year of the Master Fund, 25% of the Class C aggregate net increase in excess of the
Class C hurdle return.
The incentive allocation shall be allocated as follows: 15% will be allocated to the capital account of the Master
Fund GP, and 85% will be allocated to the capital account of the Special LP.
Class A/B hurdle return means an amount equal to one percent (1%) of the portion of the Offshore Feeder capital
account balance in the Master Fund which is attributable to Class A/B shareholders, calculated as of the beginning
of each calendar quarter. The Class A/B hurdle return will be adjusted throughout the applicable period to reflect
additional contributions and withdrawals by the Class A/B shareholders of the Offshore Feeder in the Master
Fund. The Class A/B hurdle return is cumulative with respect to each quarter during a calendar year but not from
year to year.
Class C hurdle return means an amount equal to six percent (6%) of the portion of the Offshore Feeder capital
account balance in the Master Fund which is attributable to Class C shareholders, calculated as of the beginning
of each calendar year.
The Class C hurdle return will be adjusted throughout the applicable period to reflect additional contributions and
withdrawals by the Class C shareholders of the Offshore Feeder in the Master Fund. The Class C hurdle return is
non-cumulative with respect to each calendar year.
Under a loss carry forward recovery account, no incentive allocation is made from the sub-capital account of a
particular shareholder of the Offshore Feeder until any net loss previously allocated to the sub-capital account of
such shareholder has been offset by subsequent net profits. Any such loss carry forward will be subject to reduction
for redemptions on a pro rata basis.
Incentive allocation shall be credited as of the end of the performance period to the capital account of the Master
Fund GP and Special LP. The Master Fund GP and Special LP may, at their sole discretion, waive or reduce the
incentive allocation with respect to any shareholder.
For the year ended December 31, 2013, $7,029,186 and $1,240,445 were allocated from the Offshore Fund to the
Special LP and the Master Fund GP respectively.
Onshore Feeder
Incentive allocation is calculated on the Onshore Feeder in accordance with the amended and restated confidential
private placement memorandum dated January 1, 2008.
45
For the year ended December 31, 2013 (Expressed in United States dollars)
Subject to the loss recovery account provisions discussed below, the following amounts will be reallocated (in the
aggregate) from the Onshore Feeders capital account in the Master Fund to the Master Fund GPs capital account
in the Master Fund:
(i) at the end of each calendar quarter, 20% of the Class A aggregate net increase, in excess of the Class A hurdle
return;
(ii) at the end of each calendar year of the Master Fund, 25% of the Class B aggregate net increase in excess of the
Class B hurdle return.
Class A hurdle return means an amount equal to one percent (1%) of the portion of the Onshore Feeders capital
account balance in the Master Fund which is attributable to Class A limited partners, as of the beginning of each
calendar quarter. The Class A hurdle return will be adjusted throughout the applicable period to reflect additional
capital contributions and withdrawals by the Class A limited partners in the Master Fund. The Class A hurdle return
is cumulative with respect to each quarter during a calendar year but not from year to year.
Class B hurdle return means an amount equal to six percent (6%) of the portion of the Onshore Feeders capital
account balance in the Master Fund which is attributable to Class B limited partners, calculated as of the beginning
of each calendar year. The Class B hurdle return will be adjusted throughout the applicable period to reflect
additional capital contributions and withdrawals by the Class B limited partners in the Master Fund. The Class B
hurdle return is non-cumulative with respect to each calendar year.
Under a loss carry forward recovery account, no incentive allocation is made from the sub-capital account of a
limited partner of the Onshore Feeder until any net loss previously allocated to the sub-capital account of such
limited partner has been offset by subsequent net profits. Any such loss carry forward will be subject to reduction
for withdrawals on a pro rata basis.
Incentive allocation shall be credited as of the end of the performance period to the capital account of the Master
Fund GP. The Master Fund GP may, at its sole discretion, waive or reduce the incentive allocation with respect to
any partners. For the year ended December 31, 2013, an incentive allocation of $696,076 was made to the Master
Fund GP from the Onshore Feeder.
