DESCO LP is a Delaware limited partnership and an investment adviser registered with and regulated by the SEC under the Advisers Act. DESCO LP serves as the managing member or manager of, and/or the investment adviser to, certain entities in the D. E. Shaw group. As used in this Part 2A, the term “the Adviser” includes both DESCO LP and the relying advisers identified as such in Schedule R to Part 1A of this Form ADV (each, a “Relying Adviser,” and collectively, the “Relying Advisers”), except where the context otherwise requires. The Adviser provides investment advice to a number of affiliated collective investment vehicles and other entities (collectively, the “Funds”). (As used herein, the term “clients” refers to the Funds.) The investor base of the Funds comprises institutional investors and other highly sophisticated, high-net-worth participants. These investors must meet certain minimum financial requirements (e.g., an institution generally must own and invest on a discretionary basis at least $25 million of certain investments), among other requirements, to be eligible to participate in the Funds, which are structured as private investment companies that are exempt from registration as investment companies under U.S. law by virtue of Section 3(c)(7) of the Investment Company Act of 1940, as amended (the “Investment Company Act”). The D. E. Shaw group was founded in 1988; DESCO LP was formed in 1992 and has been a registered investment adviser since 1999. The D. E. Shaw group invests globally using a broad array of strategies in both public and private markets. Widely recognized as a pioneer in quantitative investing, the D. E. Shaw group also has considerable expertise in areas that involve fundamental analysis or portfolio manager discretion. DESCO LP’s principal owner is Dr. David Elliot Shaw. Other entities and individuals hold minority stakes in DESCO LP. The Adviser bases its advice to clients on the investment objectives and restrictions (if any) set forth in such clients’ applicable offering memoranda, organizational documents, investment management agreements, and/or subscription agreements, as the case may be (each, a “Governing Document,” and collectively, the “Governing Documents”). The Adviser managed approximately $27,566,000,000 in investment capital on a discretionary basis as of January 1, 2019. please register to get more info

The Adviser’s compensation for advisory services generally includes a performance-based fee, charge, or allocation (each, a “Performance Charge”) and an asset-based fee (a “Management Fee”), the terms of which are set forth in the applicable Governing Document. The Adviser enters into Performance Charge arrangements with clients that fall within the definition of a “qualified client” pursuant to Rule 205-3 under the Advisers Act or as permitted under Section 205(b) of the Advisers Act. Performance Charges generally are paid in arrears annually or, where applicable, at the time of a withdrawal or distribution of capital. Management Fees generally are paid monthly or quarterly in advance based on net assets as of the beginning of the relevant month or quarter, respectively. The fee schedule for qualified clients of the Adviser includes a Management Fee of up to 3.5% annually and a Performance Charge that currently ranges from 15% to 35% of net profits; for certain Funds, the Performance Charge is assessed only on net profits above a given “preferred” rate of return. A percentage of the Management Fee (if any) is deducted monthly or quarterly from the applicable Fund. Each Performance Charge is assessed annually (or on a pro rata basis upon a withdrawal or distribution from the applicable Fund) on net profits, if any, or distributable amounts and is generally subject to loss carryforward provisions. The Governing Document of the applicable Fund provides the definitive terms of such compensation. In general, if a Management Fee has been paid in full in advance for a period in which either the advisory contract with the relevant client has been terminated, or, with respect to a Fund, for the period in which an investor has withdrawn its investment in such Fund, the applicable portion of such Management Fee paid relating to the portion of the period after such termination or withdrawal will be returned or credited to the client or to the withdrawing or redeeming Fund investor, subject to the terms of the applicable Governing Document; however, the Governing Documents typically do not permit such intraperiod terminations or withdrawals. For certain classes of interests in certain Funds, the Adviser may designate certain Investments (as defined in Item 8), including without limitation those that the Adviser determines, in its sole discretion, are illiquid, lack a readily assessable market value, and/or should be held (often for an extended period of time) until the occurrence of a specified event or the resolution of a specified circumstance, as so-called “side pocket” Investments. (Note that the Adviser is no longer making new side pocket investments, although it may continue to make follow-on investments in existing side pocket investments.) Generally, each such side pocket Investment will be valued at historical cost, and Performance Charges will not be paid until such side pocket Investment pays a dividend, effects a distribution, makes an interest payment, is liquidated, is realized, or is otherwise redesignated by the Adviser in its sole discretion as a non-side pocket Investment. Certain Funds or classes of Fund interests (including those holding side pocket Investments) may have additional fee provisions, which are set forth in the applicable Governing Document. The Adviser negotiates fees and other terms in certain cases. The Adviser from time to time has entered into agreements with certain underlying investors in the Funds that provide for terms of investment that are more favorable than the terms set forth in the applicable Governing Document. Such terms may include, among other things, the waiver, reduction, or rebate of Management Fees, Fund expenses, and/or Performance Charges; the provision of additional information or reports; more favorable transfer and/or withdrawal rights; provisions regarding indemnification and/or the jurisdiction and choice of law for disputes regarding the investment; provisions regarding the investor’s and/or the Adviser’s confidentiality obligations; and “most-favored-nation” provisions covering one or more terms or rights. No such agreement necessarily entitles any other Fund investor to the same terms of investment as offered in such agreement. The Funds generally incur expenses in connection with custodial or brokerage services outlined in Item 12. In addition, as set forth in the applicable Governing Document, each Fund incurs operating costs and expenses (including certain operating costs and expenses relating to services provided by Arcesium, as outlined below) that are borne by the investors in the applicable Fund. Examples of operating costs include without limitation: (a) costs related to the acquisition, holding, monitoring, or disposition of actual or potential investments of a Fund (such as transaction costs (including without limitation commissions; other brokerage, finder, and success fees; break-up and other similar fees; and exchange and clearing costs); financing costs; costs related to data and information services; due diligence and research costs; travel costs (including without limitation transport, food, and lodging costs); management fees, performance charges, and other expenses and costs imposed by unaffiliated funds or otherwise paid or reimbursed to third parties; and costs for accounting, consulting, legal, tax, or other services); (b) costs related to the general operations of a Fund (such as costs related to administration; costs related to accounting, audit, consulting, financial operations, legal, reporting, tax, post-trade support, treasury, valuation, independent agent, and other professional services; costs related to data and information services; costs related to the ongoing offering of Fund interests; costs related to amendments or other modifications to any Governing Document or other document relating to a Fund; insurance costs; costs related to exchange memberships; costs related to regulatory compliance, including without limitation regulatory filings, licenses, inquiries, and examinations; costs associated with the formation and operation of subsidiaries of any Fund entity; costs related to the use of assets of the Feeder, or any class, subclass, and/or series of interests in a Fund; and costs associated with any restructuring, liquidation, winding up, or dissolution of any Fund entity); (c) costs related to information technology used in connection with actual or potential investments of a Fund, research and development in respect of investment strategies that may be deployed by a Fund, and/or the general operations of a Fund (such as computer and telecommunications hardware and related storage, hosting, connectivity, and maintenance costs; software licensing, servicing, and development costs; and costs associated with disaster recovery programs); (d) taxes, duties, or other related costs (other than amounts treated as distributions); (e) certain other costs that may be charged, or for which reserves may be established, upon an Investor’s withdrawal from a Fund or upon a distribution to an Investor, as outlined in the applicable Governing Document; (f) costs associated with indemnification, including without limitation any indemnification payment, or contribution by a Fund to any person, whether pursuant to a Governing Document or any other agreement; and (g) costs associated with any actual or prospective litigation, arbitration, mediation, investigation, examination, information request, or other proceeding (including without limitation proceedings involving any regulatory or self-regulatory body or any governmental or tax authority), including without limitation the amount of any judgment, settlement, fine, penalty, or other amount related to any such proceeding, except in each case to the extent that such costs are treated as distributions. (h) actual or estimated costs of, and reserves for, any expense, liability, or obligation incurred in connection with the operations of a Fund. Operating costs may include costs in addition to or different from those outlined above. Operating costs may be fixed or variable. Variable costs may be determined by reference to, among other things, a Fund’s usage of the applicable technology or service (e.g., commissions paid per trade), the aggregate assets of the applicable Fund entity (e.g., an asset-based administration or management fee), the costs incurred by the applicable service provider (e.g., the reimbursement of such service provider’s incidental expenses), and/or the performance of actual or potential investments of a Fund (e.g., a variable fee paid to an asset servicer based on its recoveries, a variable fee paid to a data vendor based on the efficacy of its data, or a share of profits or other incentive-based compensation paid or allocated, directly or indirectly, to joint venture partners, finders, service providers, the independent management of entities in which a Fund invests, and/or other counterparties). The Adviser will make all determinations and computations regarding operating costs, including determining whether a particular item constitutes an operating cost and any adjustment to operating costs; the allocation of any particular operating cost to one or more classes, subclasses, series, and/or other similar categories of Fund interests; and the allocation of operating costs (or elements of particular operating costs) between the Adviser’s clients and/or its affiliates. The allocation of operating costs (or their elements) between the Adviser’s clients and/or its affiliates, as well as between categories of Fund interests, will be determined by the Adviser and/or its affiliates using any objective criteria, any subjective criteria, or any combination of the foregoing selected by the Adviser and/or its affiliates (including estimates of value contribution, resource utilization, personnel utilization, capital utilization, investment strategy capacity utilization, space utilization, technology utilization, asset ownership, trading volume, revenue, headcount, and/or compensation). Determinations with respect to operating costs associated with services provided by the Adviser and its affiliates are subject to conflicts of interest, including those outlined in Item 10. Furthermore, the Adviser is entitled under each such Governing Document to be reimbursed for some or all expenses that it or its related persons incur on behalf of the relevant client, including compensation and overhead costs attributable to certain personnel of the Adviser or its related persons who provide services to the relevant client. The Adviser or its related persons may waive such person’s right to reimbursement of any portion of operating costs and expenses it has incurred. The decision to waive (or not to waive) reimbursement rights with respect to any particular operating cost or expense shall not create or imply any right or obligation with respect to any other reimbursement rights, including with respect to operating costs and expenses of a similar nature to those for which reimbursement rights have been waived. Neither the Adviser nor its supervised persons receives compensation for the sale of securities or other investment products to clients or investors.
