Fundamental Advisors LP (“Fundamental Advisors,” “Fundamental,” “we” or “us”) acts as the discretionary investment adviser to U.S. private investment vehicles that we or a related entity sponsors (“fund clients”). Fundamental Advisors’ core investment strategy is primarily to pursue a diverse array of special situation opportunities within and related to the municipal bond market or assets otherwise having significance to the functioning or development of a community, which assets we refer to as “public purpose assets,” to achieve long-term capital appreciation and current income. Fundamental Advisors seeks to achieve its objective by targeting control-oriented investments in stressed and distressed assets or securities, financing the development or revitalization of public purpose assets, or acquiring undervalued securities in the secondary market. Fundamental Advisors’ strategy also uses over-the- counter derivatives, such as total return swaps, interest rate swaps and credit default swaps where we believe these instruments provide a desired exposure and to hedge exposure and risk. The investment objectives, strategies, fees and risks of each fund client and other material information, are set forth more fully in the fund clients’ confidential offering documents, which are available to investors and qualified prospective investors with whom Fundamental Advisors or its agents have a pre-existing substantive relationship. Fundamental Advisors believes its strategy positions the fund clients to benefit from evolving market dynamics in the municipal bond market.

Fundamental Advisors primarily targets (i) controlling interests in municipal revenue bonds, (ii) assets eligible for municipal financing and (iii) either debt secured by or direct ownership interests in public purpose assets. In many cases, debt securities that the fund client acquires will be in default, in violation or near violation of debt covenants, or will be secured by assets/businesses in need of restructuring or rehabilitation. On an opportunistic basis, the fund client may also invest in general obligation bonds, revenue bonds, or other securities where there is no control element but for which a compelling investment opportunity exists.

Fundamental Advisors is a limited partnership formed in Delaware in 2007. Fundamental Advisors Group LLC, also formed in Delaware in 2007, is Fundamental Advisors’ general partner as well as the general partner of Fundamental Advisors Holdings L.P., a Delaware limited partnership which is Fundamental Advisors’ principal owner. Laurence Gottlieb acts as Fundamental Advisors’ Chairman and Chief Executive Officer and is also the managing member of the general partner. Mr. Gottlieb is also indirectly Fundamental Advisors’ principal owner as the sole limited partner in Fundamental Advisors Holdings L.P. Mr. Gottlieb is assisted by a senior management team and senior investment team. FCO Advisors LP (“FCO”), a related investment adviser to Fundamental Advisors, which is also registered as an investment adviser under the Advisers Act, and FIO Advisors LP (“FIO”), a relying adviser of FCO, share certain non-investment personnel with Fundamental Advisors. As a result of their activities on behalf of FCO, FIO and Fundamental Advisors, such personnel may have conflicts in allocating their time, services and functions as between FCO and FIO and their advised funds and accounts and Fundamental Advisors and its advised funds. As of December 31, 2018, Fundamental Advisors had $1,560,267,031 of regulatory assets under management. please register to get more info

All of our fund clients currently are investment vehicles exempted from the definition of investment company by Section 3(c)(7) of the Investment Company Act of 1940 and we would expect any new fund clients to be “qualified purchasers” or private funds with “qualified purchaser” investors. Our fees and other compensation are set forth in the agreements between Fundamental and our fund clients and are disclosed to investors through the offering documents for the vehicles. Fundamental’s fees generally consist of a management fee that is a flat percentage of capital commitments or invested capital (depending on the lifecycle of the relevant fund client) and a carried interest to Fundamental Advisors or a related person in the profits of the fund client. The governing documents generally permit Fundamental to negotiate different fees with investors and to waive the fees for certain affiliates, principals and employees.

The fund client’s administrator calculates the management fees in the place of the general partners of the fund clients, and Fundamental causes fund clients to pay them to the general partner or to Fundamental. Fundamental Advisors’ management fees are fixed based either on committed capital or invested capital as set forth in the relevant fund client documents and are not refundable unless the general partner is removed as described in the fund client’s offering documents. In general, in the event of a return of capital, if any, investors in Fundamental Advisors’ fund clients are entitled to a return of their contributed capital plus a preferred return before Fundamental Advisors or its related persons are entitled to any carried interest.

Fundamental Advisors typically applies any fees (other than fees to Fundamental Asset Management LLC (“FAM”) for operation of the portfolio investments described below) it or its related persons receive from third parties related to investments of its fund clients, such as directors’ fees, advisory, monitoring, transaction, break-up or similar fees to offset the management fees. To the extent the amount of such transaction fees exceeds the amount of management fees expected from the relevant fund client over the following twelve-month period, Fundamental Advisors typically pays such excess to the applicable fund client.

Each Fundamental Advisors fund client typically pays its own organizational and offering expenses incurred in connection with fund formation and the offering of interests (which may include placement agent fees), up to an agreed upon cap with any excess used as an offset to the management fee. The fund clients also bear all regulatory costs (including expenses related to Form PF, and Commodities Futures Trading Commission and National Futures Association filings, if any) and costs of their investments and expenses incurred in connection with the evaluation, acquisition, holding, monitoring, refinancing, recapitalization, disposition or proposed disposition of any investments (including private placement fees, taxes, brokerage fees, sales commissions, underwriting commissions and discounts, appraisal and valuation fees, asset management fees and legal, accounting, administrator and consultant fees). Fund clients also bear all costs related to the investments, such as research, borrowing costs, transaction expenses, indemnification expenses of the fund client, investor communication expenses, all unreimbursed out-of-pocket expenses of the fund client relating to unconsummated transactions (including legal, accounting and consulting fees, and expenses that would have been borne by co-investors if the transaction were consummated), fees relating to audit services, the preparation of financial and tax reports, portfolio valuations and tax returns of the fund client, interest on permitted borrowings made by the fund client, the costs of any litigation, director or officer liability or other insurance and indemnification or extraordinary expense or liability relating to the affairs of the fund client, liquidating expenses, any taxes, fees or other governmental charges levied against the fund client and all expenses incurred in connection with any tax audit, investigation, settlement or review of the fund client and all other expenses of the fund client, but excluding expenses to be paid by its general partner, FAM or Fundamental Advisors. To the extent that expenses are incurred in connection with an investment in which a fund client, a parallel fund, an alternative investment vehicle and/or another Fundamental Advisors client participate, such costs incurred by a fund client and such client generally will be borne pro rata based on the amount invested by each entity. Each fund client is obligated to reimburse Fundamental and its affiliates for any such costs advanced by it on behalf of the fund client.

Fundamental Advisors’ fund clients also pay investment expenses of FAM, a Delaware limited liability company formed by Fundamental Advisors in 2009, in the form of a fee for providing monitoring and supervisory services for various fund client holdings. FAM’s responsibilities mainly include analyzing an asset’s physical condition and operating performance, supervising property managers, and reviewing and overseeing the execution of capital improvement plans. Notwithstanding Fundamental Advisors’ belief that the rendering of such services to the fund client provides an important benefit to the fund client, this arrangement creates a potential conflict of interest for Fundamental Advisors as it, in its capacity as a member of FAM, has an interest in the fees received by FAM. To minimize the potential conflict of interest created by this arrangement, to the extent FAM’s fees exceed its operating costs, a pro rata share of such excess fees will be used to reduce Fundamental Advisors’ management fee from the applicable client.

As part of a shared services level agreement, Fundamental Advisors provides for associated staff and resources to support and facilitate the management and operations of FCO and FIO as well as related expenses for financial and tax reporting, legal, compliance, human resources and administration. FCO and FIO reimburse Fundamental Advisors for these expenses.

