Exhibit 99.1
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Xxxxxxx, Xxxxx & Co| 32 Old Slip | New York, NY 10005
[GRAPHIC OMITTED][GRAPHIC OMITTED]
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October 3, 2005
Dear Investor:
We wish to inform you of certain upcoming changes being made to Xxxxxxx
Xxxxx Hedge Fund Partners II, LLC (the "Fund") effective January 1, 2006.
The changes are summarized in the attached Annex.
Some of the changes relate to modifications to your redemption rights. We
periodically review the redemption provisions of our funds, including the
Fund, to ensure prudent alignment with those of the underlying investment
funds in which the Fund indirectly invests. As a result of this review, we
are amending the Fund's limited liability company agreement to permit
redemptions on a quarterly basis rather than on a semi-annual basis.
Accordingly, beginning in calendar year 2006, with the appropriate notice
and subject to the limitations on redemption or lock-ups otherwise
applicable to your units in the Fund ("Units"), you may redeem your Units
as of the time immediately prior to the opening of business on each January
1, April 1, July 1 and October 1. Over the last several years, we have
noticed a trend toward longer notice periods among investment funds.
Therefore, the Fund is making certain changes to the notice period and
other provisions related to redemptions, the specific terms and risks of
which are described in the attached Annex.
Other changes being made to the Fund are intended to reduce administrative
burdens and costs to the Fund and to standardize terms across our various
funds. These changes, and certain related risks, are also described in the
attached Annex.
The Fund filed a Form 8-K with the Securities and Exchange Commission on
October 3, 2005 that discusses the proposed changes. The Form 8-K includes
a form of the amended and restated limited liability company agreement (the
"Amended LLC Agreement") that reflects many of the changes described in the
attached Annex. The Amended LLC Agreement will take effect beginning
January 1, 2006. We will send you a copy of the Amended LLC Agreement upon
request.
You may redeem the Units you currently hold in the Fund before the upcoming
changes take effect. Should you wish to exercise this right, you may do so
on the Fund's next scheduled redemption date, January 1, 2006, provided
that your redemption request is received in writing no later than Tuesday,
November 1, 2005. The minimum holding period applicable to your Units, if
any, will be waived for purposes of such redemption. Alternatively, if you
wish to continue your investment in the Fund but object to the liquidity
changes described in the attached Annex under "Changes to the Fund's
Liquidity" or the amendment changes described under "Dissolution Rights"
applying to your Units, please notify the Fund in writing no later than
Tuesday, November 1, 2005. If you do not provide a redemption request or
notice of objection by Tuesday, November 1, 2005, you will be deemed to
have consented to the changes described in the attached Annex.
We recommend that you review the attached Annex as it describes material
changes being made to the Fund and certain related risks.
Please do not hesitate to contact your Xxxxxxx Xxxxx Investment
Professional if we can be helpful to you in any way, including in
connection with any questions you may have concerning the changes taking
place to the Fund.
Very truly yours,
XXXXXXX XXXXX HEDGE FUND STRATEGIES LLC
Annex
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SUMMARY OF CHANGES
TO
XXXXXXX XXXXX HEDGE FUND PARTNERS II, LLC
(to take effect beginning January 1, 2006)
This summary describes certain changes to be made to Xxxxxxx Xxxxx Hedge
Fund Partners II, LLC (the "Fund"). These changes will go into effect on
January 1, 2006. Certain of these changes will be reflected in an amendment
to the Fund's limited liability company agreement (the "Amended LLC
Agreement"). This summary is qualified in all respects by the description
of such changes in the Amended LLC Agreement. Please contact your Xxxxxxx
Xxxxx Investment Professional to request a copy of the Amended LLC
Agreement.
CHANGES TO THE FUND'S LIQUIDITY
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REDEMPTION REQUESTS WILL BE PERMITTED ON A QUARTERLY BASIS (RATHER THAN
SEMI-ANNUALLY). The Amended LLC Agreement will permit redemptions on a
quarterly basis rather than on a semi-annual basis. Accordingly, beginning
in calendar year 2006, with the appropriate notice and subject to the
limitations on redemption or lock-ups otherwise applicable to your units in
the Fund ("Units"), you may redeem your Units as of the time immediately
prior to the opening of business on each January 1, April 1, July 1 and
October 1.
REDEMPTION REQUESTS WILL REQUIRE A 91 DAY NOTICE PERIOD. After January 1,
2006, you will be required to provide the Fund with written notice of a
redemption request at least 91 days prior to the applicable valuation date,
which is the day immediately preceding the applicable redemption date,
rather than the 61 day notice period previously required. Over the last
several years, we have noticed a growing trend among certain investment
funds to require longer notice periods. We believe that in order to meet
our investors' redemption requests and to avoid causing imbalances in our
portfolio holdings, it is prudent to match to a significant extent the
investors' notice periods with the notice periods of the underlying
investment funds. As a result, certain of the underlying sector funds
(each, a "Sector Fund") in which the Fund invests, and consequently the
Fund, will soon require a 91 day notice period for redemptions.