Services Provided by Arcesium LLC
The Adviser has engaged Arcesium LLC (“Arcesium”) to provide certain middle- and back-office technology and services to the Adviser. Arcesium was formed in 2015 as a joint venture between a subsidiary of DESCO LP and a third-party minority investor when a substantial portion of the D. E. Shaw group’s back- and middle-office functions spun out into an independently managed entity. Arcesium provides certain technology and services with respect to the Funds related to various middle- and back-office functions, including trade capture, asset servicing, margin and collateral monitoring, wires services, trade and position reconciliation, cash reconciliation, pricing, and support for accounting, tax, investor reporting, and compliance. In providing such technology and services, Arcesium is subject to the overall supervision of the Adviser. The Funds bear certain operating costs and expenses associated with services provided by Arcesium. Such costs may be assessed as one or more of (a) an asset-based charge; (b) a fixed charge for any particular service, technology, or software; (c) a fixed charge for each full-time equivalent employee providing services to a Fund; (d) a charge based on estimates of the time Arcesium personnel devote to providing services and the compensation and overhead costs attributable to such personnel; or (e) any combination of the foregoing or any other form agreed by Arcesium and the Adviser. Any fees paid by a Fund to Arcesium do not reduce the Management Fee and/or any operating costs or expenses of such Fund. Arcesium has no portfolio management, investment advisory, or fiduciary responsibilities with respect to any Fund. Arcesium does not manage, monitor, or oversee any trading decisions of any Fund, any Fund’s compliance with its investment objectives, or any other aspects of the portfolio management activity of any Fund. please register to get more info

When trading on behalf of multiple clients, the Adviser endeavors to allocate investment opportunities among such clients in a fair and equitable manner. The Adviser’s trade allocation among clients may vary based on, among other things, differences in investment objectives, capital constraints, and/or leverage preferences among clients, and any anticipated increase or decrease of any particular client’s assets under management. The Adviser does not alter its allocation policy with respect to a client, or allocate trades among multiple clients, without the approvals of the Adviser’s relevant senior management and compliance personnel. As outlined in further detail in this Item 6 and in Items 10 and 12, the Adviser and/or its related persons hold significant ownership interests in certain clients. Furthermore, the Adviser and/or its related persons receive the benefit of more favorable terms (such as with respect to fees or the reimbursement of expenses) in connection with their management of certain clients than in connection with their management of other clients. For purposes of this brochure, (a) “Significant Management Capital Fund” or “SMC Fund” refers to any Fund in which the Adviser or its related persons are the ultimate beneficial holders of significant ownership interests, potentially including a substantial majority or all of such ownership interests, and (b) “DESCO Favorable Fund” refers to any SMC Fund or to any Fund in which the Adviser and/or its related persons receive the benefit of more favorable terms (including higher Performance Charges or Management Fees or more generous expense reimbursement provisions) than those applicable to other Fund entities In the future, the Adviser and its related persons’ ultimate beneficial ownership of an SMC Fund may increase (or decrease) and/or the Adviser or its related persons may receive more favorable terms with respect to a DESCO Favorable Fund. Clients and prospective clients should note that SMC Funds and other DESCO Favorable Funds invest in asset classes in which other Funds also invest. The Adviser and/or its related persons (a) hold investments in DESCO Favorable Funds that are larger (whether in percentage or absolute dollar terms) than any investments they hold in other clients and/or (b) provide services to DESCO Favorable Funds that pay Management Fees, Performance Charges, or other amounts that are greater (whether in percentage or absolute dollar terms) than the corresponding amounts paid by other clients. As a result, the Adviser and/or its related persons have incentives to deploy more profitable investment strategies on behalf of, or to allocate more profitable investment opportunities to, such DESCO Favorable Funds instead of other clients, and have in fact done so on behalf of certain DESCO Favorable Funds. Any such deployment or allocation of such investment strategies or opportunities to a DESCO Favorable Fund would decrease the number and quality of investment strategies and opportunities available to such other clients. Further, the Adviser and its related persons have incentives to increase the capital each invests in SMC Funds, even if such increase would exacerbate the conflicts of interest described in this paragraph. Please see Item 10 for additional information regarding certain conflicts of interest arising from the Adviser’s allocation of investment opportunities and Item 12 for discussion of aggregated client orders. please register to get more info

The Adviser’s only clients are the Funds, which are structured as private investment companies that are exempt from registration under Section 3(c)(7) of the Investment Company Act. A minimum dollar value of assets and other conditions are typically imposed on investors in the Funds. please register to get more info

Methods of Analysis and Investment Strategies
The Adviser’s investment activities may be divided into three broad categories—systematic strategies based on quantitative and computational techniques, discretionary strategies based primarily on human analysis, and hybrid strategies that combine systematic and discretionary approaches to investing. It should be noted that not all of the Adviser’s clients participate in all of the investment activities or hold all of the investments outlined in this Item 8. Systematic strategies are a central focus of the Adviser’s activities and are used in an attempt to identify underpriced and overpriced securities, to manage various forms of portfolio risk, and to reduce the cost of transacting in various financial instruments. Although a great deal of human effort is expended conducting research in each of these areas, the Adviser’s systematic strategies are largely based on quantitative models embodied in computer software rather than on human judgments regarding the fundamental soundness of the underlying companies or other assets. By contrast, the Adviser’s discretionary strategies are based on the analysis of particular companies, resources, industries, economies, and entrepreneurial opportunities by professionals with relevant asset- and market-specific knowledge. Investments include both publicly traded and privately held financial instruments, certain physical commodities and commercial rights, and in some cases, entire companies. Certain Funds may also provide individually tailored debt and equity financing to both healthy and financially distressed companies. As noted above, the Adviser also deploys hybrid strategies that involve a combination of quantitative and fundamental techniques. The instruments in which Funds may invest include without limitation common and preferred stock; futures, options on futures, and forward contracts; bonds, notes, debentures, bills, trade claims, and other forms of indebtedness or liability issued or incurred by corporations, banks, sovereign nations, governmental agencies and instrumentalities, municipalities, or other persons; options, rights, and equity and other warrants; convertible bonds, convertible preferred securities, and other convertible instruments; exchangeable securities, synthetic and/or structured convertible or exchangeable products, participation instruments, and investment contracts; residential and/or commercial mortgage-backed securities, and other asset-backed securities; residential and/or commercial mortgage loans, other whole loans, and other consumer, commercial, and/or asset-based receivables; real estate, easements, other forms of real property- related instruments, interests in the foregoing, interests in public and/or private real estate investment trusts (“REITs”), real estate operating companies (“REOCs”), and other companies that engage in real estate-related businesses; currencies; energy-related products and instruments; weather-related instruments; emissions allowances and transmission rights; commodities; cash and cash equivalents; money market instruments; bank notes, term loans, debtor-in-possession loans, revolving loans, bank guarantees, letters of credit, and other forms of lender assets or obligations; swaps (including total return swaps, variance swaps, volatility swaps, asset swaps, credit default swaps, and interest rate swaps), swaptions, and equity and other derivative instruments; receivables; financial interests in legal disputes and other instruments related to litigation finance investing; insurance- and reinsurance-related products; instruments having a value or return that is explicitly tied to the occurrence (or non-occurrence) of economic, political, legal, natural, technological, bankruptcy, default, and/or other events; catastrophe bonds, industry loss warranties, and other catastrophe risk-linked instruments; royalty trusts; intellectual property; assets with specified tax attributes; limited partnership and other limited liability interests; general partnership and other unlimited liability interests; interests in investment companies; interests in portfolio funds; virtual currencies and other similar digital assets; and/or any other security, instrument, interest, or property selected by the Adviser (collectively, “Investments”). Such Investments are expected to be issued by or relate to publicly held issuers, privately held issuers, and other issuers of various types both in the United States and outside the United States, and may be either controlling or non-controlling Investments, in each case without restriction. Additionally, the types of Investments held by Funds and the countries in which they are issued are likely to vary over time. Such Investments may be traded on exchanges, “over-the-counter,” or on any other markets, or may not be traded on any exchange or other market. The Adviser’s trading and other authority with respect to a particular client will be outlined in the applicable Governing Document.
Potential Risk Factors
An investment in a Fund involves substantial risks that should be carefully considered by a prospective investor. Certain risk factors that may be applicable to an investment in a Fund are outlined below. Additional risk factors are outlined in the Governing Document for the applicable Fund. It should be noted, however, that there may be other risk factors applicable to such an investment that are not identified but that might still result in material losses to investors. Prospective investors should also consult their own legal, investment, tax, and other advisers, and the applicable Governing Document, as to whether such an investment is appropriate for them. It should be noted that many of the risks outlined under one caption or heading are applicable to one or more other captions and headings.
No Assurance of Investment Return
An investment in a Fund involves a high degree of risk, including the risk that the entire amount invested will be lost. An investment in a Fund is not intended as a complete investment program. Such an investment should be regarded as speculative in nature and appropriate only for a sophisticated investor that can afford a loss of all of its investment and that is able to invest for an indefinite period. It should not be assumed that an investment in a Fund will be profitable. In addition to the risk of loss on the Fund’s Investments, an investment in a Fund is subject to the direct and indirect fees and expenses, including any applicable Management Fee and operating costs (including “broken deal” expenses with respect to transactions that are not actually consummated), outlined elsewhere in this brochure or in the applicable Governing Document, which will reduce returns and require that the Fund make a certain level of profit from its investing activities in order for an investment simply to break even. Past performance of any of the Adviser’s strategies or the investment vehicles sponsored and/or advised by the Adviser, or of any investment strategies operated within any such investment vehicle, is not indicative of the results that will be achieved either by any such strategy or vehicle in the future or by any other strategy or vehicle. Further, such past performance provides no assurance of the success of any strategy or vehicle in achieving its investment objectives, including, for example, because investment strategies and/or personnel of one Fund may differ significantly from those of another Fund or may have operated in market conditions that were more favorable than current or future market conditions are or will be.
General Factors
The operating results, financial condition, activities, and prospects of an investment in a Fund could be materially adversely affected by changes or instability in market, economic, political, technological, regulatory, and social conditions and by numerous other factors outside the control of the Adviser. Many of the Adviser’s investment strategies and/or Investments are likely to be exposed to risks relating to weaknesses in various global economies and risks relating to the economic cycle. Numerous factors affecting the performance of the Adviser’s investment strategies, such as market volatility (or lack thereof), interest rates, commodity prices, equity prices, currency prices, credit spreads, availability and terms of financing, demand from market participants, and deflationary and inflationary pressures, may be affected by the economic cycle and long-term economic trends. Predictions about financial market conditions and economic factors are highly uncertain, and the presence, duration, and impact of any market or economic conditions could have a material adverse effect on the Adviser’s investment strategies. Disruptions in the global financial markets, whether similar or dissimilar to the global financial crisis that began in 2008, may exacerbate the risks to which Investments are exposed and may have a material adverse effect on the value, liquidity, and stability of the Adviser’s investment strategies and/or specific Investments. The duration, severity, and ultimate effect of any such disruptions cannot be forecast with confidence. The Adviser may choose not to attempt to, or be unable to, hedge the risk exposures outlined in this brochure, and there can be no assurance that any hedging attempted by the Adviser would reduce applicable risks. The risk models and risk management techniques expected to be deployed by the Adviser are based on the information and data available to it as well as on its assumptions, assessments, and estimates, all of which are subject to error. As a result, such models and techniques may not account for all relevant factors or may not account for any such factors correctly. More generally, there can be no assurance that such models and techniques would be effective.
Special Risks of Certain Markets
Certain markets may pose special risks due to, among other factors, the limited availability of useful information, the reliance on self-interested persons for price and other information, a limited number of market participants, and more or less regulation. For example, price information might be available only from brokers or dealers and might not be verifiable. Further, less regulation in certain markets might enable market intermediaries or other investors to engage in “frontrunning” (whether directly or through their customers or agents) of the Adviser’s trades, to misuse information about positions advised by the Adviser to reduce the value or liquidity of those positions, and to take other actions that materially adversely affect the Adviser’s investment strategies. The limited availability of price information or actions of market intermediaries or investors could exacerbate other risk factors outlined in this brochure, including short squeezes, and could have a material adverse effect on the Adviser’s investment strategies. In addition, brokers, dealers, or other market participants may withdraw or substantially reduce the scope of their activity with regard to certain markets or Investments without notice, resulting in disruptions to strategies, pricing, and/or the ability to liquidate or close out positions. Any of the foregoing could have a material adverse effect on the Adviser’s investment strategies.
International Investments
The Adviser is expected to cause one or more of its clients to purchase, sell, hold, trade, originate, structure, restructure, and otherwise acquire or dispose of Investments relating to markets and/or issuers both in the United States and outside the United States, including in certain developing or emerging markets. International investing and trading involve special risks not typically associated with trading in Investments relating to markets and/or issuers solely in the United States. Depending on the particular countries and Investments involved and on the nature of the particular transactions executed outside of the United States, these special risks may include changes in exchange rates and exchange control regulations; downgrades in sovereign credit ratings; devaluations or non-convertibility of non-U.S. currencies; failures or disruptions in central banks, banking systems, markets, or financial exchanges; changes in monetary policies, interest rates, or interest-rate policies; political, social, and economic instability; adverse diplomatic developments; investment and repatriation restrictions; the nationalization and/or expropriation of assets; government intervention in the private sector; default by public and private issuers on their financial obligations (and limited recourse in connection with such defaults); the imposition of non-U.S. taxes; discrimination against foreign investors; and less liquid markets, less information, higher transaction costs (including costs associated with alternative financing, structuring (including the use of tax blockers), and exit strategies), greater difficulty in enforcing contractual obligations, fewer or different rights for creditors generally, more uncertain procedures (if any) for bankruptcy or other reorganization or liquidation proceedings (“Reorganization Proceedings”), less information regarding legal and regulatory risks, less uniform accounting and auditing standards, greater price volatility, less reliable clearance and settlement procedures, more onerous regulatory requirements for private investment funds, and/or less government supervision of exchanges, brokers, market intermediaries, issuers, and other markets and market participants than generally is the case in the United States. Further, individual non-U.S. economies may differ favorably or unfavorably from the U.S. economy in various respects, such as pace of economic growth, rate of inflation, amount of capital reinvestment, degree of resource self-sufficiency, and balance of payments position. For example, inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets (both public and private) of certain countries in which the Adviser may invest, and therefore may have a material adverse effect on the Adviser’s investment strategies. The Adviser’s clients may trade, directly or indirectly, Investments on exchanges, or use clearinghouses or clearing firms, located outside the United States. Some non-U.S. exchanges, in contrast to domestic exchanges, are “principals’ markets” in which performance is solely the responsibility of the individual member with whom the trader has entered into a contract and not that of an exchange or its clearinghouse. Clients thus may be subject to the risk of the inability of, or refusal by, a counterparty to perform with respect to any such contract. Moreover, as there may be less government supervision and regulation of non-U.S. exchanges, clearinghouses, and clearing firms than of those in the United States, clients may also be subject to greater risk of failures of the exchanges on which its positions trade and/or failures of such exchanges’ clearinghouses or clearing firms than it would be in the United States. The foregoing risks are likely to be more pronounced in connection with Investments in countries with developing or emerging markets. A client may be treated as a U.S. person for purposes of U.S. Commodities Futures Trading Commission (“CFTC”) regulations, which may limit such client’s ability to participate in certain non-U.S. futures. Alternatively, if a client is treated as a non-U.S. person under CFTC regulations, such client may be permitted to invest in non-U.S. futures, which are not subject to CFTC regulation or review. Any such client’s status as a U.S. person or non-U.S. person for these purposes will depend on, among other factors, the applicable Fund manager’s principal place of business and the level of investment in such client by U.S. investors and, accordingly, such status may change from time to time.
Availability of Investment Opportunities
There can be no assurance that the Adviser will be able to identify and/or successfully take advantage of suitable investment opportunities. For example, it is expected that the effectiveness of certain quantitative models developed in connection with the systematic trading strategies deployed by the Adviser will be particularly sensitive to changes in applicable policies, regulations, or laws; changes in the number, nature, or behavior of other market participants; and/or changes in economic or market conditions generally. The effectiveness of such models may therefore diminish, disappear, or become negative, any of which could occur quickly or over a more prolonged period. As a result, the performance of the applicable Fund will depend on the ability of the Adviser to develop suitable models and to respond to such changes. In addition, the Adviser decides which investment opportunities to pursue based on the information and data available to it and on its assumptions, assessments, and estimates, all of which are subject to error. Even if the Adviser makes investments (or fails to liquidate investments) with the intent of taking advantage of a perceived investment opportunity, there is a risk that any such decision will result in losses to the Adviser’s clients due to unanticipated circumstances, errors in judgment, errors in execution, or other causes. Further, the Adviser may elect to stop deploying any particular investment strategy on behalf of a particular Fund at any time, regardless of whether such strategy has been successful or whether other Funds (including DESCO Favorable Funds) continue (or begin) to deploy such strategy. If the Adviser is not able to identify and/or take advantage of suitable investment opportunities, it may alter its investment strategy and/or risk tolerances in order to deploy capital, which may have a material adverse effect on the Adviser’s investment strategies. Even if investment opportunities are identified, the Adviser is currently expected to cause one or more of its clients to hold significant cash positions for extended periods of time, which may materially reduce the returns of such client(s). Alternatively, the Adviser may elect to cause one or more of its clients to hold little or no cash for extended periods of time, which may materially increase the risk of loss associated with such client’s activities.
