DR2 Momentum AllWeather Strategies II Fund Update April 2009 Alternative Background: At the end of 2008, and given illiquidity in the markets, a number of Pioneer Alternative Investments fund of hedge fund ( FoHF ) underlying managers reported that some assets held within their portfolios had become illiquid or difficult to sell quickly enough to meet their liquidity terms. Therefore, these managers took steps to isolate the illiquid assets, or otherwise restrict the liquidity of their fund, and some chose to change their overall liquidity terms to better reflect the nature of the assets held within the portfolios. For Momentum AllWeather Strategies II Master Fund, we separated some of these holdings from the rest of the portfolio by placing them in a separate delayed redemption class fund of Momentum AllWeather Strategies Limited called DR Momentum AllWeather Strategies II Fund (the DR Fund ). Since December, the liquidity of many of these managers has not improved and some underlying managers that did not take action in December reacted at the end of Q1 2009 by changing their prospectus terms and/or otherwise modifying their liquidity. As a result of the increased illiquidity of the underlying funds in which Momentum AllWeather Strategies II Master Fund (the Master Fund ) invests and a higher than expected level of redemption requests received by the Master Fund, DR2 Momentum AllWeather Strategies II Fund ( DR2 Fund ) was created on 31 March 2009 to hold some of these additional illiquid assets. Below is a short summary of the positions in the DR2 Fund as of 31 March 2009. It should be noted that the YTD returns for the underlying hedge funds shown reflect that of the underlying hedge fund and are not necessarily representative of the performance of the side pocket portions of certain hedge funds. Returns for the side pockets, where reported separately by hedge funds, have been provided in the text. Fund1 Name and Strategy: Styx International, Ltd., Specialist Credit :Loan Origination % of DR2 Fund NAV: 52.09% 2009 YTD Return: -0.17% Styx International, Ltd s ( Styx ) performance suffered in 2008 amongst non-realised losses from loan mark-downs. In the context of the brutal lending environment recent performance has come under pressure, however Styx has been well served by its conservative nature. Styx has also been affected by the current liquidity crisis, despite running a well-diversified portfolio. Duration of loans in the book has been extended in recognition of the changed lending environment. In order to reflect such a change of liquidity in Styx, we have placed approximately 80% of the position within Momentum AllWeather Strategies II Master Fund in the DR2 Fund. 1
Styx is managed by Cerberus Capital Management ( Cerberus ). The fund was launched in May 1996 and follows a loan origination strategy or asset backed lending. Styx originates secured loans for middle market companies in need of shortterm liquidity. The companies are financed on the basis of their asset and liquidation values only and not on their future business prospects. The investments are short-term in nature with an average loan period of 3 years. The loans are typically secured on the assets of the company and are made when the company's assets far exceed the loan amount. Styx is diversified by position and industry and Cerberus aims to obtain collateral which substantially exceeds the amount of a loan. Although it rarely occurs, it is generally a favourable outcome if the company defaults which enables the lender to foreclose on and dispose of the collateral that has over-secured the loan. Cerberus was formed in 1992 with a focus on investments in distressed debt. Since then, Cerberus has become a one-stop shop for financially and operationally challenged companies, with the ability to invest at any level in a company s capital structure and is currently one of the largest players in the distressed investment market. Over its 17-year history, Cerberus has expanded its expertise from publicly traded distressed debt to include private equity, lending and real estate. Fund 2 Name and Strategy: Strategic Value Restructuring Fund, Ltd, Specialist Credit : Distressed Securities % of DR2 Fund NAV: 17.29% 2009 YTD Return: -1.54% At the end of 2008, the manager of Strategic Value Restructuring Fund, Ltd created a side pocket to hold 6.4% of the fund which was illiquid at the time. The entire illiquid position was placed into DR AllWeather Fund which was created at the end of last year. Recently, the manager of Strategic Value Restructuring Fund, Ltd has implemented a vertical slice distribution with respect to Q1 2009 redemptions and therefore the residual position within Momentum AllWeather Strategies II Master Fund was placed in the DR2 Fund. Strategic Value Restructuring Fund Ltd. launched in July 2002 with a focus on global distressed investing and lost -20.7% in 2008 as both sides of the ledger incurred negative performance. The short book lost because of a short squeeze in CDS at year end with the balance of mark-to-market losses across the board. Side pocket investments detracted and performance was dragged further by German real estate. Mark-to-market losses on long and short positions continued to harm the returns of Strategic Value Restructuring Fund, Ltd in January and are the main reason for the Q1 2009 performance of -1.54%. Victor Khosla established Strategic Value Partners in 2001. He is the Managing Partner and has an extensive background in distressed investing. Prior to setting up Strategic Value Partners he managed a distressed debt fund in a joint venture with Moore Capital Management, and earlier was a President of Cerberus Capital Management and a Managing Director and Co-Head of the Distressed Products Group at Merrill Lynch &Co. Fund 3 Name and Strategy: Lampe Conway Capital Offshore Fund, Ltd, Specialist Credit : Distressed Securities % of DR2 Fund NAV: 13.43% 2009 YTD Return: 1.45% In 2008 Lampe Conway Capital Offshore Fund, Ltd s ( LCCOF ) performance was hurt because of its long only credit bias. In an environment where extreme technical pressures were dictating the market, the manager of LCCOF has been 2