$ 190,416
$ 763,690
$ 954,106
8. Administration Agreement
The Master Fund and the Feeder Funds entered into an administration agreement with Prime Management Limited
(the Administrator) a subsidiary of SS&C Globe Op for the provision of certain accounting, administrative and
investor services. The Master Fund pays the Administrator an annual fee calculated and payable on a monthly basis.
The fee is calculated based on certain percentages of the partners capital of the Master Fund at the beginning of
each month and is subject to a monthly minimum of $5,000.
46
For the year ended December 31, 2013 (Expressed in United States dollars)
For the year ended December 31, 2013, total administration fees of $164,146 were incurred of which $19,489 was
payable at the reporting date.
9. Risk Factors
Investment in the Master Fund involves significant risk factors and is suitable only for persons who can bear the
economic risk of the loss of their investment, who have limited need for liquidity in their investment and who meet
the conditions set forth in the private placement memorandum. There can be no assurances that the Master Fund
will achieve its investment objective.
Investment in the Master Fund carries with it the inherent risks associated with investments in securities, as well
as additional risks including, but not limited to, the following:
Short sales
The Master Funds investment portfolio includes short positions. Short selling involves selling securities which
may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation
to replace the borrowed securities at a later date. Short selling allows the investor to profit from a decline in the
price of a particular security. A short sale creates the risk of a theoretically unlimited loss, in that the price of the
underlying security could theoretically increase without limit, thus increasing the cost to the Master Fund of
buying those securities necessary to cover the short position.
There can be no assurance that the security necessary to cover a short position will be available for purchase.
Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby
exacerbating the loss. As a result, short sales create the risk that the Master Funds ultimate obligation to satisfy
the delivery requirements may exceed the amount of the proceeds initially received or the liability recorded in the
statement of assets and liabilities.
The Master Fund had no short sales during the year ended December 31, 2013.
47
For the year ended December 31, 2013 (Expressed in United States dollars)
Market risk
Market risk is the risk that future changes in equity and commodity prices, interest rates and foreign exchange
rates may make an instrument less valuable or more onerous. Market risk includes price risk, interest rate risk and
currency risk. All investments held are subject to market risk, are recognized at fair value, and all changes in market
condition directly affect net increase/decrease in partners capital resulting from operations.
The Master Fund manages its exposure to market risk in accordance with risk management principles set by the
Investment Manager for buying or selling instruments.
Price risk The Master Fund is exposed to market risk on financial instruments that are valued at market prices.
Specifically, a risk exists that the ultimate selling price of such financial instruments may differ from their estimated
fair values at December 31, 2013.
Interest rate risk Certain of the Master Funds financial assets and liabilities are interest bearing and as a result the
Master Fund is subject to risk due to fluctuations in the prevailing levels of market interest rates.
Currency risk The functional currency of the Master Fund is the US dollar. The Master Fund invests in financial
instruments denominated in currencies other than its functional currency. Consequently, the Master Fund is
exposed to risks that the exchange rate of its currency relative to other currencies may change in a manner that has
an adverse effect on the value of the portion of the Master Funds assets or liabilities denominated in currencies
other than US dollars.
Credit risk
Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or
commitment that it has entered into with the Master Fund. Credit risk is generally higher when a non-exchange
traded financial instrument is involved because the counterparty for non-exchange traded financial instruments is
not backed by an exchange clearing house.
Substantially all financial instruments are cleared through and held in custody primarily by two major international
institutions. The Master Fund is subject to credit risk to the extent that these institutions may be unable to fulfill
their obligations either to return the Master Funds securities or repay amounts owed.
The risk that counterparties to both derivative and other instruments might default on their obligations is
monitored on an ongoing basis. To manage the level of credit risk, the Master Fund seeks to conduct business with
counterparties of good credit standing.