Concentration; Limited Diversification; Correlation
The portfolios of the Adviser’s clients may be concentrated in particular countries, industries, exchanges, counterparties, strategies, types of Investments, issuers, issuances, companies, or other shared characteristics. Any such concentration would magnify risks associated with the Investments held in such portfolios, including the risk of significant losses. Portfolios advised by the Adviser may not have any diversification requirements. In general, less diversification will tend to expose the applicable client to greater volatility and/or risk than would be the case with a more broadly diversified portfolio. Even if a particular client’s portfolio were diversified, however, there can be no assurance that such diversification would reduce volatility and/or risk. In addition, certain Investments held in a client’s portfolio may represent, alone or together with Investments held in other clients’ portfolios, a significant percentage of the markets in which such Investments are traded, and there are no restrictions (other than limits imposed by applicable law) on the percentage of any market that such Investments may represent. Occupying a significant position in any given market may result in such Investments in such market being less liquid than would be the case with a smaller position, may subject a portfolio to additional regulatory scrutiny or restrictions, and/or may have other adverse effects. There can be no assurance that the Adviser’s portfolios will achieve returns that are not closely correlated with various market indices or the returns of other investment vehicles. There can be no assurance that the Adviser will value less-correlated returns more highly than any other factor (or at all) in selecting the Investments and strategies. Further, it is anticipated that certain Investments made and strategies deployed by the Adviser will experience returns that individually or in the aggregate are correlated (possibly highly) with various market indices or other strategies, including various equity, debt, commodities, currency, or other markets around the world. In addition, it is possible that certain strategies deployed by the Adviser on behalf of a client may be closely correlated with one another from time to time. Correlations between investment strategies deployed by the Adviser, and/or correlations between the returns of the Funds and the returns of market indices and/or other investment vehicles, may change over time. In particular, such correlations may increase in times of market stress, such as those caused by widespread liquidation events, or other times of unusual market activity. Moreover, certain of the strategies deployed by the Adviser may maintain (possibly extensive) unhedged exposure, whether intentional or unintentional, to various market movements, style factors, and other sources of risk, whether known or unknown, while other strategies deployed on behalf of a client may have such unhedged exposures from time to time. Such sources of risk may include changes in the future levels and/or volatility of interest rates, currency prices, commodity prices, sovereign credit spreads, corporate credit spreads, and equity and other markets, as well as correlations between any such risks. There can be no assurance that an investment in a portfolio would improve the risk/return profile of any client’s or investor’s overall portfolio or otherwise improve the performance of such portfolio, and such an investment may in fact result in material losses.
Volatility of Investment Returns
The performance of strategies the Adviser deploys on behalf of its clients may be highly volatile (both in absolute terms and relative to expected and/or realized returns), potentially resulting in increased risks, including the risk of substantial losses. Such strategies may, by design or otherwise, have high volatility, negative skewness (or “left tail” risk), negative kurtosis (or “flat” distribution risk), high correlation with certain macroeconomic risk factors, high position concentrations, and/or other significant risks, whether in absolute terms or relative to expected and/or realized returns, or relative to certain strategies that are deployed by the Adviser on behalf of other clients. As a result, the investment returns of a client may vary significantly over time, and there is a risk of substantial losses to such client. A prospective client or underlying investor should invest with the Adviser only if it has determined that such variance of returns is consistent with its investment objectives and risk tolerances. The risks outlined in this section may be intentional and/or may result, in part, from the election by the Adviser not to take risk-reducing actions that it might deploy elsewhere, including where it deploys similar strategies on behalf of other clients. In addition, the Adviser is expected to deploy certain strategies (or elements of certain strategies) for various clients. It is possible that such strategies may produce returns that are not closely correlated with, and from time to time may be inferior to, the returns associated with such strategies as they are deployed on behalf of other clients (including DESCO Favorable Funds).
Complexity of Quantitative Strategies
Many of the investment strategies that the Adviser deploys on behalf of clients, and many of the Adviser’s clients’ Investments, are highly complex. In many cases, the successful deployment of a particular investment strategy is expected to require or involve sophisticated mathematical calculations and complex computer programs. Although the Adviser intends to use good faith efforts to carry out such calculations and programs correctly and to use them effectively, there can be no assurance that it will successfully do so. Errors have occurred and are expected to continue to occur in designing, writing, testing, monitoring, and/or implementing such calculations and programs, including errors in the manner in which such calculations and programs function together. Any such error may be difficult to detect, may not be detected for a significant period of time, and could have a material adverse effect on the Adviser’s clients. This risk may be exacerbated by the fact that certain investment strategies deployed by the Adviser are expected to result in the execution of a significant number of trades over a relatively short period of time, which may result in many trades being affected by any such error before it can be detected and corrected. In addition, such calculations and programs are dependent upon accurate market and other data, and inaccuracies in or any corruption of such data (or errors in incorporating such data) may have a material adverse effect on the results of such calculations and programs. The Adviser may seek to apply existing calculations and programs to different components of the investment strategies deployed on behalf of its clients (including different markets, strategies, or Investments), but there can be no assurance that such application would prove effective in such different contexts. Moreover, the effectiveness of such calculations and programs is expected to diminish over time, including as a result of changes in the market and/or changes in the behavior of other market participants. The Adviser may respond to such diminishing effectiveness by making certain changes to the investment strategies and/or the manner in which they are implemented. Any such changes could increase the likelihood of the errors described above. The complexity of the components of the investment strategies that apply such calculations and programs, and the interactions among such components, may make it difficult or impossible to detect the source of any weakness or failure in such components and/or such calculations and programs before material losses are incurred. For example, it may be difficult or impossible to distinguish unexpected trading results caused by market activity from unexpected trading results caused by an error in the applicable calculations or programs. Any mathematical calculations and computer programs utilized by the Adviser are subject to inherent limitations and may be improved upon as experience is gained, strategies are refined, and markets change. However, there can be no assurances that the Adviser would be able to make, or would make, any such improvements, and its inability or failure to do so could have a material adverse effect on the Adviser’s clients. Further, the Adviser’s clients are exposed to risks arising from the systematic or algorithmic trading of other market participants. Market events such as the “flash crash” of May 6, 2010 illustrate how the behavior of one or a small number of market participants can cause dramatic movements in the prices of individual securities and/or the market as a whole. The systematic nature of certain investment strategies deployed by the Adviser may make the Adviser’s clients particularly susceptible to such movements, which could have unforeseen effects on one or more such investment strategies and/or on the interactions among such strategies. Any such market event could have a material adverse effect on a client of the Adviser.
Electronic Trading
The Adviser expects to trade on electronic trading and order routing systems. Transactions using an electronic system are subject to the rules, regulations, and policies of the exchanges or persons offering the system or listing the instrument. Characteristics of electronic trading and order routing systems vary widely with respect to order matching procedures, opening and closing procedures and prices, trade error policies, and trading limitations or requirements. Trading on such systems may also expose a client of the Adviser to the risk that the applicable exchanges may have discretion to cancel particular orders or trades under certain circumstances, including in the event of market disruptions. Any such cancellations could affect such client’s portfolio in unexpected and/or adverse ways. There are also differences regarding qualifications for access, grounds for termination of access, limitations on the types of orders that may be entered into the system, and other applicable terms. Each of these matters may present different risk factors with respect to trading on or using a particular system. Each system may also present risks related to system access, varying response times, the behavior of other market participants, security, service providers, and the receipt and monitoring of electronic mail. Trading through an electronic trading or order routing system is also subject to risks associated with system or component failure, whether such failure affects the hardware or software of the exchange or person offering the relevant system or of the Adviser. In the event of system or component failure, it is possible that, for a certain time period, it might not be possible to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. System or component failure may also result in loss of orders or order priority. Trading venues offering an electronic trading or order routing system typically adopt rules to limit their liability, the liability of member brokers and software and communication system vendors, and the amount that may be collected for system failures and delays, which rules vary among the venues. In addition, changes in laws or regulations related to electronic trading and order routing systems are currently being considered in certain jurisdictions. Any such changes could have a material adverse effect on certain strategies deployed by the Adviser.
Reliance on Technology; Cybersecurity; Back-up Measures
The Adviser’s investment activities and investment strategies are dependent upon various computer and telecommunications technologies, many of which are provided by or are dependent upon third parties such as data feed, data center, telecommunications, or utility providers. The successful deployment, implementation, and/or operation of such activities and strategies, and various other critical activities of the Adviser on behalf of its clients, could be severely compromised by system or component failure, telecommunications failure, power loss, a software-related “system crash,” unauthorized system access or use (such as “hacking” or other cybersecurity breaches), computer viruses and similar programs, fire or water damage, human errors in using or accessing relevant systems, or various other events or circumstances. Such events or circumstances may affect the Adviser directly and/or may affect one or more third parties (including Arcesium and any third-party administrator to a Fund) that provide services to the Adviser and/or its clients. It is not possible to provide comprehensive and foolproof protection against all such events and circumstances, and no assurance can be given about the ability of the Adviser or any third party to continue providing applicable services. Any event or circumstance that affects the Adviser’s or one or more third party’s computer and/or telecommunications systems or operations (including systems or operations at co- location sites or other locations not controlled by the Adviser) could have a material adverse effect on the Adviser’s clients, including by preventing the Adviser from trading, modifying, liquidating, and/or monitoring its clients’ Investments. Moreover, any unauthorized access to the information systems of the Adviser or certain third parties could result in the loss, disclosure, or improper use of tangible or intangible property of the Adviser, its affiliates, or its clients, information relating to Investments, and/or personally identifiable information of the Adviser’s clients or underlying investors in the Funds; any such loss, disclosure, or use could have a material adverse effect on such clients or investors. The Adviser maintains back-up electronic books and records at their disaster recovery site, which is a fully operational data center facility. In the case of events that interrupt the Adviser’s computer and/or telecommunications systems or operations, the Adviser hopes to resume trading, modifying, liquidating, and/or monitoring its clients’ Investments relatively promptly, subject to any circumstances that are outside the control of the Adviser. In the case of severe business disruptions (e.g., regional power outage or loss of personnel), the Adviser may not resume such activities for one or more business days because (among other things) such resumption is dependent on other critical business constituents, such as brokers and exchanges, and on the nature of the disruption. Although the foregoing reflects the Adviser’s objectives, designs, and/or plans, no assurance can be given that these objectives, designs, and/or plans will be realized, or that, in particular, the Adviser would be able to resume operations following a business disruption, and any such disruption could have a material adverse effect on the Adviser’s clients.
Currencies
Client accounts generally will be denominated in U.S. dollars. Therefore, investments in such accounts generally will be subject to fluctuations in the value of a client’s own domestic currency relative to the U.S. dollar. With respect to certain of its clients’ portfolios, the Adviser expects to recommend Investments that are denominated in currencies other than U.S. dollars, and there generally would be no limit on the portion of Investments that may comprise such Investments. In addition, the Adviser may cause such portfolios to make investments in, or otherwise hold, non-U.S. currencies themselves. As a result, a client may be exposed to currency risks, including the risk of fluctuations in the value of the applicable currency relative to the U.S. dollar. The occurrence of any such currency risks could have a material adverse effect on such client. The Adviser may or may not seek to hedge such exposures, and there can be no assurance that any such hedging would be feasible or, if undertaken, would reduce applicable risks. A client may also incur costs in connection with hedging against currency exposures and conversions between various currencies.