unable to create much liquidity in the portfolio. Additionally, the lack of buyers in the credit market and illiquidity necessitated further markdowns on various credit positions. Because of this situation, LCCOF was forced to implement a gate as a reflection of the illiquidity of the portfolio. With the situation in Q1 2009 not showing improvement, the fund has suspended redemptions until at least 1 July 2009. To reflect this illiquidity we placed the entire remaining LCCOF position in the DR2 Fund. In terms of performance in 2009, in March the fund is up 2.05%, with main drivers of performance being investment positions in stocks and bonds that rose in value due to company specific news during the month. YTD in Q1 LCCOF is up 1.45%. Lampe Conway & Co was founded in 1999 by Steven G. Lampe and Richard F. Conway. The company is exclusively focused on investments in United States distressed securities and special situations. Steven Lampe and Richard Conway have over 53 years of combined investment experience, 36 years of which have been spent investing in distressed securities. Lampe Conway Capital Offshore Fund was launched in May 2002. Fund 4 Name and Strategy: Sola I, Specialist Credit : Distressed Securities % of DR2 Fund NAV: 11.83% 2009 YTD Return: 7.79% Sola I ( Sola ) launched in June 1998 with a focus on capital structure value investing. Sola s investment flexibility accommodates the continual repositioning of the portfolio in an effort to reflect the most compelling risk-adjusted investment opportunities. Sola was down 19.5% in 2008, a reflection of a tough year for distressed managers. Despite losses incurred in March (a strong short bias hurt the performance as equity markets rallied after the first week of the month), Sola is up 7.8% in Q1 thanks to exceptional performance in January (+9.42%). It s gains were almost equally split between equity (as equity markets declined significantly, being net short helped, with larger gains coming from financial shorts) and credit positions (some tightening of basis, allowed Sola to produce positive returns on both the long and the short side). Sola s manager has recently taken exposure down to net 78% short, trimming both the long and short sides. To reflect the 2008 situation, Sola has decided to segregate its illiquid assets. Sola s manager announced the inability to fully satisfy investors redemption requests and the intentions of restructuring in the last few days of 2008. Approximately 40% of Sola s NAV was illiquid and placed in a special purpose vehicle ( SPV ) to segregate assets. The residual position based on this side pocket was added to the DR2 Fund. Solus Alternative Asset Management LP ( Solus ) is a private investment management firm specializing in alternative credit-based strategies. Solus was founded in June 2007 when the Hedge Fund Strategies Group of Stanfield Capital Partners separated to form an independent firm under the continued leadership of Christopher Pucillo, former Head of Hedge Fund Strategies at Stanfield. As a result of the separation, Solus replaced Stanfield as the investment manager of the Sola Ltd master fund and each of its feeder funds. Sola s investment team and support staff, including legal, compliance, risk, operations, and investor relations remained substantially intact and transitioned along with Christopher Pucillo to Solus upon founding of the firm. 3
Fund 5 Name and Strategy: Cerberus International Ltd., Specialist Credit : Distressed Securities % of DR2 Fund NAV: 3.04% 2009 YTD Return: -0.73% Further to the suspension of redemptions in December 2008, Cerberus International Ltd. continues to be extremely illiquid. The manager, Cerberus Capital Management ( Cerberus ), has suspended redemptions in full for March 2009 for a period of up to one year and is currently contemplating a restructuring plan for Cerberus International Ltd in an effort to provide fair treatment for remaining and redeeming investors. At the end of Q1, in order to keep the weight of the fund within desired exposures, and while coping with redemptions received at the FOHF level, a proportionate amount of Momentum AllWeather Strategies II Master Fund's holding of Cerberus International Ltd. was added to the DR2 Fund. Cerberus International Ltd. has been caught in the current crisis with a bias towards financials and consumer related businesses such as Auto Manufacturers and Consumer Finance/Mortgages. The cash position has increased since the beginning of 2009 as Cerberus lightened exposure in bank debt and mortgage related securities and further freed some cash related to the 2007 sale of a Canadian company. On a positive note, last year the manager agreed the sale of a blood plasma business (currently the holding is amongst the top positions) and the deal is expected to close in the second half of 2009 due to pending regulatory approval. Cerberus was formed in 1992 with a focus on investments in distressed debt. Since then, Cerberus has become a one-stop shop for financially and