Once a redemption request is made, it cannot be voluntarily rescinded.
Accordingly, you will bear the risk that the Fund's net asset value ("NAV")
may fluctuate significantly in the period between the date by which
redemption requests must be submitted and the date as of which such Units
are valued for purposes of such redemption. Lengthening the notice period
potentially increases the risk of variation in the Fund's NAV between the
date of the redemption request and the applicable valuation date and
further increases your burden of having to make a decision based on
valuation information that is not proximate to the date on which Units are
valued by the Fund for purposes of effecting such redemptions.
THE FUND IS ADOPTING A 25% "GATE," WHICH MAY LIMIT THE AMOUNT OF INTERESTS
THAT MAY BE REDEEMED ON ANY SINGLE REDEMPTION DATE. In order to permit the
Fund to avoid disproportionately high redemptions on any particular
redemption date, which could have an adverse effect on the Fund's portfolio
mix and therefore on those investors not redeeming all of their interests
in the Fund, the Fund is instituting a limit on the amount of outstanding
interests in the Fund that may be redeemed on any particular redemption
date, also known as a "gate." Pursuant to the gate, if outstanding
redemption requests for any redemption date total in the aggregate more
than 25% of the net asset value of the Fund, Xxxxxxx Xxxxx Hedge Fund
Strategies LLC (the "Managing Member") may, in its sole discretion, refuse
to redeem Units in excess of the 25% threshold. If this occurs, the
requests for redemption on such date will be reduced ratably and the
unredeemed Units will be redeemed on a subsequent regular redemption date
in priority to any subsequent redemption request.
The intention of a gate is to attempt to reduce potentially adverse effects
on the Fund's investment mix and potential disruption of the Fund's
investment strategy that could occur should the Fund be required to
liquidate significant portions of its investment portfolio over a
relatively short period. This risk is particularly acute as the Sector
Funds in which the Fund invests impose similar liquidity restrictions,
which from time to time may limit the Fund's ability to redeem its
interests in such Sector Funds. Members whose redemption requests are
delayed because of the application of the gate (i) will not be able to
liquidate all of their interests in the Fund as quickly as they may have
desired, and (ii) with respect to the unredeemed portion of their holdings,
will be required to bear the risk of fluctuations in the Fund NAV until
such remaining holdings can be liquidated.
COMMODITY EXCHANGE ACT REGISTRATION
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The Managing Member currently provides you with quarterly reports required
to be provided by commodity pool operators registered under the U.S.
Commodity Exchange Act of 1974, as amended (the "Commodity Exchange Act").
Because operating as a registered commodity pool operator under the
Commodity Exchange Act creates added administrative burden and cost to the
Fund and the Managing Member, the Managing Member has determined to operate
the Fund as if the Managing Member were exempt from registration as a
commodity pool operator under the Commodity Exchange Act, as permitted
under Rule 4.13(a)(4) under the Commodity Exchange Act. Therefore,
beginning on January 1, 2006, the Managing Member will operate the Fund as
if the Managing Member were exempt from registration as a commodity pool
operator pursuant to such Rule 4.13(a)(4) because Units (i) are exempt from
registration under the U.S. Securities Act of 1933, as amended, and are
being offered and sold without marketing to the public in the United
States, and (ii) may be purchased only by persons who are "qualified
eligible persons" as defined in Rule 4.7 under the Commodity Exchange Act
(the "Rule 4.13 Conversion"). Pursuant to Rule 4.13(a)(4), the Managing
Member will no longer be required to, and will no longer, deliver to you
quarterly reports otherwise required to be delivered under the Commodity
Exchange Act. Moreover, the Managing Member will not be required to deliver
to you the certified annual reports and disclosure documents that it would
otherwise be required to deliver pursuant to the Commodity Exchange Act.
Such documents may have contained certain disclosures that are not included
in the Fund's confidential private placement memorandum or any reports that
will be provided to you going forward. Please note that you will continue
to receive the audited financial statements of the Fund, and, if your Units
are held in a brokerage account at Xxxxxxx, Xxxxx & Co., your monthly
brokerage statements will continue to include the estimated value of your
Units.
DISSOLUTION RIGHTS
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THE MEMBERS, BY MAJORITY VOTE, WILL BE ABLE TO DISSOLVE THE FUND.