Leverage; Financing
Many of the strategies deployed by the Adviser are highly dependent on the use of leverage for their success, and certain clients are expected to employ financial leverage (which may be substantial) in connection with their investment and other activities. The Adviser intends to use instruments (including futures, swaps, options, and other derivative instruments) that, if such instruments were to decrease in value, could result in losses exceeding the capital allocated to them. In addition, the Adviser may cause clients to buy certain Investments on margin and/or to enter into swaps or other derivative instruments to enhance leverage or for any other reason. The amount of leverage employed by clients is determined by the Adviser. The Adviser may cause a client to employ leverage up to the maximum amount permitted by the terms of the applicable Governing Document, by applicable law and regulation, and by the persons extending credit or otherwise providing leverage to the client. Only a limited amount of the leverage employed by a client may be apparent from the balance sheet or other financial statements of the client, and it is possible that a large portion (and possibly a significant majority or more) of the leverage employed would be effected through off-balance sheet transactions or methods, such as total return swaps (which can offer leveraged exposure to the reference instrument). A client may incur potentially significant expenses, including interest charges and commitment fees, in connection with any leverage that it uses, and the returns of the Fund will be reduced by such expenses. In addition, the rights of any lenders to a client (including a client’s prime brokers) to receive payments of interest, additional margin, or repayments of principal generally will be senior to the rights of the client’s underlying investors, and the terms of any such borrowings or arrangements may restrict certain activities of a client, including the client’s ability to make distributions. Leverage will increase the volatility of the performance of the client investments and, as a result, will increase the volatility of returns. Although the use of leverage may have the effect of increasing returns to a client (and its underlying investors) in the event of favorable investment results (to the extent the effect of such leverage is larger than the related costs incurred), investment losses and other losses will be exacerbated by leverage and may be substantial losses, possibly including losses exceeding the total value of the assets of a client). Notwithstanding the foregoing, there can be no assurance that clients will be able to borrow money, use margin, or engage in any financing transaction in order to obtain and/or employ leverage. Events in the global financial markets in recent years have decreased the availability, and increased the cost, of certain forms of financing. Further, a client may not be able to obtain leverage and/or other financing, whether at a reasonable cost or at all, in the event that the Investments held by the client are not sufficiently diversified. Any inability of a client to obtain, employ, and/or maintain leverage or other forms of financing, whether at a reasonable cost or at all, would be expected to result in (possibly materially) lower returns to the client than had the client been able to obtain, employ, and/or maintain such leverage or other financing at a reasonable cost. Conversely, the Adviser may determine to obtain financing for clients despite the substantial costs or other onerous terms of that financing. By way of example, should a client require capital on an emergency basis, such as when that client is suffering substantial losses, the Adviser may agree to “rescue financing” on terms that are significantly favorable to the lender. Any such arrangement could have a material adverse effect on a client.
Derivative Instruments
The Adviser’s clients may make investments in all types of derivative instruments, subject only to any limitations imposed by applicable law and/or by counterparties and clearing brokers. Derivative instruments are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index, interest rate, or other reference instrument. Examples of derivative instruments include swaps, futures, forwards, options, warrants, options on futures, and swaptions. Investments and trading in derivative instruments are generally highly speculative and involve various risks that are different in certain respects from, and are possibly greater than, the risks associated with investing directly in the applicable underlying assets or reference instruments. Examples of various risks associated with derivative instruments include market risk, complexity, a high degree of leverage, illiquidity, the absence of reliable price quotes and/or a reliable trading market, unstable correlation between a derivative instrument and the underlying asset or reference instrument, volatility, tax risk, government intervention to influence prices, legal or regulatory uncertainty, insider trading by other market participants, and non-performance of counterparties (including direct or central counterparties). A decrease in the value of the derivative instruments held by a client of the Adviser could result in losses exceeding the capital allocated to them. Further, because trading such derivative instruments often requires amounts of capital that are small relative to the instruments’ notional value, such trading may result in leveraging effects for such client’s overall portfolio. In addition, agreements that govern the Adviser’s investments in derivative instruments typically impose obligations on the Adviser or the applicable client. Under such agreements, a failure to observe such obligations (e.g., a failure to meet a required margin call) may result in the declaration of an event of default, which could permit the counterparty to exercise a range of remedies, possibly including the ability to unilaterally terminate Investments governed by such agreements and to require the Adviser’s client to pay such counterparty the replacement cost of the terminated Investments based on prices determined by such counterparty, which may be materially different than market prices. Such agreements also typically include payment or valuation provisions that require determinations by a calculation agent or a valuation agent (typically the dealer). If the Adviser is unable to negotiate favorable terms for such provisions or rights to dispute such determinations, the counterparty may have rights to make determinations that materially adversely affect the applicable Investments. Trading derivative instruments might deprive a client of certain tax benefits obtained from trading the underlying assets or reference instruments and/or, with respect to over-the-counter derivative instruments, from trading otherwise similar exchange-traded instruments. Trading in options or warrants involves a risk of loss related to the premium for the option or warrant as well as a risk of loss related to the value of the underlying security or instrument, which loss in either case could be substantial. The writing of an uncovered option by a client may result in an unlimited loss of a client’s capital within a relatively short period of time. Trading in futures contracts and options on such contracts may be subject to limitations imposed by regulatory authorities and relevant exchanges that may prevent a client from liquidating positions and could subject such client to substantial losses. Many derivative instruments, including forward contracts and options on forward contracts, are not traded on exchanges and are generally not regulated. The regulation of derivative instruments is evolving, and changes in such regulation may materially adversely affect Investments in client portfolios. For example, several U.S. and non-U.S. regulatory authorities have adopted, and other regulators have proposed or considered, rules for oversight and/or regulation of the previously largely unregulated market in over-the-counter derivatives.
Debt Investments
The Adviser is expected to cause certain clients to hold, structure, restructure, and otherwise acquire or dispose of bonds, loans, and other forms of indebtedness. The discussion in this section is based in part upon principles of U.S. federal and state laws. However, it is possible that a significant portion of a particular client’s portfolio will be invested in non-U.S. jurisdictions, and there may be no limit on the portion of such portfolio that can be invested in such Investments. With respect to Investments relating to non-U.S. borrowers, there can be no assurance that the laws of certain non-U.S. jurisdictions (and/or the consequences of such laws) would not result in different or additional risks.
General Risks; Default
In general, any Investments by a client of the Adviser in bonds, loans, or other forms of indebtedness will entail various market risks (i.e., the risk that certain market factors, including interest rates, credit spreads, and supply and demand imbalances caused by the activities of other market participants will cause the value of the applicable Investment to decline) and issuer-specific risks (e.g., the risk of non- payment of interest and principal; the risk that changes in an issuer’s credit quality causes the value of the applicable Investment to decline). Further, the Adviser may cause a client to invest in debt instruments that are currently in default or that may later experience events of default. Any default in payment under any debt instrument owned by a client of the Adviser may result in material losses to such client. The Adviser’s clients may also invest in pools of loans, which may be subject to additional risks, such as high correlation of the performance of the loans in any such pool.
Debt Market Conditions
Disruptions in debt markets have occurred in the past, including during the global financial crisis that began in 2008, and may occur in the future, possibly with greater severity and/or frequency. Any such disruptions may negatively affect a wide range of issuers and may increase the likelihood that such issuers will be unable to make principal and interest payments on, or refinance, outstanding debt when due. Moreover, the risk that such disruptions will affect an issuer’s ability to pay its debts and obligations when due is enhanced if such issuer in turn provides credit to third parties or otherwise participates in the credit markets. In the event of a default by an issuer, the Adviser’s clients could lose both capital invested in, and anticipated profits from, any affected Investment. The reoccurrence of the events described in this paragraph, or other similar or dissimilar events, could have an adverse impact on the availability of credit to businesses generally and may lead to an overall weakening of the U.S. and other economies around the world. In addition, any disruptions of this kind may affect a client’s ability to procure its own financing arrangements and/or the terms of any such arrangements.
Secured Loans; Unsecured or Subordinated Loans
Clients of the Adviser may invest in loans secured by property of the borrower. Investments in such loans are subject to the risk that some or all of the underlying collateral will decrease in value to an extent that the value of such collateral is insufficient to satisfy the borrowers’ payment obligations under such loans in the event of a default. Measures taken by the Adviser to protect clients’ interests in loans in which they may invest, including the validity or enforceability of such loans and the creation and maintenance of the anticipated priority and perfection of applicable security interests, may prove to be inadequate. There can be no assurance that any collateral would be sufficient to cover the obligations being collateralized or the amount of a client’s investment. Any collateral may decline in value; may be subject to competing claims of creditors; may be difficult to recover or sell due to legal, regulatory, or other reasons; or otherwise may be inadequate to allow a client to recoup its investment. The Adviser may cause clients to invest in loans that are secured with a junior priority interest or lien on collateral that is subordinated to senior secured obligations. Such loans are subject to a risk that the cash flow of the related borrower and the collateral securing such a loan may be insufficient to make scheduled payments after giving effect to any obligations in respect of the senior secured loans of the borrower. As a result, in certain situations little or no recovery may be available following a default with respect to such a loan. Such loans are also expected to be less liquid than senior secured loans. Such loans are intended to be senior in right of payment and priority to any unsecured obligations, but the priority of such loans could be challenged, whether in bankruptcy court or otherwise. Any successful challenge could have a material adverse effect on the value of the applicable Investment. Finally, the Adviser may cause a client to invest in various types of unsecured indebtedness (such as senior unsecured, subordinated, or general indebtedness) that would be junior in priority to the claims of secured creditors. The claims of secured or senior creditors may exhaust some or all of the assets of a borrower before unsecured, subordinated, or general creditors may participate in such assets, thus materially adversely affecting the value of the applicable Investment.
Lender Liability; Equitable Subordination; Fraudulent Conveyance
Investments structured as loans or other forms of indebtedness may subject clients to claims of lender liability and/or may be subject to claims of equitable subordination or recharacterization. The risk of such claims may be exacerbated if a client holds a significant equity position and/or certain management positions (including representation on the board of directors) with respect to the applicable borrower. It is also possible that such claims could arise without the direct involvement of a client or the Adviser with the applicable borrower. Any successful claims of lender liability against a client or any equitable subordination or recharacterization of any Investment (which may result in the claims of a client being subordinated to the claims of certain or all other creditors) could have a material adverse effect on such Investment held by a client (possibly resulting in losses that exceed the value of such Investment) and thus on the client itself. Investments structured as loans or other forms of indebtedness may also be subject to claims of fraudulent conveyance if the borrower was insolvent or rendered insolvent. Any successful claims of fraudulent conveyance or preferential payment with respect to an Investment could have a material adverse effect on such Investment and, possibly, on a client, and the client and/or one or more of its underlying investors may be required to return related payments and could experience losses that exceed the value of such Investments.
Certain Additional Risks
Clients of the Adviser may engage one or more loan or mortgage servicers to assist with the collection of payments from borrowers in respect of such clients’ Investments in loans, mortgages, and other forms of indebtedness. The fees and costs associated with such assistance generally would be borne by the applicable client(s). The Adviser may modify or terminate any such engagement without notice to or the consent of the client. A decision not to utilize such a servicer, the termination of the engagement of such a servicer, the inability to replace such a servicer(or the inability to replace such a servicer at a similar cost or level of service), the poor performance of such a servicer (including any failure to comply with applicable law), contractual or other disputes with such a servicer (including as a result of a breach by the servicer under any applicable servicing agreement), and/or the bankruptcy of such a servicer may result in lower returns on the applicable clients’ Investments and have a material adverse effect on the clients. Certain loans in which the Adviser may cause a client to invest may be subject to additional obligations, including intercreditor agreements (pursuant to which certain creditors agree to restrictions on their rights) or future extensions of credit to the borrower. Such obligations may materially adversely affect the value of such loans, such as by limiting the ability of the applicable client to exercise its rights under a loan agreement or by increasing such client’s exposure to the borrower.
Asset-Backed Securities
The Adviser may cause clients to invest directly or indirectly in asset-backed securities, which are structured securities collateralized or backed by another asset or assets, such as residential or commercial mortgages, home equity loans, auto loans, student loans, installment sale contracts, credit card receivables, business loans, investment-grade or high yield debt, or a mix of such assets. Asset-backed securities may include instruments such as commercial mortgage-backed securities, residential mortgage- backed securities, collateralized mortgage obligations, collateralized bond obligations, collateralized debt obligations, and collateralized loan obligations, and may include synthetic structures that are backed by derivative instruments instead of by the relevant loans, bonds, or other assets themselves. Other types of asset-backed securities, including interest-only, inverse interest-only, and principal-only securities, may participate in only certain types of income streams generated by the underlying assets. Asset-backed securities are often extremely complex, and their values and returns may be subject to significant fluctuations as a result of relatively small changes in interest rates; the rates of prepayments, defaults, or late payments with respect to the relevant underlying assets; or other factors. The value of an asset-backed security is highly dependent upon the performance of its underlying assets and upon the expected quality of the underlying assets. Substantial leverage may be inherent in the structure of some asset-backed securities. Consequently, asset-backed securities may present a greater degree of risk than other types of fixed income securities and may be more volatile, less liquid, and more difficult to price accurately than less complex securities. The Adviser may recommend hedging transactions in certain circumstances to protect against interest rate movements, prepayment risk, defaults, or other factors, but there can be no assurance that such hedging transactions, if any are undertaken, would fully protect a client against such risks. Asset-backed securities are typically separated into tranches representing different degrees of credit quality, with lower-rated tranches being subordinate to senior tranches. It is expected that the returns on the junior tranches of such securities would be especially sensitive to the rate of defaults in the collateral pool and would be subject to a substantially greater risk of non-payment than would senior tranches of such securities. There are no restrictions on the tranches in which clients of the Adviser may invest. The Adviser may cause clients to, directly or indirectly, issue mortgage-backed and other asset-backed securities collateralized by real property and/or other assets. Any such asset-backed securities generally would be for resale in the secondary market and may include collateralized mortgage obligations, real estate mortgage investment conduits, and collateralized debt obligations. In connection with any such issuance, it is possible that a client of the Adviser would not be able to sell all or a portion of the subordinated tranches, whether debt or equity. Such tranches generally would be the first to bear any losses with respect to the underlying collateral. Because mortgage-backed securities comprise pools of underlying loans, such securities are subject to risks similar to those applicable to investments in particular mortgage loans. In addition, certain types of mortgage-backed securities contain highly complex interest-rate and cash-flow provisions and may be highly volatile with respect to yield, total return to maturity, and market value For example, a mortgage- backed securities position may experience losses due to defaults in one or more underlying mortgage loans, but it may be difficult to assess the extent of such losses because the resolution of such defaults may occur only after extended settlement negotiations, or after the foreclosure and subsequent liquidation of the underlying properties, which could take a significant period of time. Asset backed securities backed by other types of loans may be subject to similar risks. Even though assets typically support the underlying loans, full recovery of a loan in the event of default may not be possible due to litigation costs or delays, legal uncertainties, limited marketability or reduced valuations of the asset, and other similar or dissimilar factors. Accordingly, any defaults may materially adversely affect an Investment in asset-backed securities. In addition, the quality of certain asset-backed securities in which clients of the Adviser may invest is subject to the accuracy and completeness of representations made by the borrowers under the underlying loans. Accordingly, clients of the Adviser that invest in asset-backed securities are subject to the risk that originators of certain such securities fail to adequately verify such representations, whether because of defects in the verification systems used by such originators or otherwise.