operationally challenged companies, with the ability to invest at any level in a company s capital structure and is currently one of the largest players in the distressed investment market. Over its 17-year history, Cerberus has expanded its expertise from publicly traded distressed debt to include private equity, lending and real estate. In particular, the Firm invests in: (i) equity and equity-related securities (both minority and majority positions), debt securities and other obligations of undervalued, operationally challenged and/or financially troubled companies; or (ii) the purchase of pools of non-performing loans and single distressed loans underwritten by financial institutions and structured finance instruments; (iii) the purchase of distressed real estate and real-estate related securities. Cerberus has a truly global presence and with a large and seasoned investment team, as well as an experienced bench of operating executives (former CEOs, CFOs, COOs, and other executives forming the Management Bench ) available for utilization on projects around the world, it would typically seek control-oriented positions in operationally challenged companies while most distressed managers seek passive positions in financially troubled companies. The Management Bench collectively has global expertise in a variety of industries and they assist in sourcing deals, performing due diligence on potential investments and in managing the operational turnarounds in which the firm gets involved. Fund 6 Name and Strategy: Marathon Special Opportunity Fund Ltd., Specialist Credit : Multi Credit % of DR2 Fund NAV: 2.10% 2009 YTD Return: -2.70% As of 31 December, 75% of Marathon Special Opportunity Fund Ltd ( MSOF ) was illiquid (side pocketed). Half of the illiquid position was placed in the DR Fund and the other half was left in Momentum AllWeather Strategies II Master Fund, reflecting the investment team s desired exposure. At the end of Q1, to keep the weight of the fund within the desired exposure while coping with redemptions at the FOHF level, a proportionate amount of Momentum AllWeather Fund s holding in MSOF was added to the DR2 Fund. 4
Despite maintaining a bearish outlook over the last year, MSOF was hurt as markets have deteriorated amidst intense selling pressure while remaining net long. When liquidity dried up substantially at the end of 2008 and volatility was severe, all assets faced tremendous selling pressure regardless of quality. MSOF finished 2008 down -28.9% and although redemptions were not substantial for year end, in order to reflect the current illiquidity in the portfolio, MSOF s manager, Marathon Asset Management, implemented a side pocket and moved assets into a liquidating trust to distribute cash to redeeming investors. While performance was positive in January and February, aided by short positions via CDS protection, MSOF incurred negative performance in March, impacted by a net short bias in rallying credit and equity markets. MSOF launched in March 1999 and is managed by Louis Hanover. Its objective is to allocate capital to distressed securities and special situations in the global high yield debt universe to construct a diversified portfolio in order to capture returns by purchasing grossly undervalued securities while selectively shorting overvalued debt securities in which credit deterioration creates opportunity. Marathon Asset Management was founded by Bruce Richards and Louis Hanover in January 1998 as an alternative asset manager focused on global credit investment opportunities. The firm has 150 professionals worldwide with headquarters in New York City and investment offices in London and Singapore. The firm's investment management team specializes in global debt, including high yield, bank debt, distressed debt, emerging market debt, special situations, structured finance, structured debt transactions and real estate opportunities and investments. Currently, the company manages $10 billion. More recently, at the beginning of 2009, Marathon announced the appointment of five additional partners. Fund 7 Name and Strategy: Cerberus Institutional Overseas IV, Ltd., Specialist Credit : Distressed Securities % of DR2 Fund NAV: 0.29% 2009 YTD Return: 3.64% A proportionate amount of the Cerberus Institutional Overseas IV, Ltd position within Momentum AllWeather Strategies II Master Fund was placed into DR Momentum AllWeather Strategies II Fund at the end of 2008 because of stringent liquidity conditions. At the end of Q1, in order to keep the weight of Cerberus Institutional Overseas IV, Ltd at the desired level, while coping with redemptions at the FoHF level, a proportionate amount of Momentum AllWeather Fund s holding in Cerberus Institutional Overseas IV, Ltd. was added to the DR2 Fund. Momentum AllWeather Strategies II Master Fund gains exposure to Cerberus's distressed securities investment strategy through one internal vehicle or bucket, which allocates a majority of its assets to Cerberus International Ltd, (a hedge fund structure) and the remainder to Cerberus Institutional (a private equity structure). The two Cerberus funds have been investing in the same opportunities on a pro-rata basis since inception of Cerberus Institutional (in December 2006), but still have slightly different investments due to remaining legacy positions in Cerberus International. Of note, Cerberus Institutional has greater concentration in certain control-oriented Cerberus investments and more recently in mortgages. Both funds have limited use of market hedges. Other than that, there are two main differences between the two funds, which are liquidity and fees. As is typical for private equity funds, the management fee is charged on the total commitment rather than on the capital actually called, and liquidity is more stringent. 5
