Management Company, Typical Fund Structures and Special Purpose Vehicles Session

1. Hedge Funds and Alternative Investments Conference Management Company, Typical Fund Structures and Special Purpose Vehicles Session Karen Kerby, Untracht Early Chuck Beel, KPMG Joseph Fisher, Deloitte & Touche Tom Gengler, GoldenTree Asset Management July 30, 2008

2. ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY GOLDTREE ASSET MANAGER LP, DELOITTE & TOUCHE, UNTRACHT EARLY AND KPMG TO BE USED, AND CANNOT BE USED, BY ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. • The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser. • DATED MATERIALTHE INFORMATION CONTAINED IN THESE COURSE MATERIALS IS CURRENT AS OF THE DATE PRODUCED. THE MATERIALS HAVE NOT BEEN AND WILL NOT BE UPDATED TO INCORPORATE ANY TECHNICAL CHANGES TO THE CONTENT SINCE THE PRODUCTION DATE, WHICH IS INDICATED AT THE BOTTOM OF EACH PAGE. YOU ARE RESPONSIBLE FOR VERIFYING WHETHER OR NOT THERE HAVE BEEN ANY TECHNICAL CHANGES SINCE THE PRODUCTION DATE

3. Management Companies Joseph Fisher, Audit Partner, Deloitte & Touche LLP July 2008

4. Agenda • Definition • Management company characteristics • Registration • Structures (LLC/LP/Corp) • Basis of accounting • Financial statements / example • Accounting issues

5. What is a Management Company ? Management companies provide investment advice, research services and certain administrative services to hedge funds. Note: Many funds have a separate management company and general partner entity. Funds with international offices usually have multiple management companies – at least one in each country (see chart).

6. Management company characteristics • Management fee income • Incentive / performance fees • Fixed assets / leasehold improvements • Payroll expense / compensation • Leases • Deferred taxes • Taxes – sales and use, Unincorporated Business Tax (UBT), commercial rent • Pay expenses on behalf of funds

7. Registration Generally anyone “in the business” of providing investment advice must register as an “investment adviser” with the SEC. However, there are exemptions for “private” investment advisers who do not advertise or hold themselves out to the public as an investment adviser and do not have 15 or more clients – each hedge fund is considered a client, not each investor in the fund.

8. POSSIBLE MANAGEMENT COMPANY STRUCTURE WHEN THERE ARE OFFICES IN US & UK Individual Partners GP Entity US Management Company UK Corp (Disregarded for US Purposes) UK Partnership Individual Partners Individual Partners

9. Basis of accounting Management company’s financial statements may be prepared under : • Generally accepted accounting principles in the United States • International Financial Reporting Standards • Other comprehensive basis of accounting • Tax basis • Cash basis • Modified-cash basis

10. Illustrative financial statements Statement of Financial Condition

11. Illustrative financial statements Statement of Operations

12. Illustrative financial statements Statement of Changes in Shareholders’ Equity

13. Illustrative financial statements Statement of Cash Flows

14. Accounting Issues • Consolidation - ARB 51/EITF 04-05 • FIN 46 • Goodwill and impairment analysis • Valuation • Deferred compensation arrangements • Deferred taxes • Deferred rent (FTB 85-3) • Transfer pricing (between countries)

15. THE “SHAPES” OF HEDGE FUNDS Chuck Beel, Tax Partner, KPMG LLP Tom Gengler, CPA, MBA, Tax Director, GoldenTree Asset Management, LP July 2008

16. Agenda • Typical Fund Structures – Pros and Cons • Side by Side • Traditional Mini Master • Mini Master • Investor Fund • Pros and Cons of Each Structure • Special Purpose Vehicles – Pros and Cons • Aggregating Entity • Blockers for One Company Coupled with an Aggregating Entity • Blockers for More Than One Company Includes a Chain of Blockers (Foreign & Domestic) Coupled with an Aggregating Entity The information above, are the personal views of Tom Gengler and Chuck Beel and not of any other entity

17. KEY Separate Investors, Including Individuals, US Corporations, Foreign Corporations, and Non-Profits Corporation(s) Partnership Hybrid Entities (Partnership (US); Corp (Non-US)) Disregarded Entity Note: Colors of shapes may vary, but the meaning of the shapes themselves remains constant. These slides are available to view/download in color on the NYSSCPA website.