Sovereign Debt
Clients of the Adviser may make Investments in sovereign debt instruments. Certain sovereign issuers have in the past experienced substantial difficulties in servicing their external debt obligations, which has led to defaults on certain obligations and the restructuring of certain indebtedness. Countries in which clients of the Adviser may invest may experience high rates of inflation, high interest rates, exchange rate fluctuations and currency devaluation, large amounts of external debt, balance of payments and trade difficulties, political and/or social uncertainty and instability, and/or poor economic performance or conditions. Any of these factors, as well as other factors, could materially increase the risk of a total or partial default by such sovereign issuers and/or the risk of the restructuring of all or certain indebtedness of such sovereign issuers, either of which may result in substantial losses for the Adviser’s clients.
Distressed Debt and Other Investments
The Adviser may cause clients to make investments in instruments issued by or otherwise related to companies that at the time of the applicable investment are experiencing, or subsequent to the applicable investment do experience, various forms of financial, business, operational, legal, and/or other distress or impairment, including companies involved in bankruptcy or other reorganization or liquidation proceedings (collectively, “Reorganization Proceedings”), as well as those emerging from Reorganization Proceedings and those seeking financial restructurings or reorganizations outside such proceedings. These Investments involve a high degree of risk that the total value of the applicable Investment may be lost. The Adviser also may cause clients to purchase from banks, other financial institutions, or other investors bank loans (whether through assignment or participation transactions) and other forms of direct or indirect indebtedness (including revolving loans and letters of credit) of distressed companies. Investments in loan participations would expose a client to risks related to the creditworthiness of the banks or other financial institutions issuing such participations. As a holder of participation interests or as a member of a loan syndicate, such client may not be able to assert any rights against the borrowers of the underlying indebtedness and may need to rely on the financial institutions issuing the participations or the lead or agent bank to assert such rights. These financial institutions and banks may have reasons not to assert their rights, whether due to a limited financial interest in the outcome, other relationships with the borrowers, the threat of potential counterclaims, or other reasons. The Adviser also may cause clients to purchase bankruptcy claims (including trade claims), which are amounts owed to creditors of a distressed company. Investments in bankruptcy claims are difficult to value. Moreover, bankruptcy claims generally are illiquid and non-interest-bearing, and there can be no assurance that a company will be able to satisfy its obligations under a claim. Sophisticated financial and legal analysis is required to invest successfully in distressed companies, and there can be no assurance that the Adviser will adequately perform such analysis. Among other things, the Adviser may not correctly determine the value of the collateral (if any) supporting the Investments held by a client or the prospects for a successful reorganization or similar action. Such Investments may be subject to additional risks, such as significant volatility in the value of the Investment; the involuntary exchange of such Investments for cash, financial instruments, or other property (including illiquid Investments) having substantially less value than the original Investment; and/or delayed or extended payment for such Investments. In addition, Reorganization Proceedings, as well as other financial restructurings or reorganizations, are subject to a number of risks. For example, such proceedings may be of uncertain duration; may be subject to unanticipated and possibly lengthy delays; may involve substantial legal, professional, and administrative costs to the reorganizing company and its investors; may involve other factors that are beyond the control of the reorganizing company and its investors; and/or may result in the liquidation of the reorganizing company. Further, the Adviser, on behalf of a client, may decide to become involved in the restructuring of a particular distressed company, including through representation on creditors’ or equityholders’ committees or other groups (whether formal or informal) and participation in litigation or direct negotiations with the company’s management, each of which may involve special risks and/or conflicts of interest for a client. The occurrence of any of these risks could have a material adverse effect on the value of the applicable Investment or on the Adviser’s ability to dispose of or to act to protect the value of such Investment. Moreover, the Adviser, on behalf of a client, may become involved in managing and/or operating companies in various states of distress or impairment, by acquiring control positions or certain assets of such companies. This involvement may include creating business plans and hiring senior management, who, together with such company’s other personnel, is expected to have experience with such activities. The Adviser may rely on the expertise of existing management, notwithstanding the negative track record of such persons, and/or new management, which may not have a significant track record. Administrative costs related to Reorganization Proceedings may be substantial and generally are paid from the reorganizing company’s assets prior to any payments to creditors or equityholders. Certain other claims, including claims for taxes, have priority by law over claims of creditors and equityholders. Such administrative costs and other claims could materially reduce the return to the Adviser’s clients on a particular Investment.
Low Creditworthiness Investments
A (possibly substantial) portion of the Investments held in connection with the Adviser’s investment strategies may, whether at the time of investment or at a later time, be unrated; rated below “investment grade” by recognized rating agencies; and/or defaulted. Unrated, sub-investment-grade, and defaulted Investments generally involve greater risk of loss in either a short or a long position than do investment- grade Investments. For example, the market values and yields of unrated, sub-investment-grade, and defaulted Investments genera please register to get more info

DESCO LP’s wholly owned subsidiary, D. E. Shaw & Co. (Asia Pacific) Limited (“DESCO AP”), is a Relying Adviser and is licensed with the Securities & Futures Commission in Hong Kong to engage in certain regulated activities. (Please refer to Item 10 below for more detail regarding DESCO AP.) In December 2013, DESCO AP, on behalf of a Fund, entered into a block trade with a counterparty to purchase shares of a public company in Korea. Subsequently, on the same day, DESCO AP directed the Fund to sell those shares. Due to events outside the control of DESCO AP, the counterparty in the block trade unilaterally delayed the trade and failed to deliver the shares on the agreed date of settlement, which caused the Fund to fail on its delivery requirement for the subsequent sale of the shares. In September 2015, the Securities & Futures Commission of Korea imposed a fine of approximately US $13,000 on DESCO AP for violating Korean restrictions on short selling. DESCO AP paid such fine in October 2015. In April 2014 and June 2014, DESCO LP submitted notifications of net short positions in the shares of a Swedish issuer to the Swedish Financial Supervisory Authority (the “SFSA”) pursuant to the European Union short-selling regulation (the “Regulation”) after the next-day notification deadline in the Regulation. In each case, the delay in the submission of the net short position notification was the result of unintentional human error, and DESCO LP submitted the required notification promptly upon its own discovery of such error. In January 2015, the SFSA imposed penalty fees of approximately US $1,150 (in the case of the April 2014 notification) and US $10,500 (in the case of the June 2014 notification) on DESCO LP for failure to report within the time period prescribed by the Regulation. The fines became effective in April 2015 and were paid by DESCO LP in May 2015. In November 2012 and October 2013, certain entities in the D. E. Shaw group advised by certain of DESCO LP’s Relying Advisers unintentionally violated a position limit applicable to natural gas futures traded on the New York Mercantile Exchange (“NYMEX”) and ICE Futures U.S., Inc. (“ICE”). In each case, the violation was discovered prior to the open of trading on the day after which it occurred, and corrective trades were placed soon thereafter to bring the applicable positions into compliance. With respect to each violation, DESCO LP submitted to NYMEX a settlement offer in which DESCO LP agreed to pay a fine of $25,000 (in the case of the November 2012 violation) and $75,000 (in the case of the October 2013 violation). NYMEX entered orders effective on May 1, 2014 accepting the settlement offers. ICE issued a warning letter to the D. E. Shaw group for the November 2012 violation. With respect to the October 2013 violation, DESCO LP entered into a settlement agreement with ICE, effective January 16, 2015, in which DESCO LP agreed to pay a fine of $20,000 and to cease and desist from such position limit violations. DESCO LP received a request for information from the SEC in June 2013 relating to compliance with Rule 105 of Regulation M under the Securities Exchange Act of 1934 (the “Exchange Act”) and identified five inadvertent violations of Rule 105 from 2010 through 2012. DESCO LP submitted an Offer of Settlement to the SEC, in which DESCO LP consented to cease and desist from such violations and to the payment of $667,492.37, including disgorgement of $447,794.00, prejudgment interest of $18,192.37, and a civil monetary penalty of $201,506.00. The SEC entered an Order on September 16, 2013, accepting the Offer of Settlement. DESCO LP’s related person, D. E. Shaw Securities, L.L.C. (“Securities LLC”), is a broker-dealer registered under the Exchange Act, and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). In June 2009, Securities LLC self-reported to FINRA inadvertent violations of certain rules regarding technical trade reporting obligations for certain short sale transactions it executed. Specifically, Securities LLC failed to include the short sale modifier in such transactions reported to the FINRA/Nasdaq Trade Reporting Facility. Securities LLC submitted a Letter of Acceptance, Waiver and Consent (“AWC”) to FINRA and consented to a censure and fine of $45,000. FINRA accepted the AWC on December 2, 2011. In addition, FINRA conducted a routine trading and market making surveillance examination of Securities LLC in the beginning of 2010 and identified that Securities LLC had submitted inaccurate time stamps on certain order cancellations submitted to the Order Audit Trail System. Securities LLC submitted an AWC to FINRA and consented to a censure and fine of $15,000. FINRA accepted the AWC on May 7, 2013. Securities LLC’s disciplinary history is available at www.finra.org/brokercheck. In April 2010 and June 2010, certain entities in the D. E. Shaw group advised by DESCO LP unintentionally violated futures contract position limits set by the CFTC in connection with trading soybeans and corn, respectively, on the Chicago Board of Trade, a member of the CME Group. In each case, the violation was as of the close of trading on a single day, and in each case, the D. E. Shaw group discovered the violation and put on correcting trades on or before the next trading day and before receiving notification of the violations, so that its positions were below the applicable limits. DESCO LP submitted to the CFTC an Offer of Settlement, in which DESCO LP consented to cease and desist from such violations and to the payment of a civil monetary penalty of $140,000. The CFTC entered an Order on February 22, 2012, accepting the Offer of Settlement. The CME Group issued warning letters to the D. E. Shaw group for each violation. DESCO LP believes there are no other legal or disciplinary events that are material to a client’s or prospective client’s evaluation of its advisory business or the integrity of its management; note that DESCO LP’s Form ADV Part 1 may include certain disciplinary events not outlined above. please register to get more info

Certain management persons of the Adviser are registered representatives of Securities LLC, which is a related person of DESCO LP. DESCO LP and certain of its related persons are currently registered as commodity pool operators (each, a “CPO”) pursuant to the Commodity Exchange Act (the “CEA”) and are members of the National Futures Association (the “NFA”). Certain other of DESCO’s related persons have been listed with the CFTC as commodity pools and will be operated as “exempt pools” in accordance with Commodity Futures Trading Commission Rule 4.7. DESCO LP and certain of its related persons rely on an exemption from registration as commodity trading advisors with the CFTC. Certain management persons of DESCO LP are registered with the NFA as associated persons of the Adviser and each of the Adviser’s related persons that is registered as a CPO.