Unless otherwise stated all information contained in this document is from Pioneer Alternative Investments and is as of 31 March 2009. This document was prepared by the staff and management of Pioneer Global Investments Limited. In preparing this document, information has been received and collated from various companies comprising the Pioneer Global Asset Management S.p.A. group of companies. Whilst every effort has been made to ensure that all factual data provided is accurate based on the most current information available at the time of preparation, Pioneer Global Investments Limited cannot accept liability for any errors or omissions contained within and expressly disclaim any liability whether in contract or negligence to the addressee of this document or any third party who may review it or use any material from it in respect of any loss or damage occasioned whether direct or consequential. Momentum AllWeather Strategies II Master Fund, DR Momentum AllWeather Strategies II Fund and DR2 Momentum AllWeather Strategies II Fund are class funds Momentum AllWeather Strategies Ltd., a mutual fund company incorporated under the laws of Bermuda with a separate class of funds for each class of shares created from time to time. Pioneer Alternative Investment Management Limited ( PAI ) has been informed by some of the underlying funds of Momentum AllWeather Strategies II Master Fund(the Master Fund ) that a portion of the investments in the underlying funds are illiquid. Some of these illiquid assets have been placed in a newly created class fund of Momentum AllWeather Strategies Limited, namely DR Momentum AllWeather Strategies II Fund and DR2 Momentum AllWeather Strategies II Fund (the DR Funds ) and the Master Funds received shares in the DR Funds in exchange. A shareholder who redeems his holdings in the Master Funds will receive a combination of cash and a pro rata number of DR Fund shares in specie. Any shares in the DR Funds received on redemption will not be redeemable at the option of the shareholder until the holdings of the illiquid assets, in whole or in part, become liquid. This material is provided for information purposes only and should not be used for solicitation purposes. The Master Funds are currently closed to new subscriptions. For further information regarding the impact of this change, please contact your Pioneer representative. This document may not be circulated to third parties or distributed to the public. The document is not intended for and no reliance can be placed on this document by retail clients to whom this document should not be provided. This material is provided for information purposes only and should not be used for solicitation purposes. Unless otherwise stated, all views expressed are those of Pioneer Alternative Investments. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Past performance does not guarantee and is not indicative of future results. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. Investments employing the strategies of the funds referred to in this document are by nature highly speculative and may be volatile, involve leverage and be affected by a lack of liquidity and should only be considered by experienced and sophisticated investors. This material is not a prospectus and does not constitute an offer to buy or a solicitation to sell any shares of any fund or any services, by or to anyone in any 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 anyone to whom it is unlawful to make such offer or solicitation. This information is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities or services in the United States or in any of its territories or possessions subject to its jurisdiction to or for the benefit of any United States person (being residents and citizens of the United States or partnerships or corporations organized under United States laws). The funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units of the Fund are not registered in the United States under the Securities Act of 1933. This document is not intended for and no reliance can be placed on this document by retail clients, to whom the document should not be provided. This content of this document is approved by Pioneer Global Investments Limited. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is directed at professional clients and not at retail clients and it is approved for distribution by Pioneer Global Investments Limited (London Branch), 123 Buckingham Palace Road, London SW1W 9SL, authorised by the Financial Regulator in Ireland and regulated by the Financial Services Authority for the conduct of UK business. The funds referred to herein are unregulated collective investment schemes under the UK Financial Services and Markets Act 2000 and therefore do not carry the protection provided by the UK regulatory system. Pioneer Funds Distributor, Inc., 60 State Street, Boston, MA 02109 ( PFD ), a U.S.-registered broker-dealer, provides marketing services in connection with the distribution of Pioneer Alternative Investments products. PFD markets these products to financial intermediaries, both within and outside of the U.S. (in jurisdictions where permitted to do so) for sale to clients who are not United States persons. Pioneer Alternative Investments and Pioneer Investments are trading names of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: 27 May 2009 6