Fees and expenses are allocated to fund clients in accordance with the expense allocation policies and procedures adopted by Fundamental Advisors, FCO and FIO. Such general expense allocation policies and procedures are subject at all times to any specific allocation provisions set forth in a fund client’s offering documents or separate account client’s account documents. For private equity fund clients managed by Fundamental Advisors and fund clients managed by FCO or FIO (including separate account clients), deal related expenses are generally allocated based upon the percentage of capital deployed by the respective client(s) into the deal. Deal expenses relating to potential investments that were never consummated are, in the case of private equity fund clients, typically allocated in the same manner as deal expenses, with the exception that capital was never deployed by the funds and must be allocated based upon expected deployment. Where a co-investment was contemplated, the allocation typically will take into account the expected investment by co-investor(s) only when the respective adviser receives a formal commitment to participate. In the case of hedge fund clients, such dead deal expenses are typically allocated in the same manner as deal expenses, if consistent with the underlying offering documents or other account documents and if the potential investment was eligible for allocation to such client. Notwithstanding the foregoing, Fundamental Advisors, FCO and FIO may use other methods to allocate fees and expenses among clients in any manner that they deem appropriate in their sole discretion. Current and prospective investors in fund clients of Fundamental Advisors should refer to the private placement memorandum or other offering documents of the respective fund client for detailed information with respect to the fees and expenses they may pay in connection with an investment in such fund client. The information contained herein is a summary only and is qualified in its entirety by such documents. please register to get more info

Fundamental Advisors or its related persons have a carried interest in each fund client that is a private equity fund and may also participate in parallel vehicles in which investors may co-invest with the fund clients. Further, although Fundamental Advisors generally agrees with each fund client not to sponsor any additional fund with substantially similar investment strategies until the capital commitments for the existing fund client are at least 75% invested (although may not be deployed), there are times when Fundamental Advisors manages m u l t i p l e fund clients that are in their investment periods. To the extent the carried interest in one fund client is greater or the overall performance of one fund client is better than another, Fundamental Advisors may have an incentive to allocate promising investments to the fund client that would result in a greater carried interest to Fundamental Advisors and its related persons. The level of anticipated carried interest is not a consideration in such allocation decisions.

Fundamental, which is responsible for the investment decisions made on behalf of its fund clients, is responsible directly or indirectly for investment decisions made on behalf of other investment vehicles. Fundamental may take action with respect to its fund clients that differs from that taken with respect to other pooled investment vehicles advised by Fundamental or its affiliates. Fundamental Advisors has sole discretion to allocate investment opportunities among its fund clients and no particular fund client has a priority claim on any type of investment. Where an investment is appropriate for multiple fund clients, Fundamental Advisors will allocate such investment among them in a way it determines is appropriate bearing in mind, among other things, the size, investment objectives, risk tolerance, return targets, diversification considerations, eligibility to participate in such investment, available capital, permissible and preferred asset classes’ time horizon, and liquidity needs of each fund client. please register to get more info

Fundamental currently manages the assets of U.S. privately offered pooled investment vehicles for which its related persons act as general partner or sponsor, as well as certain parallel and alternative investment vehicles. The fund clients’ structures most resemble those of “private equity funds” and would be considered “private funds” for purposes of the Advisers Act. please register to get more info

Fundamental Advisors principally invests its fund clients’ assets in distressed and special situation opportunities within the municipal markets. Fundamental Advisors pursues a diverse array of special situation opportunities within and related to the municipal bond market or assets otherwise having significance to the functioning or development of a community, which assets we refer to as “public purpose assets,” to achieve long-term capital appreciation and current income. Fundamental Advisors seeks to achieve its objective by targeting control oriented investments in stressed and distressed assets or securities, financing the development or revitalization of public purpose assets, or acquiring undervalued securities in the secondary market. Fundamental Advisors’ strategy also uses over-the-counter derivatives, such as total return swaps, interest rate swaps and credit default swaps where we believe these instruments provide a desired exposure and to hedge exposure and risk, and we may in the future access the futures markets for these purposes.

Fundamental Advisors uses a multi-step approach in implementing its investment strategy that consists of: (i) sourcing investment opportunities, (ii) performing extensive due diligence on prospective investments (mindful of viable exit strategies), (iii) assessing value, (iv) actively managing the investment, and (v) evaluating appropriate exit alternatives.

Fundamental Advisors targets industries in which the investment professionals of Fundamental Advisors have prior experience and relies on their strong network of relationships. Fundamental Advisors’ underwriting and investment procedures attempt to identify investments that typically have floor values equal to the hard assets securing such securities, which we believe minimizes investment risk and provides favorable risk/reward characteristics. Fundamental Advisors seeks to minimize concentration risk by diversifying fund clients’ portfolios among sectors and geographies on the basis of absolute capital committed.

Fundamental Advisors records, categorizes and tracks each potential investment. Once an opportunity is identified and approved to proceed to the investment analysis stage, Fundamental Advisors devotes significant resources to up-front due diligence, among other things. Such up- front due diligence generally includes: a thorough review and analysis of financial statements, on- site property visits, meetings with management and local industry professionals, engaging third- party professionals to aid in valuation, sculpting appropriate exit strategies, seeking strategic input from industry consultants, and engaging attorneys to review bond or loan documents. Once a transaction has materialized, Fundamental Advisors aims to drive value in the underlying assets through, among other things, rehabilitation, restructuring, bankruptcy or recapitalization and the overhaul of the management or marketing function related to the underlying asset. To this end, Fundamental Advisors will leverage its experience along with extensive relationships with seasoned, third-party, industry professionals and affiliates of Fundamental Advisors. During the investment hold period, Fundamental Advisors conducts frequent on-site visits to assess the condition of the asset, participates in strategic and tactical meetings with management, performs ongoing reviews of financial statements, and assesses the external factors impacting the underlying assets/businesses. As appropriate, Fundamental Advisors will actively change management, engage consultants or other advisors, or make capital improvements to assets. This active monitoring is intended to allow Fundamental Advisors to manage its clients’ investments to produce attractive returns.
Material Risks
Investing in debt and the municipal market involves risk of loss that the investors in fund clients should be prepared to bear. An investment in a fund client involves a high degree of risk, and is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in such fund client. There can be no assurance that the investment objective of any fund client will be achieved, that any fund client will otherwise be able to successfully carry out its investment program, or that an investor will receive a return of its capital contributed to any fund client. A brief explanation of the material risks associated with Fundamental Advisors’ principal investment strategy and methods of analysis follows. Please note that the following is not meant to be an exhaustive listing of all potential risks associated with investing in a fund client. Additional risk factors are set forth in the offering documents for each fund client provided to investors and potential investors. The following summary of risks is qualified in its entirety by the respective fund client’s offering documents.