Related Persons
DESCO LP is part of an international financial services firm. DESCO LP acts as managing member, manager, holding company, and/or “parent company” for certain of its related persons, and this activity may be considered to be separate from the provision of investment advice. For purposes of this brochure, DESCO LP does not consider itself to be engaged in the business of its related persons. DESCO LP’s related persons license (or sublicense) certain intellectual property from DESCO LP and may utilize DESCO LP’s employees in connection with their businesses. DESCO LP acts as investment adviser to certain Funds. Subject to applicable law, the Adviser may use for clients, or suggest or recommend to clients, placement agent services offered by DESCO LP’s related person, Securities LLC. It is expected that Securities LLC will not be compensated by clients for such services. DESCO LP’s wholly owned subsidiary, D. E. Shaw Investment Management, L.L.C. (“DESIM”), is registered with the SEC as an investment adviser under the Advisers Act. DESIM is also registered as a CPO and a commodity trading advisor (“CTA”) pursuant to the CEA and is a member of the NFA. DESIM licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse DESIM for certain expenses and DESIM may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Direct Capital, L.L.C. (“DESDC”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. Prior to becoming a Relying Adviser, DESDC had been registered with the SEC as a standalone investment adviser under the Advisers Act. DESDC licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse DESDC for certain expenses and DESDC may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Multi-Asset Adviser, L.L.C. (“Multi-Asset Adviser”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. Multi-Asset Adviser is registered as a CPO pursuant to the CEA and is a member of the NFA. Multi-Asset Adviser relies on an exemption from registration as a CTA with the CFTC. Multi-Asset Adviser licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse Multi-Asset Adviser for certain expenses and Multi-Asset Adviser may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Heliant Adviser, L.L.C. (“Heliant Adviser”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. Heliant Adviser is registered as a CPO pursuant to the CEA and is a member of the NFA. Heliant Adviser relies on an exemption from registration as a CTA with the CFTC. Heliant Adviser licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities the Adviser may reimburse Heliant Adviser for certain expenses and Heliant Adviser may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Composite Adviser, L.L.C. (“Composite Adviser”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. Composite Adviser is registered as a CPO pursuant to the CEA and is a member of the NFA. Composite Adviser relies on an exemption from registration as a CTA with the CFTC. Composite Adviser licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse Composite Adviser for certain expenses and Composite Adviser may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Adviser, L.L.C. (“DESCO Adviser LLC”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. DESCO Adviser LLC is registered as a CPO pursuant to the CEA and is a member of the NFA. DESCO Adviser LLC relies on an exemption from registration as a CTA with the CFTC. DESCO Adviser LLC licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse DESCO Adviser LLC for certain expenses and DESCO Adviser LLC may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Adviser II, L.L.C. (“DESCO Adviser II LLC”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. DESCO Adviser II LLC is registered as a CPO pursuant to the CEA and is a member of the NFA. DESCO Adviser II LLC relies on an exemption from registration as a CTA with the CFTC. DESCO Adviser II LLC licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse DESCO Adviser II LLC for certain expenses and DESCO Adviser II LLC may reimburse the Adviser for certain expenses. DESCO LP’s related person, D. E. Shaw & Co., L.L.C. (“DESCO LLC”), serves as managing member to certain clients of DESCO LP, but does not provide investment advisory services. DESCO LLC is not registered with the SEC as an investment adviser under the Advisers Act. DESCO LLC is registered as a CPO pursuant to the CEA and is a member of the NFA. DESCO LLC relies on an exemption from registration as a CTA with the CFTC. DESCO LLC and DESCO LP act as joint CPOs for certain commodity pools. DESCO LLC licenses certain intellectual property from DESCO LP and may utilize certain of DESCO LP s employees in connection with its own activities. In addition, as agreed between the entities, the Adviser may reimburse DESCO LLC for certain expenses and DESCO LLC may reimburse the Adviser for certain expenses. DESCO LP’s wholly owned subsidiary, D. E. Shaw Renewable Investments, L.L.C. (“DESRI”), is a Relying Adviser and its personnel are subject to the supervision and control of DESCO LP. DESRI licenses certain intellectual property from DESCO LP and utilizes certain of DESCO LP’s employees in connection with its own investment advisory activities. In addition, as agreed between the entities, the Adviser may reimburse DESRI for certain expenses and DESRI may reimburse the Adviser for certain expenses. DESCO LP’s indirect subsidiary, D. E. Shaw & Co. (London), LLP (“DESCO London”), is a Relying Adviser and has received permission from the U.K. Financial Conduct Authority under Part 4A of the Financial Services and Markets Act 2000, authorizing it to engage in certain regulated activities in the United Kingdom. Pursuant to that authorization, DESCO London provides investment management and other services to DESCO LP that ultimately are for the benefit of certain of DESCO LP’s advisory clients; DESCO LP compensates DESCO London for those services. DESCO London licenses certain intellectual property from DESCO LP and may utilize certain of DESCO LP’s employees in connection with its own investment management activities. In addition, as agreed between the entities, DESCO LP may reimburse DESCO London for certain expenses and DESCO London may reimburse DESCO LP for certain expenses. Julius Gaudio and Chris Zaback are Management Committee members of DESCO London. Please refer to Form ADV Part 2B for the education and business backgrounds of Mr. Gaudio. Mr. Zaback joined the firm in 2008 and is a Managing Director of DESCO LP. Mr. Zaback graduated from the University of Notre Dame with a degree in accounting and received his M.B.A. with honors from Columbia University’s Graduate School of Business. DESCO LP’s wholly owned subsidiary, D. E. Shaw & Co. (Asia Pacific) Limited (“DESCO AP”), is a Relying Adviser and is licensed with the Securities & Futures Commission in Hong Kong to engage in certain regulated activities, pursuant to which DESCO AP provides asset management and other services to DESCO LP that ultimately are for the benefit of certain of the Adviser’s advisory clients; DESCO LP compensates DESCO AP for those services. DESCO AP is also registered as a foreign institutional investor with the Securities and Exchange Board of India. DESCO AP licenses certain intellectual property from DESCO LP and may utilize certain of DESCO LP’s employees in connection with its regulated activities. In addition, as agreed between the entities, the Adviser may reimburse DESCO AP for certain expenses and DESCO AP may reimburse the Adviser for certain expenses. DESCO AP established its wholly owned subsidiary, D. E. Shaw Investment Management (Shanghai) Co., Limited (formerly known as D. E. Shaw Private Equity Investment Management (Shanghai) Co., Limited, “DESCO Shanghai”) in accordance with the Wholly Foreign-Owned Enterprise Law of the People’s Republic of China, the Detailed Implementing Rules with respect to the Wholly Foreign-Owned Enterprise Law of the People’s Republic of China, and other relevant laws and regulations in the Pudong New Area, Shanghai. DESCO Shanghai provides relevant general research support services to the Adviser that ultimately are for the benefit of certain of the Adviser’s advisory clients. DESCO LP compensates DESCO Shanghai for those services. In addition, as agreed between the entities, the Adviser may reimburse DESCO Shanghai for certain expenses and DESCO Shanghai may reimburse the Adviser for certain expenses. The directors of DESCO AP are Julius Gaudio, Chris Zaback, and Kevin Patric. Please refer to Form ADV Part 2B for the education and business background of Mr. Gaudio and to the preceding paragraph for the education and business background of Mr. Zaback. Mr. Patric, who joined the D. E. Shaw group in 2003, received his B.S. from the University of Pennsylvania. DESCO LP’s wholly owned subsidiary, D. E. Shaw & Co. (Mauritius) Limited (“DESCO Mauritius”), provides financial and other services to the Adviser that ultimately are for the benefit of certain of the Adviser’s advisory clients; DESCO LP compensates DESCO Mauritius for those services. In addition, as agreed between the entities, the Adviser may reimburse DESCO Mauritius for certain expenses and DESCO Mauritius may reimburse the Adviser for certain expenses. DESCO Mauritius’s wholly owned subsidiary, D. E. Shaw India Advisory Services Private Limited (“DESIAS”) provides non-binding investment recommendations and other services to DESCO Mauritius that ultimately are for the benefit of certain of the Adviser’s advisory clients. DESCO Mauritius compensates DESIAS for those services. In addition, as agreed between the entities, DESCO Mauritius may reimburse DESIAS for certain expenses and DESIAS may reimburse DESCO Mauritius for certain expenses. DESCO LP’s related person, DESCO Re, is registered with the Bermuda Monetary Authority under the Insurance Act 1978 as a reinsurance and insurance company (Class 3). DESCO LP’s wholly owned subsidiary, DESCO Bermuda, is registered with the Bermuda Monetary Authority under the Insurance Act 1978 as an insurance manager. Pursuant to an insurance management agreement between DESCO Re and DESCO Bermuda, all reinsurance and insurance activities of DESCO Re are performed by DESCO Bermuda. These activities ultimately are for the benefit of certain of the Adviser’s advisory clients; the Adviser compensates DESCO Bermuda for those activities. DESCO Bermuda licenses certain intellectual property from DESCO LP and may utilize or employ certain of DESCO LP s employees in connection with its activities as an insurance manager. In addition, as agreed between the entities, the Adviser may reimburse DESCO Bermuda for certain expenses and DESCO Bermuda may reimburse the Adviser for certain expenses. DESCO LP’s employees may also serve as directors or officers of DESCO Bermuda and DESCO Re.
Certain Actual and Potential Conflicts of Interest
The Adviser and its related persons and their directors, partners, officers, and employees have various advisory, transactional, financial, and other interests in securities and/or other financial instruments that may be purchased or sold by the Adviser’s clients (or clients of related advisers), which themselves may be related persons. The Adviser, and/or its related persons that are investment advisers, has established a variety of restrictions, procedures, and disclosures designed to address potential conflicts between the interests of its clients and the interests of itself and/or its related persons in this regard, to ensure that its actions are consistent with the best interests of its clients in this context. When conflicts of interest in this regard arise, they are addressed in compliance with all legal requirements and such restrictions, procedures, and disclosures, as applicable. Restrictions and procedures generally are established by heads of the applicable strategies, senior management, and/or compliance personnel. The Adviser and its related persons have actual and potential conflicts of interest with respect to the Adviser’s clients. Although this section outlines certain such conflicts of interest, it does not purport to identify or describe all such conflicts; the applicable Governing Document of each Fund contains more extensive disclosure regarding the conflicts of interests that arise in connection with the operation of such Fund.
Conflicts Arising from Management and Operations of Clients
Various conflicts of interest may arise from the management and operations of the Adviser’s clients. For example, with respect to Funds advised by the Adviser and/or its related persons, the Adviser and/or such related persons have incentives to allocate expenses to any such Fund to the extent that doing so would reduce the amount of expenses that would be borne by the Adviser or such related persons (either directly or, for example, indirectly through their ownership of other Funds). Such conflicts are expected to arise in a variety of scenarios, including in determining which expenses relate to the general operations of a Fund and/or to the acquisition, holding, monitoring, or disposition of actual or potential Investments, in which case they will be deemed operating costs that are borne by the relevant Fund, and which expenses are solely costs of the Adviser or its related persons that should not be borne by the relevant Fund. Such conflicts are also expected to arise when determining which portions of operating costs are allocable to clients of the Adviser that have different expense reimbursement provisions according to their respective Governing Documents. For example, certain clients may have more generous expense reimbursement provisions than others, which may give the Adviser and/or its related persons an incentive to deploy more resources on behalf of the clients with more generous reimbursement provisions. As an additional example, for Funds from which the Adviser or its related persons receive a Performance Charge, the existence of such Performance Charge, along with the absence of provisions requiring the manager of or the investment adviser to a Fund to absorb an equivalent percentage of any cumulative losses (other than as specified in the relevant provisions outlined in the Fund’s applicable Governing Documents), may create an incentive for the Adviser and/or its applicable related persons to make decisions and/or investments on behalf of a Fund that are riskier or more speculative than those that would be made in the absence of a Performance Charge. Another example of such conflicting incentives relates to the authority of the Adviser and its related persons to value each Fund’s portfolio and to make determinations about a Fund’s Management Fee and Performance Charge. Such valuations and such determinations affect the amount of the Management Fee and Performance Charge payable or allocable by a Fund to the Adviser and its related persons. As outlined in each Fund’s Governing Documents, the Adviser and/or its applicable related persons are authorized to determine the financial institutions and counterparties, if any, to be used by such Fund. Such financial institutions and counterparties (or their affiliates or other related persons) may have relationships with the Adviser and/or one or more of its related persons. Examples of such relationships include (a) investments by such financial institutions or counterparties or their clients in certain Funds and/or other affiliated entities; (b) investments by the Adviser’s related persons in such financial institutions, counterparties, or their affiliates; and (c) placement agent, capital introduction, or other service or advisory relationships. These relationships may give the Adviser and/or its related persons an incentive to select such financial institutions and counterparties for the transactions of the applicable Fund even when such financial institutions or counterparties offer less competitive terms (such as with respect to fees) for their services.