Liquidity risk
Liquidity risk is the risk that the Master Fund may have difficulty in liquidating its positions due to existing or
unforeseen market constraints. The Master Funds financial instruments may include investments that are traded
over-the-counter, which are not traded in an organized public market and may generally be illiquid. As a result, the
Master Fund may not be able to quickly liquidate investments or to respond to specific events such as deterioration
in the credit worthiness of any particular issuer.
At December 31, 2013, the Master Funds listed securities are considered to be readily realizable as they are listed
on major United States and international stock exchanges.
These risks are monitored on an ongoing basis and the composition of the portfolio is amended accordingly while
adhering to the investment guidelines set forth in the Master Funds confidential information memorandum.
48
For the year ended December 31, 2013 (Expressed in United States dollars)
Total return
Total return before incentive allocation
Incentive allocation
Total return after incentive allocation
Ratio to average limited partners capital*
Operating expenses before incentive allocation
Incentive allocation
44.09%
(8.12)
35.97%
(1.59)%
(6.56)
(8.15)%
(1.27)%
(6.56)
(7.83)%
*Ratios of operating expenses and net investment loss are computed based on the monthly average of the partners
capital of all limited partners for the year.
49
Table of Contents
Independent Auditors Report
52
53
Statement of Operations
54
55
56
50
57-65
51
We have audited the accompanying financial statements of Aquamarine Fund, Inc. (the Offshore Feeder), which comprise the statement
of assets and liabilities as of December 31, 2013, and the related statements of operations, changes in net assets and cash flows for the year
then ended (all expressed in United States dollars), and the related notes to the financial statements.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Offshore Feeders preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Offshore Feeders internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Offshore Feeder
as of December 31, 2013 and the results of its operations, changes in net assets and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
52
For the year ended December 31, 2013 (Expressed in United States dollars)
Notes
Assets
148,093,022
253,601
208
Total assets
148,346,831
Liabilities
250,000
26,240
Total liabilities
276,240
148,070,591
Net assets
53
STATEMENT OF OPERATIONS
For the year ended December 31, 2013 (Expressed in United States dollars)
Notes
Income 492,389
Expenses
4 (10,485,953)
(9,993,564)
Income
Other income
Expenses
Professional fees
Administration fee
5
Office expenses
Directors fee
4
2,468
29,907
19,750
10,311
4,000
63,968
Net Investment Loss
(10,055,064)
54
(1,735,470)
48,445,975
46,710,505
36,655,441
For the year ended December 31, 2013 (Expressed in United States dollars)
105,217,876
145,000
61,633
100,000
600,000
250,000
248,075
1,182,000
300,000
850,000
1,319,200
300,000
5,000,000
10,355,908
Redemption of shares
Class A Initial Series
Class A Series 1
Class B Series 9
Class C Series 1
(56,270)
(1,347,240)
(844,880)
(1,910,244)
(4,158,634)
Increase in net assets from capital transactions
6,197,274
Net Assets, December 31, 2013
148,070,591
55
For the year ended December 31, 2013 (Expressed in United States dollars)
36,655,441
Financing Activities
10,460,908
56
For the year ended December 31, 2013 (Expressed in United States dollars)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results
could differ from those estimates and the differences could be material.
57
For the year ended December 31, 2013 (Expressed in United States dollars)
ASC 820, Fair Value Measurement and Disclosures (ASC 820) defines fair value, establishes a framework for
measuring fair value and requires certain disclosures about fair value measurements. Additional disclosures due to
the impact of ASC 820 on the Offshore Feeders underlying investments held within the Master Fund are included
in Note 4 of the Master Funds Notes.