• Distressed Municipal Debt Investing Risks. Investments in distressed municipal debt are subject to various risks that are not generally found in investments in other types of securities. The assets underlying such municipal debt will typically have significant risks as a result of business, economic or legal uncertainties. They likely will be experiencing financial or operational difficulties or be otherwise out of favor. Such securities are typically illiquid and may be considered speculative. The ability of Fundamental Advisors to manage and rehabilitate the assets underlying such securities could be adversely affected by interest rate movements, changes in the general economic climate or the economic factors affecting a particular industry, or specific developments related to such underlying assets. Any such underlying assets that are operating in workout or bankruptcy modes present additional legal risks, including fraudulent conveyance, voidable preference and equitable subordination risks. Prices of the portfolio investments may be volatile or difficult to gain third party validation of, and a variety of other factors that are inherently difficult to predict or evaluate, such as domestic or international economic and political developments, may significantly affect the results of the fund clients activities and the value of its portfolio investments. As part of Fundamental Advisors’ strategy to restructure and rehabilitate the assets underlying the municipal bonds in which the fund clients invest, the fund clients may hold various types of other securities, including secured and unsecured notes. There can be no assurance that Fundamental will correctly evaluate the nature and magnitude of the various factors that could affect the value of, and return on, such portfolio investments.
• Municipal Bond Risks. There are two common types of municipal bonds, general obligation bonds and revenue bonds. Both general obligation bonds and revenue bonds are typically issued by or on behalf of the political subdivisions, agencies or instrumentalities of states, territories and possessions of the United States and the District of Columbia to obtain funds for a wide range of public facilities including housing projects, industrial projects, hospitals, schools, mass transportation, stadiums, water and sewer systems and highways. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to obtain funds for many types of local, privately operated facilities (such debt instruments are considered municipal obligations if the interest paid on them is exempt from federal income tax). General obligation bonds are backed by the “full faith and credit” of the governmental entity issuing the bonds. The creditworthiness of general obligation bonds is primarily based upon the “ability to pay”, generally defined by the overall financial health of the issuer and its “willingness to pay” generally determined by the history of fiscal responsibility, necessity of market access and current political climate. Revenue bonds are municipal bonds that finance income-producing projects and are payable only from the revenue derived from a particular project, facility or specific revenue source. Unlike general obligation bonds, revenue bonds are not payable from the general taxing power of the municipality and holders of revenue bonds typically have no claims on the issuer’s other resources. The primary source of repayment and collateral for revenue bonds generally consists of revenue from the underlying project (fees, rent, tolls, concessions, etc.), generally, a senior lien on the underlying asset and an obligation for repayment by the sponsor. Municipal revenue bonds may carry a higher default risk than general obligation bonds. Not only are they not backed by the full faith and credit of a municipality, but the income from the projects funded by revenue bonds cannot be predicted with certainty. If the projects do not produce enough revenue, the bonds may default. The success of revenue bonds ultimately depends on the projects’ ability to produce revenue. Projects backing distressed municipal revenue bonds in which Fundamental Advisors expects to invest will typically be experiencing financial or operational difficulties, which heightens the risk that sufficient revenue will not be generated. If Fundamental is unable to manage and rehabilitate the assets underlying such bonds and improve the prospect for revenue generation, the value of the fund client’s investment in such bonds will likely decline.

Each type of municipal obligation may be more or less susceptible to downgrades or defaults during recessions or similar periods of economic stress. The value of the fund client’s investments in municipal revenue bonds will be affected by local, state, regional and national factors. These may include economic or policy changes, erosion of the tax base, legislative changes (especially those regarding taxes) and the possibility of credit problems. Any such changes or events may adversely affect the value of the fund client’s investments.

For example, the fund clients may invest in municipal revenue bonds issued to fund housing projects. Successful operation of a commercial or multifamily real estate project is dependent upon, among other things, economic conditions generally and in the area of the project, fluctuations in interest rates, the degree to which the project competes with other projects in the area, construction and operating costs and the performance of the management agent. In some cases, that operation may be affected by circumstances outside the control of the borrower or lender, such as the deterioration of the surrounding neighborhood, the imposition of rent control or changes in tax laws. The ability of Fundamental to rehabilitate the housing projects underlying such bonds will be affected by such factors, which could have a negative impact on the value of the fund client’s investment in such bonds. In addition to being downgraded, an insolvent municipality may file for bankruptcy. The reorganization process of a municipality’s debts has little precedent and may significantly affect the rights of creditors. Moreover, there is political risk that state legislatures or municipal authorities will seek to interfere with or rescind the revenue streams required for the issuer to satisfy its obligations, leaving the creditor with no recourse. This risk exists for both performing and non- performing or defaulted obligations. Furthermore, states and municipalities face uncertainty in respect of federal mandates, federal assistance and subsidies, a rapidly changing and unpredictable regulatory landscape and other political and regulatory policy changes, any of which may adversely affect the performance of municipal obligations. There is no guarantee that Fundamental Advisors will be able to anticipate these risks effectively.
• Tax Risk Associated with Tax-Exempt Municipal Bonds. The fund client will invest in, among other things, tax-exempt municipal revenue bonds. The interest from such bonds is generally exempt from U.S. federal income tax. The Internal Revenue Code of 1986, as amended (the “Code”) imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds, the payment of rebates to the United States and the registration of certain bonds. Failure by the issuer to comply, subsequent to the issuance of tax-exempt bonds, with certain of these requirements could cause interest on the bonds to become includable in gross income retroactive to the date of issuance, which may reduce the value of the bonds. For example, certain housing authority bonds are subject to special requirements that must be met to preserve the bond’s tax-exempt status. If such requirements are not met, the interest on such bonds may become taxable, the value of the bonds may be reduced, the fund client may be required to sell the bonds at a reduced value and fund client investors may be subject to unanticipated tax liabilities.

The interest payable on the municipal bonds in which the fund client expects to invest may be under forbearance or deferred. Any interest that accrues while such bonds are held by the fund client may be exempt from U.S. federal income tax, and will increase the fund client’s basis in such bonds. There is no guarantee, however, that such interest will have or retain such a tax-exempt status.


• Distressed Securities Risks; Illiquidity. Distressed securities generally are securities of issuers that have either defaulted or appear to be at a heightened risk of doing so. The assets underlying such securities will typically have significant risks as a result of business, economic or legal uncertainties. Although investments in distressed securities may result in significant returns, such investments are subject to greater risks with respect to the issuing entity and to greater market fluctuations than certain higher rated securities and also may not show any return for a considerable amount of time. In fact, many of these securities and investments ordinarily remain unpaid unless and until the entity reorganizes and/or emerges from bankruptcy proceedings, and as a result may have to be held for an extended period of time. In some circumstances, such securities may be converted to equity as part of the reorganization. A wide variety of considerations, including, for example, the possibility of litigation between the participants in a reorganization or liquidation proceeding or a requirement to obtain mandatory or discretionary consents from various governmental authorities or others may affect the value of these securities and investments. The uncertainties inherent in evaluating such investments may be increased by legal and practical considerations that limit the access of Fundamental Advisors to reliable and timely information concerning material developments affecting a company or municipality, or which cause lengthy delays in the completion of the liquidation or reorganization proceedings. The level of analytical sophistication, both financial and legal, necessary for successful investment in companies or municipalities experiencing significant business and/or financial distress is unusually high. There is no assurance that Fundamental Advisors will correctly evaluate the nature and magnitude of the various factors that could affect the prospects for a successful reorganization or similar action. In any reorganization or liquidation proceeding relating to the entity in which the fund client invests, the fund client may lose its entire investment or may be required to accept cash or securities with a value less than the fund client’s original investment. The market values of such bonds tend to be more sensitive to economic conditions than are higher rated securities. Because there is not an established secondary market for many of these securities, including but not limited to bonds, Fundamental Advisors anticipates that such securities could be sold only to a limited number of dealers or institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for higher rated securities. With respect to bonds, the lack of a liquid secondary market may have an adverse impact on market price and Fundamental Advisors’ ability to dispose of particular bonds when necessary to meet a fund client’s liquidity needs or in response to a specific economic event such as a deterioration in the condition or prospects of the project for which such securities were issued. The lack of a liquid secondary market for certain securities also may make it more difficult for Fundamental Advisors to obtain accurate market quotations for purposes of determining the value of a prospective investment or valuing a fund client’s portfolio.

Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of these securities. These securities may be particularly susceptible to economic downturn and be subject to substantial market price volatility. It is likely that any economic recession would disrupt severely the market for such securities and have an adverse impact on their value.

To enforce its rights in defaulted bonds, a fund client may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer’s obligations on the defaulted securities. This will increase the fund client’s operating expenses and could adversely affect the value of its investments.