Conflicts Arising from Other Activities
In addition to conflicts of interest that arise with respect to the management and operation of the Adviser’s clients, actual and potential conflicts of interest of the Adviser and its related persons also arise from, among other things, other activities (“Other Activities”) that are unrelated (or only partly related) to the business and affairs of any particular client (e.g., advising or managing other Funds). Such Other Activities may partially or exclusively benefit the Adviser and its related persons, and the Adviser or one or more related persons will make all decisions with respect to any actual and potential conflicts of interest with respect to the Adviser’s clients and/or such clients’ underlying investors, including conflicts involving the management and operations of clients or any Other Activity. Because the Adviser and its related persons may in the future expand the number, variety, and/or focus of their Other Activities, conflicts of interest (whether or not outlined in this brochure) may become more frequent and/or pronounced over time. The Adviser and its related persons currently engage in a range of Other Activities, and there are no limits on the nature or the extent of Other Activities in which they may engage in the future. Such Other Activities in many cases will produce greater economic or other benefits for the Adviser and/or its related persons than certain clients produce for such parties, and thus will create incentives for the Adviser and its related persons to favor Other Activities over the applicable clients in various ways. Examples of Other Activities that may be pursued by the Adviser and/or its related persons include: (a) providing investment advice and/or operational or other services to various clients (including SMC Funds and/or other DESCO Favorable Funds) or other persons generally in exchange for Management Fees; (b) serving as general partner or manager of, or holding a limited partner, shareholder, member, or other ownership interest in, other investment vehicles (including SMC Funds and/or other DESCO Favorable Funds) or businesses generally in exchange for Performance Charges or other charges; (c) engaging in other investment, trading, lending, or financial businesses and activities unrelated to its clients; and (d) engaging in technology-related or other businesses and activities. Other Activities generally will benefit persons other than any particular client or its underlying investors. Such persons may include other clients and their investors, the Adviser itself or its related persons (such as when the Adviser pursues an investment opportunity for its own benefit and not for the benefit of a client), and/or the person performing the activity (such as when employees of the Adviser conduct trading for their own accounts). In addition, the Adviser or a related person may participate in an investment alongside a client even if such client possesses sufficient desire and capital to make such investment entirely on its own. No client of the Adviser, and no investor in any such client, shall have any right to receive notice of, participate in, or otherwise receive the benefit of any Other Activity. Another example of an Other Activity pursued by a related person is Arcesium, which is a joint venture between a subsidiary of the Adviser and a minority third-party investor. This third-party investor is also affiliated with certain investors in certain Funds that are clients of the Adviser and/or its related persons. As co-owners of Arcesium, such subsidiary of the Adviser and the third-party investor will share in income attributable to fees paid to Arcesium. This may create an incentive to retain Arcesium to provide post-trade technology and services, even if Arcesium offers less competitive terms for such services and/or technology. Further, fees paid to Arcesium by other clients may be greater (whether on an absolute or relative basis) than fees paid by applicable clients of the Adviser. The interests of the Adviser and its related persons when engaging in Other Activities are expected to diverge from the interests of the Adviser’s clients and/or such clients’ investors. For example, the Adviser or its related persons (a) hold investments in DESCO Favorable Funds that are larger (whether in percentage or absolute dollar terms) than any investments they hold in any particular other client and/or (b) provide services to DESCO Favorable Funds that pay Management Fees, Performance Charges, or other amounts that are greater (whether in percentage or absolute dollar terms) than the corresponding amounts paid by another client. As a result, the Adviser and its related persons have incentives to deploy more profitable investment strategies on behalf of, or to allocate more profitable investment opportunities to, such DESCO Favorable Funds instead of other clients, and have in fact done so on behalf of certain DESCO Favorable Funds. Any such deployment or allocation of such investment strategies or opportunities to a DESCO Favorable Fund would decrease the number and quality of investment strategies and opportunities available to other clients. Further, the Adviser and its related persons have incentives to increase the capital each invests in SMC Funds, even if such increase would exacerbate the conflicts of interest described in this paragraph. More generally, the divergent interests of DESCO Favorable Funds, on the one hand, and other clients and/or their underlying investors, on the other hand, create incentives for the Adviser and certain of its related persons to devote more time and resources to such DESCO Favorable Funds rather than to other clients. Currently, the Adviser and its related persons devote only a portion of their working time and effort to the business and affairs of any particular client of the Adviser, and it is expected that they will devote a substantial (and probably a greater) amount of their working time and effort to Other Activities (including the business and affairs of DESCO Favorable Funds). Moreover, any information learned, or expertise developed, by the Adviser or a related person that performs work on behalf of a client may also be used on behalf of one or more Other Activities. In addition, Other Activities may expose the Adviser and/or its related persons to risks independent of those associated with any particular client, and such risks could adversely affect the Adviser and/or such related persons and their ability to perform work that benefits the Adviser’s clients. In addition, a client of the Adviser may, and in certain cases currently does, compete with Other Activities for (a) the purchase, sale, trading, structuring, restructuring, and otherwise acquiring or disposing of Investments and investment opportunities; (b) the deployment of new investment strategies; and/or (c) the use of investment strategies or tools deployed or used on behalf of more than one client. Certain Other Activities also make use of certain intellectual property of the Adviser or certain of its related persons that is also used for clients of the Adviser, and it is expected that such shared use will continue in the future. No assurances can be given that the application of the Intangible Property of the Adviser and certain of its related persons, both to the activities of the Fund as well as the activities of others, would not materially adversely affect the Adviser’s clients. The use or non-use of any intellectual property by the Adviser with respect to its clients or with respect to any other person shall be determined by the Adviser. Other Activities may create additional incentives for the Advisers and/or its related persons to take actions with respect to a client that they might not otherwise take if they were to consider solely the interests of the client. For example, the Adviser may take into account various non-financial considerations in both the formulation and execution of investment decisions, including environmental, social, political, ethical, corporate governance, and other considerations. The Adviser may conclude that certain actual or potential Investments implicate such non-financial considerations and could therefore result in adverse publicity or regulatory scrutiny and/or undermine the ability of the Adviser and/or its related persons to attract and retain key employees, raise additional capital from investors, and/or maintain relationships with commercial counterparties. As a result, the Adviser may make or dispose of Investments, or forgo investment opportunities, in a manner that it would not have done had it taken into account only financial, economic, operational, and/or legal considerations applicable to its clients. The Adviser has policies to address certain of the conflicts outlined in this Item 10. However, any such policies will not necessarily eliminate the effects of such conflicts of interest. Moreover, in certain instances the application of such policies may result in an economic benefit to certain clients (including DESCO Favorable Funds) or to the Adviser’s related persons and not to other clients, and/or an economic harm to one or more clients.
Deployment and Modification of Investment Strategies and Tools; Exclusive Access;
Shared Strategies; Preferential Access
The Adviser and certain of its related persons have developed, and expect to continue to develop, various investment strategies. Such investment strategies may be distinguished by, among other things, asset class, instrument type, industry sector, geography, data inputs, time horizon, and/or investment approach. Each investment strategy may in turn comprise multiple elements, each of which may reflect a distinct investment thesis that attempts to identify trading opportunities based on various quantitative and/or qualitative factors. The risks described in this brochure with respect to investment strategies generally apply to individual elements of such investment strategies. The trading opportunities identified by each investment strategy are evaluated by the Adviser or its applicable related person on behalf of each Fund that participates in such investment strategy. Moreover, the Adviser and certain of its related persons have developed, and expect to continue to develop, portfolio optimization tools, price forecasting methods, risk management approaches, low latency trading approaches, transaction cost minimization techniques, and/or other tools (each, a “Portfolio Management Tool”) to help execute trades and manage portfolios on behalf of relevant Funds. As outlined in this Item 10, the Adviser and its related persons face conflicts in deciding how to allocate resources and opportunities among the Adviser’s clients (including DESCO Favorable Funds).
Deployment and Modification of Investment Strategies and Tools; Exclusive Access
The Adviser may deploy one or more investment strategies or Portfolio Management Tools (a) on behalf of solely one client, (b) on behalf of a number of clients, or (c) on behalf of certain clients, including SMC Funds and/or other DESCO Favorable Funds, but not other clients. The Adviser and its related persons will determine which investment strategies and Portfolio Management Tools will be deployed on behalf of each client (for example, whether to deploy such items on behalf of a particular client at all and whether other clients will have preferential access to a Shared Strategy (as defined below) or shared Portfolio Management Tool relative to such client). Further, the Adviser and its related persons may (w) deploy a new investment strategy or Portfolio Management Tool, (x) cease to deploy any investment strategy or Portfolio Management Tool, (y) modify any investment strategy or Portfolio Management Tool, or (z) increase or decrease (in either relative or absolute terms) the capital or risk allocated to any investment strategy or Portfolio Management Tool, in each case with respect to any client. Such decisions may have a material adverse effect on the performance of any particular client and may instead benefit other clients (including SMC Funds and/or other DESCO Favorable Funds). In addition, in connection with any such decisions with respect to an investment strategy, a Fund may directly or indirectly engage in transactions with one or more other Funds. For the avoidance of doubt, neither the Adviser nor its related persons have any obligation to deploy any particular investment strategy or Portfolio Management Tool on behalf of any particular client, even if such deployment would be consistent with one or more of such client’s investment objectives and even if such strategy is allocated to one or more other clients (including one or more SMC Funds and/or other DESCO Favorable Funds). In fact, the Adviser and its related persons currently do not, and expect that in the future they will not, deploy on behalf of certain clients certain investment strategies, Portfolio Management Tools, and other opportunities deployed on behalf of various other clients. For example, one or more SMC Funds have been given exclusive access to certain investment strategies with shorter-duration time horizons, which may experience higher returns and/or higher Sharpe ratios (typically with higher operating costs and/or higher turnover) compared to longer-duration strategies. As a result, it is expected that if such an SMC Fund trades in the same or a similar instrument as a Fund that does not have access to such shorter- duration strategies, such SMC Fund will from time to time buy or sell such instrument at a more favorable time than such other Fund buys or sells such instrument, which is likely to have a (possibly material) adverse effect on prices paid or received by the other Fund for such instrument. Therefore, it is possible that such other Fund would experience materially better returns were it able to deploy such investment strategies.
Shared Strategies; Preferential Access
For purposes of this brochure, any investment strategy that is deployed on behalf of more than one of the Adviser’s clients is referred to as a “Shared Strategy,” and each such client is referred to as a “Sharing Investor.” In the case of certain Shared Strategies, certain Sharing Investors (including DESCO Favorable Funds) may be given preferential access, relative to other Sharing Investors, to such Shared Strategies (and resulting Investments). For example, if (a) preferential access has been granted to one or more Sharing Investors with respect to a Shared Strategy and (b) the Adviser or applicable related person determines there is insufficient capacity for all such Sharing Investors to participate in a particular trading opportunity to the full extent of each participant’s desired exposure, then such opportunity would be offered to the relevant Sharing Investors in a specific order of priority, such that the client with the highest priority would have the ability to participate in such opportunity up to its desired exposure, while the client with the next highest priority would have the ability to participate in such trading opportunity only to the extent there was remaining capacity in such opportunity. In the event a Sharing Investor (which may include a DESCO Favorable Fund) is given preferential access, relative to another Sharing Investor, to a Shared Strategy, then such other Sharing Investor may be unable to obtain their desired (or any) exposure to such opportunity. Further, any such preferential access may require such other Sharing Investor to reduce or eliminate its exposure to such Shared Strategy, including by selling its holdings of Investments related to such Shared Strategy. The identity, number, and relative priority of Sharing Investors that participate in a Shared Strategy may vary materially over time. The amount (whether relative or absolute) of each Sharing Investor’s capital invested using a particular Shared Strategy may differ from the amount of any other Sharing Investor’s capital invested using such Shared Strategy, and it is also possible that one Sharing Investor could take a different directional position relative to another Sharing Investor in the same instrument at any point in time due to changes in a given trading opportunity, differences in each participant’s desired exposure, and/or determinations made by the Adviser or its applicable related persons. Thus, the returns experienced by one Sharing Investor in connection with a Shared Strategy may differ materially from those experienced by any other Sharing Investor. Further, the deployment of any Shared Strategy on behalf of multiple Sharing Investors may cause any such Sharing Investor to acquire and/or liquidate certain Investments at less favorable prices, and may reduce the amount of capital such Sharing Investor is able to invest profitably, in each case relative to what would be the case if such Sharing Investor did not participate in such Shared Strategy. As disclosed in the applicable Governing Documents, the Adviser has no obligation to recommend for purchase or sale by its clients any securities that the Adviser, its related persons, and/or personnel of the foregoing may purchase for themselves or for other clients. In addition, the ability of the Adviser to effect and/or recommend transactions for certain or all clients may be restricted due to actual or perceived regulatory requirements in the United States or elsewhere, to the Adviser’s or a related person’s internal policies designed to comply with such requirements, to actual or perceived conflicts of interest, to operational issues, and/or to other issues. Regulatory or contractual limitations related to effecting transactions for certain of the Adviser’s clients may not apply to other clients, resulting in differences among the composition of and return from client portfolios. The Adviser reserves the right not to effect transactions for clients with or through its related persons.