Redemptions payable
The Offshore Feeder recognizes redemptions payable in accordance with ASC 480, Distinguishing Liabilities from
Equity (ASC 480). Redemptions are recognized as liabilities when the amount requested in the redemption
notice becomes fixed. Prior to December 31, 2013, the Offshore Feeder received redemption notice to be paid
after year end but based on December 31, 2013 net asset value. Within the context of ASC 480, such redemption
notices represent an unconditional obligation of the Offshore Feeder at December 31, 2013. The liability to such
shareholders is presented in the statement of assets and liabilities as redemptions payable.
Foreign currency
The books and records of the Offshore Feeder and the Master Fund are maintained in US dollars. The foreign
currency translation policy is discussed in Note 2 of the Master Funds Notes.
Income taxes
Under current BVI law, the Fund is not required to pay taxes in BVI on either income or capital gains. Accordingly,
no provision for taxation has been made in these financial statements. The Offshore Feeder intends to conduct its
affairs such that it will not be subject to taxation in any jurisdiction, other than withholding taxes on investment
58
For the year ended December 31, 2013 (Expressed in United States dollars)
income and capital gains allocated from the Master Fund, where applicable.
The Offshore Feeder reviews and evaluates tax positions in its major jurisdictions and determines whether or
not there are uncertain tax positions that require financial statement recognition. In determining the major tax
jurisdictions, the Offshore Feeder considers where it is organized and where it makes investments. The Offshore
Feeder is filing a protective return in the United States. The tax returns for 2010 to 2013 remain open for examination
by tax authorities. Tax positions associated with foreign tax jurisdictions remain subject to examination based on
varying statutes of limitations.
Based on its review, the Offshore Feeder has determined that the adoption of ASC 740 Income Taxes
(ASC 740) has not impacted the Offshore Feeders financial statements for the year ended March 31, 2013 and
therefore no provision for income taxes was recorded. The Offshore Feeder is also not aware of any tax positions
for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the
next twelve months. The determination of income taxes is based on complex of many factors, including matters
that are subject to interpretation.
3. Share Capital
Authorized share capital of the Offshore Feeder
As of April 1, 2007, the Offshore Feeder no longer offers Class A shares. Instead, the Offshore Feeder offers the
Class B shares, which have the same rights, privileges and terms as the Class A shares, except for the terms of
redemption as noted below. As of January 1, 2008, the Offshore Feeder offers Class C shares.
The authorized capital of the Offshore Feeder is $100,000 and consists of 1,000 voting non-participating, nonredeemable shares of par value $0.01 each (the Ordinary shares) and 9,999,000 non-voting, participating
redeemable shares of par value $0.01 each (the Participating shares). The authorized capital of the Offshore
Feeder may be divided into different classes with varying rights attached to each class. The Participating shares
are divided into Class A, Class B and Class C Participating shares (respectively, the Class A shares, the Class B
shares, the Class C shares, each a Class collectively, the Shares).
The Ordinary shares of the Offshore Feeder are held by the Master Fund Special LP (the Special LP), a related
party to the Investment Manager. The Articles of Association of the Offshore Feeder empowers the Board of
Directors (the Board) to create different classes of shares.
The Shares are issued in series with a new series being issued on each date that the Offshore Feeder permits
subscription for shares. The series are issued consecutively per class (i.e. commencing with A1, B1, C1 etc.). Each
of the outstanding series of shares participates ratably with all other outstanding series of the same class in the
Offshore Feeders fees, expenses, assets and earnings with respect to such series.
The Shares are issued in various series to reflect equitably the differing incentive allocation attributable to
each series.
At the end of each quarter or year as applicable, all series that do not have a loss carryforward available to them
will be converted into the initial series of the applicable class of Participating shares unless the initial series has a
loss carryforward, then the next available series that does not have a loss carryforward shall be used in its place.
Certain series may not be subject to the conversion at the discretion of the Board.