18. Typical Fund Structure 1: SIDE BY SIDE HYPO Fund Management LP (Investment Manager) U.S. Taxable Investors U.S. Tax Exempt and Non-U.S. Investors GP LLC (General Partner) Management Fee Management Fee Incentive Fee L.P. (Delaware Partnership) Incentive Allocation Partners, Ltd. (Cayman Corp.) Investments Investments The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

19. Purpose:Separate Funds are created to accommodate different investor needs by allowing multiple entry points. • Pros: • U.S. tax exempt partners are able to invest in an entity that will block unrelated business taxable income; • Non U.S. Investors can invest in a non U.S. entity; • The Delaware Limited Partnership and the Cayman Corp can invest side-by-side; • The General Partner/Investment Manager can earn a promote/incentive fee from all investors using a similar promote structure; • The General Partner will earn the same character of income earned by the Delaware Partnership; • Foreign tax credits (if available) will pass through to the U.S. Taxable Investors; • The General Partner’s earnings and investment management fees are in separate entities; • The Sponsor has a structure to control both funds. • Cons: • The Investment Manager will receive ordinary income as opposed to capital gain income due to the investment management fee being ordinary income in nature; • Additional cost to administer – shareholder agreement, partnership agreement, separate bank accounts, additional audits; • Both Funds must invest side-by-side in all deals, creating additional burdens for joint venture partners. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

20. Typical Fund Structure 2: TRADITIONAL MASTER FUND HYPO Fund Management LP (Investment Manager) U.S. Tax Exempt and Non-U.S. Investors U.S. Taxable Investors GP LLC (General Partner) ManagementFee Incentive Fee Management Fee L.P. (Delaware Partnership) Partners, Ltd. (Cayman Corp.) Incentive Allocation HYPO Master Fund, Ltd. (Cayman Corp., Treated as a Partnership For U.S. Tax Purposes) The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

21. Purpose:Same as Structure 1 but separate funds can use one investment vehicle as a focal point to make investments with third parties. • Pros: • Generally, same as Structure 1; • The two funds can use one investment vehicle to make all investments. This may make it easier for third party joint venture partners and provide some anonymity as the General Partner will not need to explain the parallel fund structure to joint venture partners. • Cons: • Generally, same as Structure 1; • The creation of HYPO Master Fund, Ltd. creates an extra level of accounting, compliance and potential for a financial statement audit; • The U.S. investors investing in the Delaware LP can potentially lose tax treaty benefits from foreign countries. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

22. Typical Fund Structure 3: MINI MASTER HYPO Fund U.S. Tax Exempt and Non-U.S. Investors Management LP (Investment Manager) U.S. Taxable Investors Partners, Ltd. (Cayman Corp.) Management Fee GP LLC (General Partner) Management Fee L.P. (Delaware Partnership) Incentive Allocation Incentive Allocation Cayman Partnership HYPO Master Fund, Ltd. (Cayman Corp., Treated as a Partnership for US Tax Purposes) The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

23. Purpose:Same as Structures 1 and 2 except the General Partner now earns a promote from both parallel funds. This allows the GP to earn capital gain income from U.S. Tax Exempt and Non U.S. Investors • Pros: • Generally, same as Structure 2, except; • The GP can now earn capital gain income from investments made indirectly by the Cayman Partnership through the HYPO Master Fund Ltd. If structured properly, the economics to all partners should be the same as in Structure 2. • Cons: • Generally, same as Structure 2; except; • The creation of the Cayman Partnership creates an extra level of accounting, compliance and a potential financial statement audit; • There is now a need to have two agreements in relation to the U.S. Tax Exempt and Non-U.S. Investors group, a partnership agreement for the Cayman Partnership and a management agreement for the Cayman Corp. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

24. Typical Fund Structure 4: INVESTOR FUND HYPO Fund U.S. Tax Exempt and Non-U.S. Investors Management LP (Investment Manager) U.S. Taxable Investors Management Fee Management Fee GP LLC (General Partner) Partners, Ltd. (Cayman Corp.) L.P. (Delaware Partnership) Incentive Allocation Cayman Partnership Incentive Allocation HYPO Master Fund, Ltd. (Cayman Corp.) The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

25. Purpose:Same as Structures 1, 2 and 3 except the Investment Manager now earns a management fee from one entity, HYPO Master Fund LP, In addition, HYPO Master Fund, Ltd. is classified as a corporation for U.S. tax purposes and will be treated as a passive foreign investment company (“PFIC”). • Pros: • The Investment Manager can now earn its fee directly from one entity (HYPO Master Fund LP) as opposed to two entities (Delaware Limited Partnership and the Cayman Partnership); • There is one management contract instead of two as required by the other structures; • Assuming the Delaware Limited Partnership makes a QEF election, U.S. Taxable Investors investing indirectly in a PFIC will receive allocations of ordinary income and capital gain income; • Costs that are normally classified as expenses for the production of income (subject to the 2% floor limitation) are netted with income at the PFIC level; • PFIC reporting is generally easier to comply with then partnership reporting; • The Cayman Corp will block UBTI income for the U.S. Tax Exempt Investors. • Cons: • If the Investment Manager wants to charge varying management fees based on committed capital, this structure becomes cumbersome as usually these expenses are specially allocated to the investors who bear such costs. In this case, special records will need to be kept to track this allocation; • Foreign tax credits (if available) will not pass through to the U.S. Taxable Investors; • Unlike a partnership, losses from the PFIC will not pass through to U.S. Taxable Investors. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