Shared Positions; Conflicting Positions
As disclosed in the applicable Governing Documents, the Adviser may give advice and take action with respect to any of its clients, including SMC Funds and/or other DESCO Favorable Funds, or with respect to the Adviser’s own investments, that may differ from the advice given, or may involve a different timing or nature of action taken, with respect to any one or all other clients that the Adviser or its related persons advise, and thus effect transactions for such clients at prices or rates that may be more or less favorable than for other clients. In addition, the Adviser, its related persons, and/or other clients (including SMC Funds and/or other DESCO Favorable Funds) may hold the same (or the opposite) position in a given security, commodity, or other financial instrument as that held by a client at the same time, and the Adviser and/or its related persons may cause one or more clients to take actions that conflict with actions taken by other clients or that involve a different timing or nature of action taken than with respect to other clients. For example, it is possible that one client would (knowingly or unknowingly) buy or sell certain securities or instruments while another client is undertaking a different (including potentially opposite) strategy with respect to those securities or instruments. To the fullest extent permitted by law, the Adviser and its related persons are not required to seek to eliminate the possibility or effects of any such action. Accordingly, such an action may result in an economic benefit to one client and/or an economic harm to another client. In general, the Adviser will act in the best interests of its clients, subject to applicable law and to any agreement, organizational or other document, or disclosure applicable to a particular client or underlying investor. Any common (or opposing) positions described above may limit the ability of the Adviser to add to the position held on behalf of any particular client, to readily liquidate such a position, or to obtain a favorable price in the course of such liquidation. In effecting transactions for the client, related person, and/or any other persons or entities, it may not always be possible or consistent with the investment objective of the client or of such other persons or entities to take or liquidate the same investment positions at the same time or at the same prices. The “market impact” associated with a liquidation by such other persons or entities may adversely affect a client’s ability to liquidate its position; or where a client’s position is liquidated, the price at which such liquidation occurs; or where a client does not liquidate its position, the mark-to-market value of such position. The Adviser, its related persons, and/or their clients may trade with each other from time to time upon the advice of the Adviser and, as applicable, related persons. The Adviser generally does not itself trade securities on a principal basis with clients. However, certain clients and related persons of the Adviser, including SMC Funds, are deemed principals (and in the future other clients may be deemed principals), based on SEC staff guidance, due to the investment in each such client or related person by the Adviser and controlling persons exceeding 25% of that client’s or related person’s assets. To the extent that the Adviser and/or its related persons (including Funds) engage (or are deemed to engage) in principal securities transactions, any such transactions will comply with applicable law. The Adviser and/or its related persons may have interests in such transactions that are adverse to a particular client. To the extent permitted by applicable law and the applicable Governing Documents, the Adviser and/or its related persons may effect “cross transactions” between the Adviser’s and/or its related persons’ client accounts in which one client will purchase securities held by another client. The Adviser and/or its related persons will direct clients to enter into such transactions only when the transactions are consistent with the best interests of both clients and at a price that the Adviser and/or its related persons believe constitutes best execution for both clients. Neither the Adviser nor any related party receives any commission or commission equivalent in connection with these transactions. Disclosures regarding conflicts of interest and their resolution generally will be contained in the applicable Governing Document, this brochure, and/or another document. Other documents, such as financial or periodic reports, furnished to clients or investors also may contain disclosure regarding conflicts of interest. please register to get more info

Transactions, and Personal Trading
The Adviser has adopted a code of ethics (the “Code”) that establishes the standard of business conduct that must be followed by, among others, all partners, directors, officers, and employees of the Adviser (collectively, “Supervised Persons”). The Code incorporates the following general principles, which all Supervised Persons are expected to uphold: act in the best interests of clients; conduct personal securities transactions in a manner consistent with the Code, which seeks to address certain conflicts of interest in this regard; avoid taking any inappropriate advantage of one’s position at the Adviser; maintain confidentiality of information concerning the Adviser’s securities recommendations and client securities holdings and transactions; and provide accurate disclosure in reports required by auditors, regulators, or government bodies. The Adviser believes that these general principles not only help the Adviser fulfill its obligations undertaken as an investment adviser, but also protect the Adviser’s reputation and instill in employees the Adviser’s commitment to honesty, integrity, and professionalism. The Code also provides guidelines for Supervised Persons regarding adherence to securities laws generally, transactions in personal accounts involving public and private securities and commodities, activities outside of the investment adviser’s business, giving and receiving business-related gifts, and the maintenance and memorialization of certain family and/or close personal relationships. For example, the Code generally requires that all Supervised Persons obtain approval prior to effecting a securities or commodities transaction in a personal or related account for which the employee exercises control. In addition, the Code encourages all Supervised Persons to report Code violations and outlines potential sanctions for such violations. The Adviser’s Chief Compliance Officer is responsible for various aspects of the Code’s administration, including without limitation the monitoring and review of personal securities and commodities transactions of Supervised Persons, and is available for any questions Supervised Persons have regarding the Code. The Adviser will provide a copy of the Code to any client or prospective client upon request and may elect to provide a copy of the Code to investors in the Funds. Please see Item 10 for additional information regarding certain conflicts of interest arising from circumstances in which the Adviser recommends to clients, or buys or sells for client accounts, securities in which the Adviser or its related persons is invested (or is buying or selling) or otherwise has a financial interest. please register to get more info

Generally, the Adviser is authorized by each client to determine the financial institution or counterparty to be used, if any, for each transaction executed on behalf of such client. In selecting such financial institutions and counterparties for transactions, the Adviser seeks to obtain the best execution of transactions for its clients under the circumstances (consistent with what it believes to be the best overall interests of the client), but need not solicit competitive bids, and does not have an obligation to seek the lowest available commission cost. The price offered by a financial institution or counterparty, including commissions and commission equivalents, if any, and other transaction costs, is normally an important factor in this decision, but financial institution and counterparty selection also takes into account the overall quality of the execution services offered, including without limitation such factors as: execution capability; willingness and ability to commit capital; creditworthiness and financial stability; clearance and settlement capability; ability to maintain confidentiality; the provision of research and other services; and potential or perceived conflicts between clients of the Adviser and its related persons. Accordingly, transactions will not always be executed at the best price or the lowest available commission. In addition, the Adviser is not required to negotiate “execution only” commission rates; thus, the clients may be deemed to be paying for other services provided by the financial institution that are included in the commission rate, and the Adviser may benefit to the extent it does not itself produce or pay for such services. Subject to its duties under the express terms of any applicable agreement and under applicable law, the Adviser may determine eligibility of and/or direct transactions or commissions to certain broker- dealers, exchanges, or other financial institutions and counterparties (or their affiliates) that are direct or indirect owners of the Adviser, are owned directly or indirectly by the Adviser, or are otherwise affiliated with the Adviser; have made (or whose affiliates have made or directed) investments in Funds advised by the Adviser or a related party; or may be willing to furnish other services for the benefit of the Adviser or a related party. In the latter case, such services will include only brokerage and research services that are deemed to fall within the safe harbor provided by Section 28(e) of the Exchange Act or any amendment or successor to such provision. Such services may include the provision of information on economic trends or conditions, political developments, industries, groups of securities, individual countries, and individual companies, as well as brokerage services or communication services related to the execution, clearing, and settlement of transactions. Research or other services obtained in this manner may be used in servicing any or all clients of the Adviser and may be used in connection with advisory accounts other than those that pay commissions and commission equivalents to the financial institution relating to the research or other service arrangements. The receipt of such services from particular financial institutions or counterparties may cause the Adviser to have an incentive to select or recommend such financial institutions or counterparties rather than financial institutions or counterparties from which the Adviser’s clients would receive the most favorable execution. The appropriateness of brokerage commissions is evaluated by the Adviser on an ongoing basis. Clients may need to maintain and use a number of brokerage accounts to facilitate the various trading strategies deployed by the Adviser. Nevertheless, the clearing, settlement, and custody of client positions may be carried out by a limited number of counterparties and, depending on the Investment, may require negotiation on a transaction-by-transaction basis. This may create a concentration of exposure to the creditworthiness of the counterparties carrying out such clearing, settlement, and custody. Any failure of any such counterparty could have, and has had in the past, a material adverse effect on clients. When portfolio decisions are made contemporaneously for multiple clients, including SMC Funds and/or other DESCO Favorable Funds, in the same instrument, the Adviser may, if consistent with market conditions, client characteristics, and applicable law, bunch or aggregate client orders (including orders for clients in which the Adviser, its related persons, and/or its personnel have beneficial interests) for execution. Such bunched or aggregated orders might facilitate execution and may reduce brokerage and other costs. The Adviser, however, is not required to bunch or aggregate orders if (a) portfolio management decisions are not made contemporaneously, (b) the Adviser determines that it would be consistent with its investment management duties or the interests of its clients not to do so, or (c) bunching or aggregating is not practical operationally or otherwise. Because of prevailing trading activity, it is frequently not possible to receive the same price or execution on the entire volume of positions purchased or sold in such bunched or aggregated orders. When this occurs, the Adviser (in its sole and absolute discretion) may charge or credit clients participating in the bunched or aggregated order with the average price of the various prices received for that order, or alternatively, may charge or credit such clients with a price determined in good faith to be an appropriate price. Positions purchased or sold in a bunched transaction are allocated to the participating clients using methods determined by the Adviser in its sole discretion (which methods may include pro rata by assets under management or by proportionate order size). The Adviser may, however, increase or decrease the transaction amount allocated to each client if necessary to avoid holding odd-lots or small numbers of positions for particular clients. If the Adviser is unable to or does not fully execute a bunched transaction or the Adviser determines that it would be impractical to allocate a small number of positions among all of the accounts initially intended to participate in the transaction, the Adviser may allocate such positions in a manner determined in good faith to be an appropriate allocation. Although it is anticipated that the bunching or aggregation of orders will benefit each client overall, aggregating orders may disadvantage certain clients, including without limitation by resulting in shared allocations of orders or worse execution prices for client orders. Alternatively, not aggregating orders may disadvantage certain clients, including without limitation by resulting in higher costs or worse execution prices for client orders. In addition, in cases in which the Adviser bunches or aggregates orders on behalf of its clients, some executing brokers, clearing brokers, other counterparties, or trading facilities may require or request that a single entity be the party to the contract that covers all of the trades with the Adviser’s clients. Where one of the Adviser’s clients is the party to such a contract, it will bear the risk that one of these other clients would default on its portion of any trade, and that the client that is the party to the contract would be liable for the defaulted obligation. Where one of the Adviser’s clients is not the party to such a contract and is allocated a portion of a trade, it may bear the risk that the client of the Adviser that is the party to such contract would default under the contract, which may result in the cancellation of trades made on behalf of the client that is not the party to the contract. Subject to applicable legal restrictions, the Adviser or its related persons may execute transactions in which it or its related persons act as broker or principal, as applicable, and may also execute transactions in which the Adviser and/or its related persons have an interest, as outlined in Item 10. The Adviser’s related persons may also have independent authority to determine and direct the execution of the Adviser’s clients’ portfolio transactions, within the objectives, risk and liquidity profiles, and policies (if any) specified by each client or outlined in the applicable Governing Document and/or other written agreement with a client, subject to the same policies and restrictions outlined above and applicable law. The Adviser attempts to correct any identified trade errors unless it determines that doing so would not be in the interest of the applicable client. As with all other financial gains and losses attributable to Investments, any financial gains or losses resulting from trade errors generally are borne by the applicable client and underlying investors, subject to the terms of the applicable Governing Document. When trading on behalf of multiple clients, the Adviser endeavors to allocate investment opportunities among such clients in a fair and equitable manner. The Adviser’s allocation of trades may vary based on, among other things, differences in investment objectives, capital constraints, and/or leverage preferences among clients, and any anticipated increase or decrease of any particular client’s assets under management. In some cases, the Adviser may elect to execute a single transaction, and to allocate a portion of the resulting position to multiple Funds, including SMC Funds and/or other DESCO Favorable Funds, with the actual allocation being determined by the Adviser. Positions purchased or sold in such a transaction will generally be allocated using a pro rata method, though the Adviser may at times employ other methods in an effort to achieve an allocation that is fair and equitable (as determined by the Adviser). The Adviser’s policies and procedures for allocating trades among multiple clients were developed by the firm’s relevant senior management and compliance personnel, and the Adviser does not alter such allocation policies without the approval of such personnel. The Adviser does not currently participate in directed brokerage. please register to get more info

For each of the Adviser’s investment strategies, a strategy head and/or other supervisors are responsible for reviewing trading data and other reports on a regular basis and overseeing the trading activity performed on behalf of the Adviser’s clients within such investment strategy. Such reviews include without limitation a verification that actual trading activity is consistent with the intended strategy, an analysis of risks associated with a particular strategy, and a determination that trading is undertaken in compliance with applicable regulations. Certain of the principal executive officers of the Adviser or its affiliates may review investment strategies periodically. In addition, the Adviser uses independent third parties to conduct financial audits of the accounts of its clients, and the Compliance Department reviews certain other aspects of regulatory compliance. The frequency of all such reviews is determined as warranted by the purpose of the review and other circumstances. In addition to reports required by applicable law, the Adviser provides reports in accordance with the applicable Governing Document or other written agreements with particular clients or underlying investors in Funds. The Adviser provides clients and/or underlying investors in Funds with written reports on a periodic basis that generally include, among other things, the net asset value or the capital balance of such client’s or investor’s account and a measure of performance based on the change in valuation of such client’s account or the applicable Fund during the report period. In addition, with respect to many of the Funds, an independent third-party administrator and other independent third parties conduct an independent monthly verification of the Adviser’s pricing of the investment positions held directly or indirectly by each such Fund. The independent third-party administrator provides a monthly letter to investors in such Funds that confirms, among other things, the accuracy of the capital balances and of certain monthly performance information reported by the Adviser or the Adviser’s related persons to those investors, the performance of an independent pricing verification, and the percentage (if any) of the relevant Fund’s investments for which the independent third party was unable to verify prices. please register to get more info

The Adviser and its related persons generally do not directly or indirectly compensate any person (other than supervised persons of the Adviser or its related persons) for client referrals. The Adviser has entered into capital introduction agreements with certain financial institutions; under these arrangements, the financial institution does not receive compensation for this service. Further, the Funds may engage, and in the past have engaged, internal and/or external placement agents for placement of interests in the Funds. please register to get more info

Client assets are generally held in custody by unaffiliated qualified custodians; however, the Adviser is deemed to have custody of certain client assets. Fund investors do not receive account statements from the custodian; rather, the Funds are subject to an annual audit, and the audited financial statements are distributed to each Fund investor. please register to get more info

The Adviser accepts discretionary authority to manage securities on behalf of its clients. The terms and procedures governing assumption of this authority are set forth in the applicable Governing Document. please register to get more info

The Advisers Act generally requires investment advisers to vote all proxies within their authority. The Adviser does not vote proxies where it does not have the authority to do so or where the cost of doing so, in the opinion of the Adviser, would exceed the expected benefits to the applicable client. The Adviser generally votes most shares through and in accordance with the recommendations of an independent third-party proxy voting service (the “Voting Service Recommendations”). The Adviser believes that the independent third-party proxy voting service’s internal policy regarding conflicts of interest, including the use of information barriers, addresses adequately its potential conflicts of interest. The Adviser has designated particular employees to review certain proxy matters. When the designated employees believe that the Voting Service Recommendation may be contrary to the best interest of a client, the designated employees may consider an alternative vote, in which case they must obtain the approval of the Chief Compliance Officer and a Managing Director, or their respective designees, before instructing the proxy voting service to vote the applicable proxy. For the avoidance of doubt, the Adviser retains the authority to vote proxies, has not delegated such authority to any other party, and may vote against any Voting Service Recommendation if it determines such recommendation may be contrary to the client’s best interests. Additionally, the Adviser has established written policies and procedures designed to ensure that shares owned by a client to which the Adviser provides advice are voted in the best interest of such client (the “Proxy Voting Procedures”). The Adviser will provide a copy of the Proxy Voting Procedures to any client or prospective client upon request and may elect to provide a copy to underlying investors in Funds. please register to get more info

The Adviser does not require or solicit prepayment of fees more than six months in advance. The Adviser has not been the subject of a bankruptcy petition at any time during the past ten years. please register to get more info