59
For the year ended December 31, 2013 (Expressed in United States dollars)
Subscriptions
Shares may generally be subscribed to on the first business day of each month by giving two days written notice,
or such other days approved by the Board in its sole discretion. The initial purchase price per share for each series
of shares is $1,000. The minimum initial subscription for shareholders in the Offshore Feeder is $500,000 for
Class A/B shares and $1,000,000 for Class C shares. These amounts are subject to reduction at the discretion
of the Board.
Redemptions
Shares will be redeemed at the redemption price equal to such shares net asset value (the NAV) as of the close
of business on the redemption date.
Class A shareholders have the right upon 20 days prior written notice to request a partial or total redemption
of its Class A shares as of the last business day of each calendar month or such other day as determined by
the Board.
Class B shareholders have the right upon 60 days prior written notice to request a partial or total redemption of its
Class B shares as of the last business day of each calendar quarter or such other date as determined by the Board.
Class A and B shareholders are subject to a redemption fee of five percent (5%) of the redemption proceeds for
redemptions made by a shareholder within the first six months after each subscription. A redemption fee of two
percent (2%) will be charged for redemptions made by a Class A and B shareholder, occurring any time following
the first six months and preceding the 12-month anniversary of each subscription. The Board may, in its sole
discretion, waive or reduce the redemption fees.
Class C shareholders have the right upon 60 days prior written notice to request a partial or total redemption of
its Class C shares as of the last business day of the calendar month on the Class C lock-up period (defined below)
expires, and thereafter, on the last business day of the calendar month on each 12-month anniversary of the
expiration of the Class C lock-up period, or such other date as determined by the Board.
A shareholder may not redeem any series of its Class C shares until the expiration of the 12-month period following
the purchase of such series of Class C shares, (the Class C lock-up period), without the prior written consent of
the Board.
60
For the year ended December 31, 2013 (Expressed in United States dollars)
61
For the year ended December 31, 2013 (Expressed in United States dollars)
Number of Net asset value
Ordinary shares
shares
No.
per share
$
1,000
1,000.00 1.00
Participating shares
Class A
Class A Initial Series 11,998,109
Class A Series 1
85,664,562
2,231.51
16,588.97
18,820.48
97,662,671
Class B
Series 1
12,746,751
Series 2
195,650
Series 3
74,570
Series 4
111,838
Series 5
692,746
Series 6
264,127
Series 9
10,823,891
7,785.95
145.00
61.63
100.00
600.00
250.00
7,120.00
24,909,573
16,062.58
Class C
Series 1
Series 2
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8
15,404,107
335,589
1,510,099
371,897
938,350
1,499,904
316,670
5,120,731
7,620.58
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00
25,497,347
16,819.85
62
5,376.68
5,163.95
1,637.15
1,349.31
1,209.96
1,118.38
1,154.58
1,056.51
1,520.21
2,021.38
1,352.80
1,277.58
1,239.66
1,103.94
1,136.98
1,055.57
1,024.15
For the year ended December 31, 2013 (Expressed in United States dollars)
Shares
outstanding
January 1,
2013
Shares
converted
during the
year
issued/
redeemed/
transferred transferred
during the during the
year
year
Shares
outstanding
December 31,
2013
-
-
312.08
(124.50)
(225.00)
-
-
-
-
6,549.01
(358.00)
(1,261.30)
(3,000.00)
(1,600.00)
(250.00)
(1,491.00)
(121.93)
-
-
-
145.00
61.63
100.00
600.00
250.00
-
-
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00
(13.27)
(300.00)
-
-
-
-
-
-
(610.00)
(1,000.00)
-
-
-
-
-
-
-
2,231.51
16,588.97
7,785.94
145.00
61.63
100.00
600.00
250.00
7,120.00
7,620.58
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00
(1,570.64)
10,355.90
(1,923.27)
51,702.90
44,840.91
63
For the year ended December 31, 2013 (Expressed in United States dollars)
Incentive allocation
Incentive allocation to the Master Fund GP and the Special LP are recorded in the financial statements of the
Master Fund. The amount is allocated to each of the Feeder Funds capital accounts in the Master Fund. Incentive
allocation is discussed in Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, the incentive allocations to the Master Fund GP and the Special LP from the
Offshore Feeder were $1,240,445 and $7,029,186 respectively.