• Restructuring Risks. Certain fund clients expect to be involved in restructurings involving underlying projects that are experiencing or are expected to experience financial difficulties. These financial difficulties may never be overcome and may cause such projects to become subject to bankruptcy proceedings. Such investments could, in certain circumstances, subject fund clients to certain additional potential liabilities which may exceed the value of fund clients’ original investment therein. For example, under certain circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such actions. Under common law principles that in some cases form the basis for lender liability claims, if a lender (a) intentionally takes an action that results in the undercapitalization of a borrower or issuer to the detriment of other creditors of such borrower or issuer, (b) engages in other inequitable conduct to the detriment of such other creditors, (c) engages in fraud with respect to, or makes misrepresentations to, such other creditors or (d) uses its influence as a stockholder to dominate or control a borrower or issuer to the detriment of other creditors of such borrower or issuer, a court may elect to subordinate the claim of the offending lender or bondholder to the claims of the disadvantaged creditor or creditors (a remedy called “equitable subordination”). Among other things, the nature of the fund clients’ control-oriented investments and Fundamental’s active management of the fund clients’ investments may expose the fund client to such adverse actions or liabilities. Fundamental Advisors does not intend to engage in conduct that would form the basis for a successful cause of action based upon the equitable subordination doctrine; however, because of the nature of the debt obligations, the fund client may be subject to claims from creditors of an obligor that debt obligations of such obligor which are held by the issuer should be equitably subordinated. In addition, under certain circumstances, payments to the fund client and distributions by a fund client to the investors may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, such restructurings may be adversely affected by local statutes relating to, among other things, fraudulent conveyances, voidable preferences, lender liability and the bankruptcy court’s discretionary power to disallow, subordinate or disenfranchise particular claims.

As part of Fundamental Advisors’ strategy to restructure and rehabilitate the assets underlying the municipal bonds or other securities in which fund client’s invest, fund clients may hold various types of securities, including secured and unsecured notes. As a holder of notes, fund clients are subject to the risk that the issuer of the note will default in the payment of the principal and/or interest on the instrument. Further, although the fund client may hold a security interest in certain collateral with respect to such notes, such collateral may turn out to be inadequate, especially if the collateral is “distressed.” Holding such notes may also subject the fund client to the interest rate risk discussed below – if interest rates rise, the value of the notes may decrease.


• Unregulated Transactions. Certain instruments that may be traded by the fund client may not be traded on exchanges and such trading may not be regulated by any government agency. Accordingly, the protections accorded by such regulation will not be available in connection with such investments.


• Risks in Effecting Operating Improvements. The success of the fund client’s investment strategy will depend, in part, on the ability of Fundamental Advisors to restructure and effect improvements in the operations of a portfolio investment. The activity of identifying and implementing restructuring programs and operating improvements with respect to portfolio investments entails a high degree of uncertainty. There can be no assurance that Fundamental Advisors will be able to successfully identify and implement such restructuring programs and improvements.


• Uncertainty of Financial Projections. Fundamental Advisors will generally determine the necessary restructuring and rehabilitation for portfolio investments on the basis of financial projections and other information provided by such portfolio investments. Projected operating results will normally be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed. There can be no assurance that the projected results will be obtained, and actual results may vary significantly from the projections. General economic conditions, which are not predictable, can have a material adverse impact on the reliability of such projections.
• Bankruptcy Risks. Fundamental Advisors expects to invest in securities whose underlying projects may be operating in workout or bankruptcy modes, or may enter into bankruptcy proceedings following investment by certain fund clients. There are a number of significant risks inherent in the bankruptcy process. First, many events in a bankruptcy are the product of contested matters and adversary proceedings and are beyond the control of the creditors. While creditors are generally given an opportunity to object to significant actions, there can be no assurance that a bankruptcy court in the exercise of its broad powers would not approve actions that would be contrary to the interests of the fund client. Second, the effect of a bankruptcy filing on a project may adversely and permanently affect the project. Third, the duration of a bankruptcy proceeding is difficult to predict. The fund client’s return on investment could be adversely affected by delays while the plan of reorganization is being negotiated, approved by the creditors and confirmed by the bankruptcy court and until it ultimately becomes effective. Fourth, the administrative costs in connection with a bankruptcy proceeding are frequently high and will be paid out of the debtor’s estate prior to any return to creditors. For example, if a proceeding involves protracted or difficult litigation, or turns into a liquidation, substantial assets may be devoted to administrative costs. Fifth, bankruptcy law permits the classification together of “substantially similar” claims in determining the classification of claims in a reorganization. Because the standard for classification is vague, there exists the risk that the fund client’s influence with respect to the class of securities it owns can be lost by increases in the number and amount of claims in that class or by different classification and treatment. Sixth, in the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. Seventh, especially in the case of investments made prior to the commencement of bankruptcy proceedings, creditors can lose their ranking and priority if they exercise “domination and control” over a debtor and other creditors can demonstrate that they have been harmed by such actions. Eighth, certain claims that have priority by law (for example, claims for taxes) may be quite significant. Another risk involves the failure of a municipality to pay its creditors on time. Chapter 9 of the U.S. Bankruptcy Code provides a financially distressed municipality with protection from its creditors while it develops and negotiates a plan for adjusting its debts. The commencement of a Chapter 9 bankruptcy case operates as a stay, applicable to all creditors of the municipality, of most efforts to collect prepetition claims. Such a stay would operate to restrict the municipality from making payments of either principal or interest on accounts of its general obligation bonds. In general, numerous important legal issues under Chapter 9 are unsettled and evolving. Accordingly, a Chapter 9 filing by an issuer of securities may result in an adverse effect on the value of general obligation bonds and special revenue bonds. All of the above risks may undermine Fundamental’s strategy of rehabilitating the assets or projects underlying the securities in which the fund client invests, resulting in an adverse effect on the value of those securities.

As part of Fundamental Advisors’ efforts to rehabilitate the assets underlying the fund client’s portfolio investments, Fundamental Advisors may seek to sponsor certain sales under the U.S. Bankruptcy Code which permit a debtor in bankruptcy to sell its assets outside the ordinary course of business. Such sales typically can be accomplished on an expedited basis and prior to proposing a plan of reorganization or liquidation. Although such sales can be an effective way to maximize the going concern value of a project’s assets, and thereby increase the value of the fund client’s investment, such sales must take place within the context of a bankruptcy proceeding and are subject to the bankruptcy rules and bankruptcy court approval. There is no guarantee that such sales can be successfully arranged by Fundamental Advisors to increase the value of the assets underlying the fund clients’ portfolio investments.
• Control Investments. Certain fund clients may make control investments. These investments could expose a fund client to risk of liability for environmental damage, product defect, failure to supervise management, violation of governmental regulations and other types of liability, in which the limited liability characteristics of business operations may be ignored. The fund client may also be exposed to risk in connection with the disposition of these investments. When disposing of these investments, the fund client may be required to make representations and warranties about the business and financial affairs of the investments typical of those made in connection with the sale of any business, or may be responsible for the contents of disclosure documents under applicable securities law. The fund client may also be required to indemnify the purchasers of such investment or underwriters to the extent that any such representations and warranties or disclosure documents turn out to be incorrect, inaccurate or misleading.


• Legislation Risks. From time to time, proposals have been introduced before the United States Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on tax-exempt bonds, and similar proposals may be introduced in the future. The Supreme Court has held that Congress has the constitutional authority to enact such legislation. It is not possible to determine what effects the adoption of such proposals could have on the availability of municipal securities for investment by fund clients and the value of fund clients’ investment portfolios. Recent amendments to some statutes governing security interests (e.g., Revised Article 9 of the Uniform Commercial Code) change the way in which security interests and liens securing municipal securities are perfected. These amendments may have an adverse impact on existing municipal securities (particularly issuers of municipal securities that do not have a corporate trustee who is responsible for filing UCC financing statements to continue the security interest or such lien). In addition, each industry in which Fundamental Advisors determines to invest is exposed to legislative risks that are particular to each such industry.