Currently, the members (by the affirmative vote of members holding at least
66-2/3% of the voting power, based on NAV, of the outstanding Units
(excluding for purposes of calculating such percentage any Units held by
Xxxxxxx, Xxxxx & Co., its affiliates, employees and officers) may terminate
the Managing Member or dissolve the Fund. After January 1, 2006, at any
time, at a meeting validly called for such purpose (such meeting, the
"Dissolution Meeting"), the members may, by the affirmative vote of members
holding at least a majority of the voting power, based on NAV, of the
outstanding Units (excluding Units held by the Managing Member, Xxxxxxx,
Xxxxx & Co. and any affiliate or employee of the Managing Member or
Xxxxxxx, Xxxxx & Co. (collectively, the "Managing Member Units")), cause
the dissolution of the Fund. There will no longer be an opportunity to
remove the Managing Member. Under the new policy, a dissolution is subject
to certain additional procedures and requirements that will be set forth in
the Amended LLC Agreement, including, among others, that (i) one or more
members holding at least 1% of the voting power, based on NAV, of the
outstanding Units (excluding for purposes of calculating such percentage
the Managing Member Units) request in writing that the Managing Member send
a notice to the members soliciting them to make a request in writing that
the Managing Member call a Dissolution Meeting, (ii) members holding at
least 20% of the voting power, based on NAV, of the outstanding Units
(excluding for purposes of calculating such percentage the Managing Member
Units) request in writing that a Dissolution Meeting be called, and (iii)
the Dissolution Meeting has a quorum of members, in attendance in person or
by proxy, holding a majority of the voting power, based on NAV, of the
outstanding Units (excluding for purposes of calculating such percentage
the Managing Member Units).
In the event of an affirmative vote in favor of dissolving the Fund at a
Dissolution Meeting, the Managing Member will seek to liquidate the Fund as
soon as reasonably practicable (including by submitting redemption requests
to the underlying Sector Funds within 30 days of such vote), and the Fund
will be wound up in accordance with the terms of its Amended LLC Agreement
and applicable law.
On or before August 25, 2006, the Managing Member may, in its sole
discretion, amend, delete or waive any of the provisions relating to the
dissolution of the Fund by the members described above without prior notice
to or consent of the members. Thereafter, the dissolution provisions will
become permanent.
OTHER CHANGES
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THE FUND MAY CREATE CLASSES OF UNITS OFFERED TO NON-RESTRICTED PERSONS IN
ORDER TO PERMIT THE FUND TO INVEST IN "NEW ISSUES." The Fund does not
currently intend to participate in "new issues," as such term is defined
under National Association of Securities Dealers, Inc. Rule 2790, as
amended, supplemented and interpreted from time to time (the "NASD Rule"),
but this intention could change at any time as determined by the Managing
Member in its sole discretion. If the Managing Member in the future
determines that the Fund will participate in new issues, the Fund will have
the ability to create one or more additional classes (or sub-classes) of
Units that would be offered only to those members who are not "Restricted
Persons" under the NASD Rule (and therefore generally permitted to
participate in new issues), and only such classes (or sub-classes) of Units
would be permitted to invest in and have a participatory interest in such
new issues. Should the Fund elect to participate in new issues, investors
wishing to invest in or have a participatory interest in such new issues
will be required to establish to the satisfaction of the Managing Member
that they are eligible to hold such Units. Investors participating in new
issues may have returns on their investment that are materially different
from the returns on investment obtained by investors that do not
participate in new issues.
THE FUND MAY HEDGE TO REDUCE POTENTIAL RISKS. Consistent with the Fund's
investment strategy, the Managing Member may, from time to time and in its
sole discretion, employ various hedging techniques with the intent of
reducing certain potential risks to which the Fund's portfolio may be
exposed. These hedging techniques generally will involve the use of
derivative transactions, including swaps, futures and forward contracts,
exchange-listed and over-the-counter put and call options, currency
contracts, and interest rate transactions. The Managing Member is not
required to hedge and there can be no assurance that hedging transactions
will be available or, even if undertaken, will be effective. Members should
be aware that the successful use of hedging techniques will minimize the
risk of loss to the Fund, but will also tend to limit potential gain. In
addition, because the Fund may have incomplete information regarding the
amount of exposure to which the Fund's investments are subject or for other
reasons, the Fund may not be able to precisely match the level of hedging
to the level of exposure. Consequently, it may be the case that the loss on
a hedge may be greater than gains in the value of the Fund's positions. The
Fund also may be exposed to both counterparty risk and settlement risk in
connection with its hedging activity.
TEMPORARY AND DEFENSIVE STRATEGIES. The Fund and the Sector Funds may, from
time to time, take temporary or defensive positions in cash, cash
equivalents, other short-term securities or money market funds to attempt
to minimize volatility caused by adverse market, economic, or other
conditions. Any such temporary or defensive positions could prevent the
Fund and the Sector Funds from achieving their investment objectives.