Share capital
The Offshore Feeder has related party shareholders inclusive of the Special Limited Partner of the Master Fund.
The shareholdings of these related parties total $96,834,598 and represent approximately 65% of net assets at the
reporting date.
Directors fee
For the year ended December 31, 2013, director fees of $4,000 were incurred and fully paid.
5. Administration Agreement
The Master Fund and the Feeder Funds entered into an administration agreement with Prime Management Limited
(the Administrator) a subsidiary of SS&C GlobeOp for the provision of certain accounting, administrative and
investor services.
Pursuant to the administration agreement with the Administrator, the Offshore Feeder pays to the Administrator a
monthly fixed fee as of the last business day of each month.
For the year ended December 31, 2013, total administration fees of $19,750 were incurred and $5,250 was payable
at the reporting date.
6. Risks Factors
Due to the nature of the master/feeder structure, the Offshore Feeder may be materially affected by the risk
factors affecting the Master Fund as discussed in Note 9 of the Master Funds Notes.
7. Financial Highlights
The per share operating performance, total return and ratios to average net assets are calculated for the initial series
of each share class. An individual investors per share operating performance, total return and ratios to average
net assets may vary from these amounts and ratios based on different management fee and incentive allocation
arrangements and the timing and amount of capital transactions.
The following represents the per share information, total return and ratios to average net assets and other
supplemental information for the year ended December 31, 2013:
64
For the year ended December 31, 2013 (Expressed in United States dollars)
Class A
Initial Series
Class B
Series 1
$ 1,213.32
423.83
(104.72)
528.55
$ 1, 637. 15
Class C
Series 1
$ 1,494.25
(142.94)
670.07
527.13
$ 2,021.38
42.54%
(7.61)
42.54%
(7.61)
45.04%
(9.76)
34.93%
35.28%
(1.26)%
(6.51)
(1.26)%
(6.51)
(0.23)%
(8.08)
(7.77)%
(7.77)%
(8.31)%
(0.87)%
(6.51)
(0.87)%
(6.51)
0.17%
(8.08)
(7.38)%
(7.38)%
(7.91)%
* The ratios are computed based upon the weighted average net assets of shares as a whole throughout the year.
8. Subsequent Events
Management has evaluated subsequent events occurring through April 30, 2014, the date that these financial
statements were available for issue and found that there were no significant events which would have a material
bearing on these financial statements.
65
Table of Contents
Independent Auditors Report
68
69
Statement of Operations
70
71
72
66
73-78
67
We have audited the accompanying financial statements of Aquamarine Value Fund, L.P. (the Onshore Feeder) which comprise the
statement of assets and liabilities of as of December 31, 2013, and the related statements of operations, changes in partners capital and
cash flows for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Onshore Feeders preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Onshore Feeders internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Onshore
Feeder as of December 31, 2013, and the results of its operations, changes in partners capital and its cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States of America.
68
For the year ended December 31, 2013 (Expressed in United States dollars)
Assets
10,939,216
3,403
30,000
Total assets
10,972,619
Liabilities
18,736
32,840
Total liabilities
51,576
Partners Capital
10,921,043
69
STATEMENT OF OPERATIONS
For the year ended December 31, 2013 (Expressed in United States dollars)
(705,524)
Expenses
Administration fee
Professional fees
Other expenses
29,000
20,623
5,169
54,792
Net Investment Loss
(760,316)
70
(125,656)
3,627,384
3,501,728
2,741,412
For the year ended December 31, 2013 (Expressed in United States dollars)
General Limited
Partner
Partners
Partners Capital,
January 1, 2013
Total
Increase in
Partners Capital:
From operations
Net increase in partners capital
From capital transactions
Capital contributions
Capital withdrawals
Partners Capital,
December 31, 2013
96,568
2,644,844
2,741,412
-
-
1,000,000
(727,530)
1,000,000
(727,530)
328,373
10,592,670
10,921,043
71
For the year ended December 31, 2013 (Expressed in United States dollars)
2,741,412
Financing Activities
1,000,000
72
For the year ended December 31, 2013 (Expressed in United States dollars)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results
could differ from those estimates and the differences could be material.