• Identification of Investments; Competition. Fundamental Advisors’ task of identifying, completing and realizing attractive client investment opportunities is difficult and involves a high degree of uncertainty. Investors in fund clients are relying on the skill of Fundamental Advisors to identify and successfully close on investment opportunities. The availability of investment opportunities generally will be subject to market conditions as well as the prevailing regulatory or political climate. The securities industry generally, and the varied strategies and techniques to be engaged in by Fundamental Advisors in particular, are extremely competitive. Fund clients will be competing for investments with other financial institutions and other investors, including many of the larger securities and investment banking firms, which have substantially greater financial resources and research staffs. Fundamental Advisors expects that competition for appropriate investment opportunities may increase, which could reduce the number of investment opportunities available to fund clients and adversely affect the terms upon which investments can be made. In recent years, there has been a marked increase in the number of, and flow of capital into, investment vehicles established in order to implement alternative asset investment strategies. While the precise effect cannot be determined, such increase may result in greater competition for investment opportunities, or may result under certain circumstances in increased price volatility or decreased liquidity with respect to certain positions. Prospective investors should understand that the fund client may compete with other investment vehicles, as well as investment and commercial banking firms, which have substantially greater resources, in terms of financial wherewithal and research staffs, than may be available to the fund client. Accordingly, there can be no assurance that the fund client will be able to identify and complete attractive investments or that it will be able to invest fully its committed capital. Competitive investment activity by other firms may reduce the fund client’s opportunity for profit by reducing or amplifying the magnitude as well as the duration of the market inefficiencies which it seeks to exploit.
• Limited Number of Investments. Fund clients are expected to make only a limited number of investments, and as a consequence, the aggregate return on certain fund client’s investments may be substantially adversely affected by the unfavorable performance of even a single fund client investment. The value of an interest in a fund client may be more susceptible to any single economic, political or regulatory event than interests in a more diversified fund. Other than as set forth in its operating documents, a fund client has no assurance as to the degree of diversification in its investments, either by geographic region or asset type. Participation in a fund client’s investments by an investor in the fund client may also be limited by virtue of the fund client’s general partner’s right to exclude an investor from participating in any fund client investment if the general partner determines in its discretion that such participation might otherwise have certain materially adverse effects on a fund client investment, the general partner, Fundamental, the fund client or any of their affiliates, including if such participation would be likely to result in violations of law or the imposition of materially burdensome regulatory or legal requirements.


• Long-Term Investments. Investment in a fund client requires a long-term commitment with no certainty of return. Many of the investments of fund clients will be highly illiquid, and there can be no assurance that a fund client will be able to realize on such investments in a timely manner. Although investments by fund clients may occasionally generate some current income, the return of capital and the realization of gains, if any, will occur only upon the partial or complete disposition of any investment. While an investment may be sold at any time, it is expected that an investment will not generally be sold until a number of years after it is made. Prior to such time, there may not be any current return on investment.

Nature and Risks of Investments. The types of investments contemplated by the fund clients are subject to various risks, particularly the risk that the fund client’s will be unable to dispose of their investments by sale or other means at attractive prices or will otherwise be unable to complete any exit strategy. These risks include changes in the financial condition or prospects of the assets underlying the bonds in which the fund clients invest. The fund clients will generally not be able to sell the securities or other portfolio investments publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. In addition, in some cases the fund clients may be prohibited by contract or regulatory reasons from selling certain securities or other assets for a period of time. To the extent that there is no liquid trading market for an investment, the fund clients may be unable to liquidate that investment or may be unable to do so at a profit. Moreover, there can be no assurances that private purchasers for the fund client’s investments will be found. Fundamental Advisors will have broad discretion in making investments for the fund client and expects to utilize highly speculative investment techniques, including leverage, and derivative transactions. There can be no assurance that Fundamental Advisors will correctly evaluate the nature or magnitude of the various factors that could affect the value of and return on investments. Prices of investments may be volatile. A variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may detrimentally impact the value of the securities and other financial instruments in which a fund client invests, including access by the issuers of such securities and instruments to capital and public market valuations. These factors and others may significantly affect the results of the fund client’s activities and the value of its investments.
• Leverage. Fund clients may invest in portfolio investments with leveraged capital structures and Fundamental Advisors and/or related persons of Fundamental Advisors will seek to use leverage in a manner it believes is prudent. Use of leverage is a speculative investment technique and involves certain risks to investors in fund clients. The use of leverage creates an opportunity for increased income and gains to investors but also increases the risk of loss of capital. To the extent that any investment is made in a portfolio investment with a leveraged capital structure, such investment will be subject to increased exposure to adverse economic factors such as a significant rise in interest rates, a severe downturn in the economy, or deterioration in the condition of such portfolio investment or its industry. In the event that such a portfolio investment is unable to generate sufficient cash flow to meet principal and interest payments on its indebtedness, the value of a fund client’s investment in such portfolio investment could be significantly reduced or even eliminated.

Additionally, underlying portfolio investments may be subject to restrictive financial and operating covenants as a result of their leverage. This leverage may impair these portfolio investments’ ability to finance their future operations and capital needs. As a result, their flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged entity’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

The fund client may achieve leverage through, among other methods, purchases of securities on margin and the use of options, futures, contracts for differences, swaps and other derivatives. The access to capital could be impaired by many factors, including market forces or regulatory changes. There could also be other factors more specific to the fund client, such as fraud on behalf of one of its employees.

The use of margin and short-term borrowings creates several risks for the fund client. If the value of the fund client’s securities falls below the margin level required by a prime broker, the fund client could be subject to a “margin call,” pursuant to which the fund client must deposit additional funds or securities with such prime broker. If the fund client is unable to satisfy any margin call by a prime broker, then the prime broker could liquidate the fund client’s positions in some or all of the financial instruments that are in the fund client’s accounts at the prime broker and cause the fund client to incur significant losses. The failure to satisfy a margin call, or the occurrence of other material defaults under margin or other financing agreements, may trigger cross-defaults under the fund client’s agreements with other brokers, lenders, clearing firms or other counterparties, multiplying the adverse impact to the fund client. In addition, because the use of leverage allows the fund client to control positions worth significantly more than its investments in those positions, the amount that the fund client may lose in the event of adverse price movements is high in relation to the amount of its investment. In the event of a sudden drop in the value of the fund client’s assets, the fund client might not be able to liquidate assets quickly enough to satisfy its margin requirements. In that event, the fund client may become subject to claims of financial intermediaries that extended “margin” loans. Such claims could exceed the value of the assets of the fund client. The banks and dealers that provide financing to the fund client can apply essentially discretionary margin, haircut, financing and collateral valuation policies. Changes by banks and dealers in any of the foregoing may result in large margin calls, loss of financing and forced liquidations of positions at disadvantageous prices. There can be no assurance that the fund client will be able to secure or maintain adequate financing, without which the fund client may not continue to be viable.

The purchase of options, futures, contracts for differences, swaps and other derivatives often involves little or no margin deposit and, therefore, provides substantial leverage. Accordingly, relatively small price movements in these financial instruments may result in immediate and substantial losses to the fund client.

While leverage presents opportunities for increasing the fund client’s total return, it has the effect of potentially increasing losses as well. Accordingly, any event that adversely affects the value of an investment by the fund client would be magnified to the extent the fund client is leveraged. The cumulative effect of the use of leverage by the fund client in a market that moves adversely to the fund client’s investments could result in a substantial loss to the fund client that would be greater than if the fund client were not leveraged.


• Lack of Diversification. Fund clients may not be diversified among a wide range of financial instruments, industries or asset classes. As such, a fund client may be exposed to wider fluctuations in value than otherwise would be the case if the fund client were required to maintain a high degree of diversification among the investments. The fund client may have no restrictions on either the amount of assets that can be invested in a certain industry or the percentage of assets invested in a single security. Therefore, the fund client may be subject to greater risk than diversified portfolios.