THE FUND MAY INVEST WITH THIRD-PARTY ADVISORS OUTSIDE OF AN INVESTMENT IN A
XXXXXXX XXXXX MANAGED SECTOR FUND. Currently, the Fund invests in the
Sector Funds, each of which allocates assets to independent investment
managers ("Advisors"). As of January 1, 2006, the Fund may allocate assets
to Advisors other than through investments in the Sector Funds. This
additional flexibility will permit the Managing Member to make asset
allocations that otherwise may be limited, or may not be available, by
investing only through the Sector Funds.
TAX ALLOCATIONS. Currently, the Managing Member may specially allocate
items of Fund taxable income and gain to a redeeming member who would
otherwise recognize a gain on redemption of the member's Units, in order to
reduce or eliminate the difference between the amount of redemption
proceeds with respect to such Units and the member's tax basis in such
Units. Beginning on January 1, 2006, the Managing Member will have the
additional flexibility to make special allocations of loss and deduction to
a redeeming member that would otherwise have recognized a loss (with the
same intent to reduce the difference between redemption proceeds and tax
basis). The Managing Member may also make similar special allocations to
the Managing Member with respect to withdrawals from its incentive
allocation account. In addition, beginning on January 1, 2006, the Managing
Member will have the right generally to adjust the allocation of items of
Fund taxable income, gain, loss and deduction among the members as the
Managing Member in its sole discretion deems equitable and necessary or
desirable. These special allocations are susceptible to challenge by the
Internal Revenue Service and if such allocations are successfully
challenged by the Internal Revenue Service, the Fund's items of income and
gain or loss and deduction allocable to the remaining members will be
increased.
Pursuant to U.S. Treasury Department Circular 230, the Fund is informing
investors that (i) the statements concerning U.S. federal tax matters set
forth above are not intended and were not written to be used, and cannot be
used, by any taxpayer for the purpose of avoiding penalties under the U.S.
federal tax laws that may be imposed on the taxpayer, (ii) the statements
concerning U.S. federal tax matters set forth above were written in
connection with the promotion or marketing by the Fund and the placement
agent of the Units, and (iii) each taxpayer should seek advice based on its
particular circumstances from an independent tax advisor.
THE AMENDED LLC AGREEMENT HAS BEEN GENERALLY UPDATED. In addition to
reflecting the changes described above, the Amended LLC Agreement has been
updated to standardize terms across the Managing Member's various funds,
including the following:
o Valuation of underlying investment fund and portfolio
company interests. The value of the Fund's assets will
principally be based on the value of the Fund's interests in
the Sector Funds. Beginning on January 1, 2006, the
administrator of each Sector Fund in which the Fund invests
will be given the additional flexibility to modify the value
of an interest in an underlying investment fund from the
value reported by the Advisor of such investment fund, if
the administrator determines, in its sole discretion, that
any such valuation is inaccurate or incomplete. In that case
the Sector Fund's administrator may, in its sole discretion,
determine the fair value of the investment based on
information available to, and factors deemed relevant by,
such administrator at the time of such valuation. In
addition, assets of the Sector Funds that are invested in
portfolio companies will be valued by the administrator at
fair value in a commercially reasonable manner.
As described above, beginning in 2006, the Fund may allocate
assets to Advisors other than through investments in the
Sector Funds. These assets will be valued by the
Administrator in accordance with the following: (i) the
assets of the Fund that are invested in investment funds
will be valued in accordance with the terms and conditions
of the respective governing agreement of each investment
fund as reported to the Fund, provided that if the
Administrator determines, in its sole discretion, that any
such valuation is inaccurate or incomplete, the
Administrator may, in its sole discretion, determine the
fair value of the investment based on information available
to, and factors deemed relevant by, such Administrator at
the time of such valuation; and (ii) the assets of the Fund
that are invested pursuant to investment management
agreements or in portfolio companies will be valued by the
Administrator at fair value in a commercially reasonable
manner. All other assets of the Fund will be assigned such
value as the Administrator may reasonably determine.
o Suspending redemptions because of no underlying investment
fund valuations. Currently, the Managing Member may suspend
redemptions when (among other things) the Fund is unable to
withdraw sufficient funds from underlying Sector Funds or
otherwise to meet redemption requests or in circumstances
when the disposal of part or all of the Fund's assets to
meet such redemption requests would be prejudicial to
members. In order to help ensure that the Fund would not be
required to redeem Units when the Fund's NAV is uncertain,
the Amended LLC Agreement makes clear that the Managing
Member can suspend redemptions during any period in which
any underlying Sector Fund, investment fund or portfolio
company has suspended redemptions or the calculation of its
NAV.
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If you have any questions regarding the foregoing or if you wish to receive
a copy of the Amended LLC Agreement, please contact your Xxxxxxx Xxxxx
Investment Professional.