73
For the year ended December 31, 2013 (Expressed in United States dollars)
measuring fair value and requires certain disclosures about fair value measurements. Additional disclosures due to
the impact of ASC 820 on the Onshore Feeders underlying investments held within the Master Fund are included
in Note 4 of the Master Funds Notes.
Foreign currency
The books and records of the Onshore Feeder and the Master Fund are maintained in U.S. dollars. The foreign
currency translation policy is discussed in Note 2 of the Master Funds Notes.
Income taxes
The Onshore Feeder reviews and evaluates tax positions in its major jurisdictions and determines whether or
not there are uncertain tax positions that require financial statement recognition. In determining the major tax
jurisdictions, the Onshore Feeder considers where it is organized and where it makes investments. The Onshore
Feeders US Federal tax returns for 2010 to 2013 remain open for examination by tax authorities and tax positions
74
For the year ended December 31, 2013 (Expressed in United States dollars)
associated with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations.
Based on its review the Onshore Feeder has determined that ASC 740, Income Taxes (ASC 740) has not
impacted the Master Funds financial statements for the year ended December 31, 2013 and therefore no provision
for income taxes was recorded. The Onshore Feeder is additionally not aware of any tax positions for which it is
reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve
months. The determination of income taxes is based on complex analyses of many factors, including matters that
are subject to interpretation.
Individual partners are taxed on their proportionate share of the Onshore Feeders income.
Capital contributions
The minimum investment in the Onshore Feeder is $500,000 by each Class A limited partner and $1,000,000
for each Class B limited partner. The General Partner may in its discretion waive the minimum initial contribution
amount with respect to any partner. Following initial investment, a limited partner may make additional
investments in amounts of not less than $50,000, subject to adjustment at the discretion of the General Partner.
The General Partner may admit new limited partners and permit limited partners to make additional contributions
as of the first business day of each calendar month, or at any other time in the General Partners sole discretion.
Capital withdrawals
Class A limited partners may make a complete or partial withdrawal from its capital account as of the last day of
each calendar quarter, with 60 days prior written notice to Prime Management Limited a subsidiary of SS&C
GlobeOp (the Administrator).
A withdrawal fee of five percent (5%) of the withdrawal amount will be charged for withdrawals made by a Class
A limited partner within the first six months after each capital contribution, and two percent (2%) for withdrawals
occurring any time following the six (6) months and preceding the twelve (12) month anniversary of each capital
contribution.
Additionally, the General Partner, in its sole discretion may permit any Class A limited partner to withdraw all or
any portion of its capital account on a day other than the last day of a calendar quarter and/or on less than 60 days
prior written notice subject to a withdrawal fee of two percent (2%) of the withdrawal proceeds, together with the
initial Class A withdrawal fee.
A Class B limited partners may make a complete or partial withdrawal from its capital account as of the last
75
For the year ended December 31, 2013 (Expressed in United States dollars)
business day of the calendar month in which the Class B lock-up period (defined below) expires upon 60 days
prior written notice to the Administrator. Thereafter, a class B limited partner may make a withdrawal on the last
business day of the calendar month for each 12-month anniversary of the expiration of the Class B lock-up period,
or such other date as determined by the General Partner.
Class B limited partner may not withdraw any capital contribution (and any appreciation thereon) until the
expiration of the 12-month period following the contribution of such capital, (the Class B lock-up period), without
the prior written consent of the General Partner.