• Risks Associated With Hedging. Fund clients may utilize financial instruments to hedge investments and the interest rate risk associated therewith. There can be no assurance that a fund client will hedge when appropriate or choose the correct hedge if it does hedge. The use of hedging transactions involves certain risks. These risks include: (i) the possibility that the market will move in a manner or direction that would have resulted in gain for the fund client had a particular hedging transaction not been utilized, in which case the fund client’s performance would have been better had the fund client not engaged in the hedging transaction; (ii) the risk of imperfect correlation between the risk sought to be hedged and the hedging instrument used; and (iii) potential illiquidity for the hedging instrument used, which may make it difficult or costly for the fund client to close out or unwind a hedging transaction. Additionally, such hedging transactions will add to the cost of the investment, may require ongoing cash payments to counterparties, subject the fund client to the risk that the counterparty defaults on its obligations, and may produce different tax consequences to investors in the fund client than would apply if the fund client had not entered into such hedging transactions. The success of the fund client’s hedging strategy will be subject to Fundamental Advisors’ ability to correctly assess the degree of correlation between the performance of the instruments used in the hedging strategy and the performance of the investments in the portfolio being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the fund client’s hedging strategy will also be subject to Fundamental Advisors ability to continually recalculate, readjust, and execute hedges in an efficient and timely manner. While the fund client may enter into hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance for the fund client than if it had not engaged in any such hedging transactions. For a variety of reasons, Fundamental Advisors may not seek to establish a perfect correlation between such hedging instruments and the risks being hedged. Such imperfect correlation may prevent the fund client from achieving the intended hedge or expose the fund client to risk of loss. In addition, Fundamental Advisors may not hedge a risk inherent in the fund client’s portfolio because a hedge may not be available or is too costly in light of the likelihood of the possible risk actually occurring or because the risk simply could not be reasonably anticipated. Additionally, such hedging transactions will add to the cost of an investment, may require ongoing cash payments to counterparties, subject the fund client to the risk that the counterparty defaults on its obligations, and may produce different tax consequences to the fund client investors than would apply if the fund client had not entered into such hedging transactions.


• Systems Risk. Fundamental Advisors relies on computer programs and systems (and may rely on new systems and technology in the future) in connection with the fund client’s investment activities, including, without limitation, to trade, clear and settle securities transactions, to evaluate investments, to monitor the fund client’s investments, to generate risk management and other reports that are critical to oversight of the fund client’s activities and to store confidential information. In addition, certain of the fund client’s, Fundamental Advisors’ and their affiliates’ operations interface with or depend on systems operated by third-parties such as service providers and market counterparties, and Fundamental Advisors may not be in a position to verify the risks or reliability of such third-party systems. These programs or systems may be subject to certain defects, failures, interruptions or security breaches, including, but not limited to, those caused by computer “worms,” viruses, malware, hacking, social engineering schemes such as “phishing” and power failures. Fundamental Advisors’ operations are highly dependent on each of these systems and the successful operation of such systems is often out of Fundamental Advisors’ control. Any such defect, failure or breach could have a material adverse effect on the fund client, Fundamental Advisors, their affiliates and their clients and investors. For example, systems failures or breaches could cause settlement of trades to fail, lead to inaccurate accounting, recording or processing of transactions, cause inaccurate reports and loss of data, and result in personal client or investor information being compromised, which may adversely affect the ability of Fundamental Advisors to manage the fund client’s investments and risks and to protect confidential information.
• Cybersecurity Risk. As part of its business, Fundamental processes, stores and transmits large amounts of electronic information, including information relating to the transactions of the fund clients and personally identifiable information of the investors. Similarly, service providers of Fundamental and the fund clients, especially the administrator, may process, store and transmit such information. Fundamental has procedures and systems in place that it believes are reasonably designed to protect such information and prevent data loss and security breaches. However, such measures cannot provide absolute security. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Network connected services provided by third parties to Fundamental may be susceptible to compromise, leading to a breach of Fundamental’s network. Fundamental’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats. On-line services provided by Fundamental to the investors may also be susceptible to compromise. Breach of Fundamental’s information systems may cause information relating to the transactions of the fund clients and personally identifiable information of the investors to be lost or improperly accessed, used or disclosed. The service providers of Fundamental and the fund clients are subject to the same electronic information security threats as Fundamental. If a service provider fails to adopt or adhere to adequate data security policies, or in the event of a breach of its networks, information relating to the transactions of the fund clients and personally identifiable information of the investors may be lost or improperly accessed, used or disclosed. The loss or improper access, use or disclosure of Fundamental or the fund client’s proprietary information may cause Fundamental or the fund clients to suffer, among other things, financial loss, the disruption of its business, liability to third parties, regulatory intervention or reputational damage. Any of the foregoing events could have a material adverse effect on the fund clients and the investors’ investments therein.


• Financial Model Risk. Certain of the fund client’s investments and investment strategies require the use of quantitative and qualitative valuation models developed by Fundamental Advisors and third parties. As market dynamics (for example, due to changed market conditions and participants) shift over time, a previously highly successful model often becomes outdated or inaccurate, perhaps without Fundamental Advisors recognizing the change before significant losses are incurred. The fund client’s model risk extends to the valuation of its investments, which may be made on the basis of internal Fundamental Advisors models in the absence of any readily determinable market value. The valuations so determined may differ materially from realized values.


• Ability to Enforce Legal Rights. Because the effectiveness of the judicial systems in certain non-U.S. countries in which the fund client may invest varies, the fund client may have difficulty in successfully pursuing claims in the courts of such countries, as compared to the United States or other developed countries. Furthermore, to the extent the fund client may obtain a judgment but is required to seek its enforcement in the courts of one of the countries in which the fund client invests, there can be no assurance that such courts will enforce such judgment.


• Forward-Looking Statements; Opinions. Statements contained in fund clients’ offering memoranda (including those relating to current and future market conditions and trends in respect thereof) that are not historical facts are based on current expectations, estimates, projections, opinions and/or beliefs of Fundamental. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Moreover, certain information contained in such offering memoranda constitutes “forward-looking” statements, which can be identified by the use of forward-looking terminology such as “may,” “can,” “will,” “would,” “seek,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” “target,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, including those set forth herein, actual events or results, market conditions, investment opportunities or the actual performance of the fund client or its investments may differ materially from those reflected or contemplated in such forward-looking statements.
• Counterparty and Settlement Risk. The fund client is subject to the risk of the inability of any counterparty (including prime brokers) to perform with respect to transactions, whether due to insolvency, bankruptcy or other causes. To the extent the fund client invests in swaps, derivative or synthetic instruments, or other over-the-counter transactions or in certain circumstances, non-U.S. securities, the fund client may take a credit risk with regard to parties with whom it trades and may also bear the risk of settlement default. These risks may differ materially from those entailed in exchange-traded transactions which generally are backed by clearing organization guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. It is expected that Fundamental Advisors will monitor on an ongoing basis the creditworthiness of firms with which it will enter into swaps or other over-the-counter derivatives on behalf of the fund client. If there is a default by the counterparty to such a transaction, the fund client will under most normal circumstances have contractual remedies pursuant to the agreements related to the transaction. However, exercising such contractual rights may involve delays or costs which could result in losses. Furthermore, there is a risk that any of such counterparties could become insolvent. If one or more of the fund client’s counterparties were to become insolvent or the subject of liquidation proceedings in the United States (either under the Securities Investor Protection Act or the U.S. Bankruptcy Code), there exists the risk that payment of amounts that the counterparty owes the fund client or the return of collateral that the fund client has posted to the counterparty will be delayed or otherwise impaired. The insolvency of any counterparty would almost certainly result in a loss to the fund client, which loss could be material.