26. Special Purpose Vehicle 1: AGGREGATING ENTITY Master 2 Master 3 Master 1 Aggregating Entity The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

27. Special Purpose Vehicle 1Purpose:Allows several Master Funds to use one aggregating vehicle to act as a focal point for making investments. • Points to Consider: • Generally the aggregating vehicle dose not incur debt. • The aggregating vehicle will require a separate partnership or operating agreement, will most likely require a financial statement audit and will require a cash management function to collect and distribute cash. • The sponsor will generally have control of the aggregating vehicle. • The aggregating vehicle’s operating agreement can have contain provisions to specially allocate cash and income among the Master Funds. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

28. Special Purpose Vehicle 2: BLOCKER FOR ONE COMPANY COUPLED WITH AN AGGREGATING ENTITY Offshore Feeder (1) Onshore Feeder (1) Master 2 Debt: 3,000 Equity: 1,500 D to E: 2 - 1 Total: 4,500 Master 3 Domestic Blocker I Aggregating Entity Aggregate Entity M1 Domestic Blocker: 4,500 Offshore Feeder: 4,500 Total: 9,000 M2 6,000 M3 3,000 Total: 18,000 Blocker Potential Investments in U.S. Real Estate Note: Master 1 invests indirectly through its feeder. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

29. Special Purpose Vehicle 2Purpose:Allows several Master Funds to use one aggregating vehicle to act as a focal point for making investments and allows non U.S. investors to avoid U.S. effectively connected income. • Points to Consider: • If the aggregating vehicle were to invest in U.S. real estate, it could have U.S. effectively income. This could result in the non U.S. investors being subject to U.S. federal and state income taxes and filing requirements. • By inserting a U.S. blocker corporation, the U.S. blocker corporation becomes subject to U.S. federal and state income taxes as well as filing requirements. • U.S. blocker corporations generally involve double taxation, once at the entity level and again when dividends are distributed. • The sponsor of Offshore Feeder (1) may have a harder time earning its promote if the promote calculation is based on after tax cash. • There are techniques that can be used to reduce U.S. federal and state income taxes. One such technique is the use of intercompany debt when capitalizing the U.S. offshore blocker. However, care must be taken to avoid the interest stripping and Applicable High Yield Discount Obligation rules. The information above are thepersonal views of Tom Gengler and Chuck Beel and not of any other entity

30. Special Purpose Vehicle 3: ONE CHAIN OF BLOCKING (FOREIGN & DOMESTIC) FOR MULTIPLE COMPANIES & AGGREGATING ENTITY Offshore 1 Offshore 2 Offshore 3 Onshore 2 Onshore 1 Debt: 0 Equity: 1000 (1/3) Debt: 0 Equity: 1,500 (1/2) Debt: 0 Equity: 500 (1/6) Onshore 3 Debt: 0 Equity: 3,000 Foreign Blocker Debt: 6,000 Equity: 3,000 Total: 9,000 D to E: 2 - 1 Domestic Blocker Aggregating Entity Blocker Aggregate Entity Domestic Blocker: 9,000 Onshore 1: 4,500 Onshore 2: 3,000 Onshore 3: 1,500 Total: 18,000 Potential Investments in U.S. Real Estate Note: Masters 1,2 and 3 invest indirectly through their feeders. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity

31. Special Purpose Vehicle 3Purpose:Allows several Master Funds to use one aggregating vehicle to act as a focal point for making investments and allows non U.S. investors to avoid U.S. effectively connected income. In addition, the introduction of a foreign blocker allows for transfers. • Points to Consider: • Same points as for Special Purpose Vehicle 2 . • If a U.S. corporation is a U.S. real property holding corporation (generally if U.S. real property interests held equals or exceeds 50% of the FMV of real property and assets used in a trade or business) , the sale of such corporation could trigger U.S. taxable income. • However, the sale of a foreign blocker that holds a U.S. real property holding corporation generally will not result in U.S. taxation. • Potential buyers may ask for a discount on the purchase price due to the ultimate U.S. federal and state income taxes that would be payable on sale of U.S. real estate. The information above are the personal views of Tom Gengler and Chuck Beel and not of any other entity