The General Partner in its sole discretion may waive or reduce the Class B lock-up period and/or the notice period
required for withdrawals by Class B limited partners. Class B limited partners are not subject to withdrawal fees.
Each withdrawing limited partner will receive, at the General Partners sole discretion, at least 90% of its estimated
withdrawal amount with the balance payable 30 days after the Onshore Feeders annual audit. The General Partner
may in certain circumstances suspend withdrawals from the capital account of the Onshore Feeder.
Incentive allocation
Incentive allocation to the General Partner is recorded in the financial statements of the Master Fund. The amount
is allocated to each of the Feeder Funds capital accounts in the Master Fund. Incentive allocation is discussed in
Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, the incentive allocation to the Master Fund GP from the Onshore Feeder
76
For the year ended December 31, 2013 (Expressed in United States dollars)
was $696,076. The fee is included in the caption Expenses allocated from Master Fund in the statement of
operations.
Partners capital
The Onshore Feeder has related party partners inclusive of the General Partner. These partners capital represent
approximately 11% of partners capital at the reporting date of which $389,118 are Class A Interests and $779,782
Class B Interests.
5. Administration Agreement
The Master Fund and the Feeder Funds entered into an administration agreement with the Administrator as of
April 1, 2007 for the provision of certain accounting, administrative and investor services.
The Onshore Feeder pays to the Administrator a monthly fixed fee as of the last business day of each month.
For the year ended December 31, 2013, total administration fees of $29,000 were incurred and $11,875 were
payable at the reporting date.
6. Risk Factors
Due to the nature of the master/feeder structure, the Onshore Feeder may be materially affected by the risk
factors affecting the Master Fund as discussed in Note 9 of the Master Funds Notes.
7. Financial Highlights
The following financial highlights are calculated for the limited partners taken as a whole and exclude data for the
General Partner.
Individual limited partners returns will vary due to the timing of contributions and withdrawals, different
management fees and incentive allocation arrangements. The incentive allocation is borne by the Master Fund.
77
For the year ended December 31, 2013 (Expressed in United States dollars)
Total return
Total return before incentive allocation
Incentive allocation
43.97%
(7.63)
36.34%
(1.14)%
(7.63)
(8.77)%
(0.63)%
(7.63)
(8.26)%
*Ratios of operating expenses and net investment loss are computed based on the monthly average of the partners
capital of all limited partners for the year.
8. Subsequent Events
Management has evaluated subsequent events occurring through April 30, 2014, the date that these financial
statements were available for issue and found that there were no significant events which would have a material
bearing on these financial statements.
78
Team Aquamarine
Guy Spier, Managing Partner
Office Team
Orly Hindi, Operations & Compliance, New York
Keith Smith, Consultant, London
Lynda Brandt, Events & Administration, Zurich
Director, Aquamarine Fund Inc.
Simon Spier, London
Auditor
Deloitte and Touche, Bermuda
Brokers and Custodians
UBS, The Desai Group, Chicago
Credit Suisse, Zug
General Counsel
Dentons, New York
Bratschi Wiederkehr Buob, Zurich
Ogier, British Virgin Islands
Tax, Accounting and Administration
Prime Management Limited, Bermuda
(Aquamarine Master Fund, L.P., Aquamarine Fund, Inc.,
and Aquamarine Value Fund, L.P.)
Michael J. Liccar & Co., LLC, Chicago
(K1s, US Tax accounting)
79
Credit Suisse
Thomas Rohner Thomas Lauber Taylor-Ann Messmer
Stefan Huerzeler Raphael Huber
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Aquamarine Fund
Aquamarine Zurich AG
18 Ramistrasse
8001, Zurich
Switzerland
Tel +41 44 210 1900
Fax +41 44 210 1901
Aquamarine Capital
1345 Avenue of the Americas, 2nd Floor
New York, NY 10105
United States
Tel +1 212 716 1350
Fax +1 212 716 1353
www.aquamarinefund.com