• Derivative Instruments. The fund client may invest in derivative financial instruments, which include, but are not limited to, futures, options, interest rate swaps, forward currency contracts and credit derivatives such as credit default swaps. In addition, the fund client may from time to time utilize both exchange-traded and over-the-counter, futures, options and contracts for differences, as part of its investment strategy and for hedging purposes, as well as other derivatives. Regulatory restraints may restrict the instruments that the fund client may trade. Such derivative instruments are highly volatile, involve certain special risks and expose investors to a high risk of loss. The low initial margin deposits normally required to establish a position in such instruments permit a high degree of leverage. As a result, a relatively small movement in the price of a contract may result in a profit or a loss which is high in proportion to the amount of funds actually placed as initial margin and may result in unquantifiable further losses exceeding any margin deposited. Further, when used for hedging purposes there may be an imperfect correlation between these instruments and the investments or market sectors being hedged. The trading of over-the-counter derivatives will subject the fund client to a variety of risks including: (i) counterparty risk, (ii) basis risk, (iii) interest rate risk, (iv) settlement risk, (v) legal risk and (vi) operational risk. Counterparty risk is the risk that one of the fund client’s counterparties might default on its obligation to pay or perform generally on its obligations. Basis risk is the risk that the normal relationship between two prices might move in opposite directions. Interest rate risk is the general risk associated with movements in interest rates. Settlement risk is the risk that a settlement in a transfer system does not take place as expected. Legal risk is the risk that a transaction proves unenforceable in law or because it has been inadequately documented. Operational risk is the risk of unexpected losses arising from deficiencies in a firm’s management information, support and control systems and procedures. Transactions in over- the-counter derivatives may involve other risks as well, as there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of a position or to assess the exposure to risk.
• Swap Agreements. The fund client may enter into swap agreements. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the fund client’s exposure to long-term or short-term interest rates (in the United States or abroad), non-U.S. currency values, corporate borrowing rates or other factors such as security prices, prices of baskets of equity securities or inflation rates. Swap agreements can take many different forms and are known by a variety of different names. The fund client is not limited to any particular form of swap agreement if consistent with the fund client’s investment objective and policies. The Dodd-Frank Act mandates the establishment of clearing requirements with respect to standardized swaps and margin requirements with respect to swap agreements that can be expected to impact the manner in which the fund client engages in swap transactions and the margin that the fund client must post in swap transactions, both cleared and uncleared.

Swap agreements tend to shift the fund client’s investment exposure from one type of investment to another. For example, if the fund client agrees to exchange floating rate payments for fixed rate payments, the swap agreement would tend to increase the fund client’s exposure to interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of the fund client’s portfolio. The most significant factor in the performance of swap agreements is the change in the specific interest rate, currency, individual equity values or other factors that determine the amounts of payments due to and from the fund client. If a swap agreement calls for payments by the fund client, the fund client must be prepared to make such payments when due. In addition, if a counterparty’s creditworthiness declines, the value of swap agreements with such counterparty can be expected to decline, potentially resulting in losses by the fund client.


• Fixed Income Securities. The fund client may invest in bonds or other fixed income securities of U.S. and non-U.S. issuers, including without limitation, bonds notes and debentures issued by corporations, debt securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities and bonds and notes issued by states, municipalities, agencies of states or municipalities or by such other governmental entities on behalf of not-for-profit and other organizations. Fixed income securities pay fixed, variable or floating rates of interest. The value of fixed income securities in which the fund client invests will change in response to fluctuations in interest rates. In addition, the value of certain fixed-income securities can fluctuate in response to perceptions of credit worthiness, political stability or soundness of economic policies. Fixed income securities are subject to the risk of the issuer’s inability to meet principal and interest payments on its obligations (i.e., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity (i.e., market risk). Changes in interest rates may cause a decline in the market value of an investment. With bonds and other fixed income securities, a rise in interest rates typically causes a fall in values, while a fall in interest rates typically causes a rise in values. Bonds and other fixed income securities generally involve less market risk than stocks. However, the risk of bonds can vary significantly depending upon factors such as the issuer and maturity.
• Equity Securities. The fund client does not expect to invest in equity securities. In the event the fund client did invest in equity securities, such investments are subordinate to the claims of an issuer’s creditors and, to the extent such securities are common securities, preferred stockholders. Dividends customarily paid to equity holders can be suspended or cancelled at any time. For the foregoing reasons, investments in equity securities can be highly speculative and carry a substantial risk of loss of principal.


• High-Yield Securities. The fund client may invest in “high yield” bonds and other debt securities which are rated in the lower rating categories by the various credit rating agencies (or in comparable non-rated securities). For example, the fund client may invest, directly or indirectly, in debt securities which rank junior to other outstanding securities and obligations of the issuer, all or a significant portion of which please register to get more info

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FCO Advisors LP is a separately registered investment adviser that has entered into a shared services level agreement with Fundamental Advisors. As part of the shared services level agreement, Fundamental Advisors provides for associated staff and resources to support and facilitate the management and operations of FCO and its relying advisor, FIO Advisors LP, as well as related expenses (including third party expenses) for financial and tax reporting, legal, compliance, human resources and administration. FCO and FIO reimburse Fundamental Advisors LP for these expenses. Fundamental Asset Management LLC (“FAM”) was formed by Fundamental Advisors in 2009. FAM provides monitoring and supervisory services to fund clients managed by Fundamental Advisors. Fundamental Advisors is a commodity pool operator that is exempt from CFTC registration requirements as all commodity pools operated by Fundamental Advisors rely upon the CFTC’s 4.13(a)(3) exemption. FCO is a commodity pool operator registered with the CFTC and is an NFA member.

In connection with sponsoring any fund client, Fundamental typically will also sponsor an affiliated general partner for such fund client, which will receive the performance compensation described in Item 5. For a description of material conflicts created by the relationship among Fundamental and the general partners, please see Item 11 below.

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Trading
Fundamental has adopted a Code of Ethics (the “Code of Ethics”) which sets forth the ethical and fiduciary principles and related compliance requirements under which Fundamental operates and the procedures for implementing those principles.

The Code of Ethics contains policies and procedures that, among other things:


• prohibit employees from taking personal advantage of opportunities belonging to clients;
• prohibit trading on the basis of material nonpublic information;
• place limitations on personal trading by employees and impose preclearance (in certain cases) and reporting obligations with respect to trading; and
• require initial and annual reports of securities holdings and quarterly transaction reports by employees.

The Code of Ethics also provides guidance on fiduciary duty, gifts and entertainment, political contributions, outside business activities and confidentiality.

A copy of Fundamental’s Code of Ethics is available upon request by contacting Robyn Huffman, Fundamental’s Chief Compliance Officer, at (212) 205-5004. Generally, Fundamental’s policy is to not engage in cross trades. However, if the Chief Executive Officer believes that Fundamental should move a particular securities position in whole or in part from one fund client account to another fund client account, he will bring it to the attention of the other members of the senior management team and the Chief Compliance Officer and obtain approval for the trade from the advisory committees, if any, or other governing body of each participating fund client account. Fundamental will only engage in cross transactions (causing one fund client to buy or sell securities from or to another fund client) when the transaction is permitted under applicable law and is in the best interests of, and consistent with the investment objectives and policies of, both fund clients involved in the transaction. It is Fundamental’s policy to effect all cross transaction in the most equitable and fair manner for all fund clients involved. In connection with sponsoring a fund client, Fundamental and certain affiliates have an economic interest in the fund clients, the general partner of the funds, or both. Fundamental may in the future, in its discretion, contract with any related person of Fundamental (including but not limited to a portfolio company of a fund client) to perform services for Fundamental in connection with its provision of services to the fund clients. When engaging a related person to provide such services, Fundamental has an incentive to recommend the related person even if another person may be more qualified to provide the applicable services and/or can provide such services at a lesser cost. Additionally, as discussed above in Item 6, the general partners of fund clients are entitled to a carried interest under the terms of each respective fund’s organizational documents. Such general partners are affiliates of Fundamental. The existence of the general partners’ carried interest creates an incentive for Fundamental Advisors, as an affiliate of the general partners, to cause such fund clients to make more speculative investments than they would otherwise make in the absence of the carried interest arrangement. Further, to the extent the carried interest in one fund client is greater or the overall performance of one fund client is better than another, Fundamental Advisors may have an incentive to allocate promising investments to the fund client that would result in a greater carried interest to Fundamental Advisors and its related persons. The level of anticipated carried interest is not a consideration in such allocation decisions.

The existence of multiple clients advised by Fundamental Advisors necessarily creates a number of potential conflicts of interest. Situations may occur where a fund client could be disadvantaged because of the investment activities conducted by Fundamental Advisor for other clients. Fundamental Advisors will allocate investment opportunities in accordance with its written investment allocation policies and procedures, taking into account the applicable provisions of the fund client’s offering documents (or investment management agreement in the case of a separately managed account). In general, in making such allocations Fundamental Advisors will consider such factors as the strategic objectives, suitability, relative capital available for investment, positions in similar securities, specific liquidity or other requirements of each client and overall investment cost, with the objective of allocating such investment opportunities in a manner equitable to such clients. Fund clients typically are not entitled to investment priority as against other clients and may not necessarily participate in every investment opportunity.

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Best Execution and Soft Dollars In selecting brokers for transactions, Fundamental takes into consideration certain relevant factors, including but not limited to, the ability of the broker to provide prompt and reliable executions, the financial stability and integrity of the broker, the quality of research provided, if any, and competitiveness of the transaction costs. We seek to obtain best execution on trades for our fund clients based on the circumstances of each transaction. Fundamental satisfies its best execution obligation by taking into account the different circumstances associated with executing orders related to particular types of financial instruments. In certain circumstances, Fundamental will not be able to select a particular counterparty due to a limited universe of dealers that are in a position to offer us our desired investments. In some cases the offering dealer is the only execution option for such transaction and therefore executing through that dealer is the best execution for such trade. We do not currently utilize soft dollar benefits. Soft dollar benefits include research and related services furnished by brokers including written information and analyses (including specific market, financial and economic studies and forecasts), statistics and pricing services, discussions with research personnel and similar services used in the investment and trading process in return for the investment manager paying a broker a commission in excess of that which another broker might have charged for effecting the same transaction, in recognition of the value of such services or facilities provided by the broker. To the extent we should decide to enter into soft dollar transactions, we will effect such transactions in compliance with the safe harbor provided by Section 28(e) of the U.S. Securities Exchange Act of 1934, as amended.

Order Aggregation

Fundamental Advisors may but is under no obligation to combine orders on behalf of fund clients with orders for other accounts for which it or its affiliates have trading authority, or in which it or its affiliates have an economic interest. In such cases, Fundamental generally allocates the securities or proceeds arising out of those transactions (and the related transaction expenses) on an average price basis among the various participants. While Fundamental believes combining orders in this way is, over time, advantageous to all participants, in particular cases the average price could be less advantageous to a fund client than if the fund client had been the only account effecting the transaction or had completed its transaction before the other participants.

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Fundamental’s investment team understands that they are responsible for making investments consistent with each fund client’s investment objectives, policies and restrictions as set forth in the applicable offering and governing documents of the fund client. The investments made for Fundamental Advisors’ fund clients often involve revenue bonds where the underlying asset/business is in need of repositioning, restructuring, or recapitalization and Fundamental Advisors intends to target positions that afford a level of control. After identifying an investment opportunity and making the investment, Fundamental Advisors and its investment team engage in ongoing monitoring and management of the underlying assets. The investment team also monitors the investment portfolios of each fund client on an ongoing basis and will adjust the composition, increase or decrease exposure to identified risks and evaluate exit strategies. Investors in the fund clients generally are provided with unaudited monthly or quarterly statements and annually receive audited fiscal year-end financial information. Fundamental has in the past and will continue to provide a monthly or quarterly management letter to investors in fund clients describing fund client positions and performance and its views on the market and potential investment pipeline. We expect to continue this practice and may also provide investors in the fund clients other periodic narrative reports from Fundamental regarding fund client positions or the markets. Certain large investors and members of the advisory committees of the fund clients of Fundamental Advisors may request more frequent or more in depth investment analysis not generally provided to all investors by the fund clients. Fundamental’s Chief Compliance Officer or designated compliance personnel periodically reviews the trades and positions of each fund client and such other information as she deems necessary to evaluate whether investment decisions are consistent with the investment guidelines set forth in the governing documents of each fund client. If any discrepancy is found, she discusses the discrepancy with the investment team and the Chief Executive Officer to determine if modifications to the portfolio can or should be made or other remedial actions should be taken.

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As described in Item 5 – “Fees and Compensation” above, in addition to management fees and carried interest allocable to Fundamental Advisors and its affiliates, Fundamental Advisors and its affiliates may receive acquisition, disposition and ongoing fees with respect to advisory and related services provided in connection with investments by fund clients.

In addition, Fundamental may enter into, or cause the fund clients to enter into, cash compensation arrangements with unaffiliated placement agents or third parties for introducing investors to invest in certain Fundamental fund clients. As described in the applicable offering memorandum, each Fundamental Advisors fund client typically pays its own organizational and offering expenses incurred in connection with fund formation and the offering of interests (which may include placement agent fees), up to an agreed upon cap with any excess used as an offset to the management fee. In general, each of such third-party placement agents is registered with the SEC as a broker- dealer if active in the U.S. and each employee engaged in soliciting investors in the United States for Fundamental’s fund clients is a registered representative of such broker-dealer.

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Fundamental is deemed to have custody of the assets of its fund clients because an affiliate of Fundamental generally acts as general partner or managing member of the fund vehicle. Fundamental arranges for all funds and securities to be held by qualified, third-party custodians in accounts in the name of the relevant fund client, unless an exception under the “custody rule” applies. Fundamental expects to rely on an exception to the SEC’s reporting and surprise audit obligations under the “custody rule” by making each fund client’s year-end audit by an accounting firm registered with, and subject to regular examination by, the Public Company Accounting Oversight Board (“PCAOB”) available to investors in the fund clients within 120 days of the clients’ fiscal year ends. please register to get more info

Fundamental generally manages its fund clients’ investments on a discretionary basis under the fund clients’ governing agreement (such as a limited partnership agreement) or under an investment management agreement with the fund client and the general partner of the fund client. Typically, an affiliate of Fundamental is granted full authority as general partner or managing member to make all decisions for a fund client, subject only to such restrictions or investment guidelines as may be set forth in the governing agreement and offering documents, and the general partner delegates such authority and duty to carry out such functions as well as certain administrative functions to Fundamental. please register to get more info

The nature of certain of the instruments in which Fundamental invests client funds does not often require the voting of proxies. Where such proxy voting is called for and when granted the discretion to do so, Fundamental’s policy is to vote all proxies in the fund client’s best interest and to maximize the value of the investment to the fund client, on a case-by-case basis, considering such facts as it deems material. The decision on how to vote proxies generally will be made by the investment team in the same manner as other investment decisions. Because we do not invest directly in securities in which our fund clients invest and we restrict employee investments in municipal securities, we do not expect any material conflicts of interest to arise in voting. Where the interests of different fund clients may conflict, the investment team will report the circumstances to the Chief Compliance Officer who will determine the appropriate course of action.

Proxy voting reports, identifying how proxies were voted where Fundamental has been delegated proxy voting discretion and Fundamental’s Proxy Voting Policies and Procedures are available upon written request to the Chief Compliance Officer, Fundamental Advisors LP, 745 Fifth Avenue, 25th Floor, New York, NY 10151. please register to get more info

Fundamental is not aware of any financial condition that could impair its ability to meet its contractual and fiduciary commitments to fund clients and Fundamental has not been the subject of any bankruptcy petition since Fundamental Advisors’ formation in 2007. please register to get more info