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 Eaton Center1111 Superior Avenue, Suite 970Cleveland, Ohio 44114-2529tel: 216.781.3233fax: 216.781.6670
 
Lakefront Partners
*
 
Quarterly Update – Fourth Quarter 2008
LakefrontS&P 500
2005*
3.1% 4.7%
2006
11.3% 15.8%
2007
-0.5% 5.5%
2008
3.7% -37.0%
Inception to Date18.5%-19.4%
Performance (net)
 S&P 500 returns are provided to illustrate the overall market environment. Lakefront Partners often hedgesagainst the risks inherent in the general market, and as a result, will often have little or no correlation to marketreturns.
For the fourth quarter of 2008, Lakefront Partners returned 11.2% net of fees and expensesversus a loss of 21.9% for the S&P 500. For 2008, Lakefront returned 3.7% versus a loss of 37.0% for the S&P 500.Virtually every year-end letter from investment managers we have received has gone through adetailed account of the events of 2008 followed by a short explanation of how those unexpectedevents negatively affected their fund. With this in mind, we believe that the readers of this letterare fully aware that 2008 was one of the worst years on record. The events that occurred in 2008have been well documented. As such, we do not believe we will add value by itemizing thoseevents in this communication. Rather, we will discuss some details of Lakefront Partners andour viewpoint of how it might fit into an investor’s overall asset allocation.In 2008, and particularly the fourth quarter of 2008, was an industry altering period for theinvestment management and hedge fund industries. Most asset allocation models and risk mitigation strategies failed. Many managers believed that their overall strategies were properlyhedged or properly diversified, and as a result, would protect investors from significant losses ina bear market. Almost all of them were wrong. Going forward, we believe that investors willlook back to 2008 as a way to differentiate funds. The few funds that were able to protect capitalduring the worst of times will garner assets; those who sustained major drawdowns will shrink orclose.
*
This document does not constitute an offer to sell interests in or an invitation to invest in the Partnership which will be made exclusively on aprivate placement basis, and only to qualified investors by means of the Partnership’s private placement memorandum, which contains detailedinformation concerning the investment terms and risks associated with an investment in the Partnership. Performance figures are calculated by athird party accounting firm. Other analysis is estimated and accurate to the best knowledge of the portfolio managers. 2005 represents a partialyear starting 3/2/2005.
 
In one of the worst years ever for the market, Lakefront Partners was clearly differentiated in thatthe fund was able to avoid the carnage and actually create positive returns. In 2008, and sinceinception, Lakefront Partners has significantly outperformed the market and most other funds.At the same time, the fund has exhibited less risk and has been, on average, uncorrelated with themarket and other funds.
Risk Diversification and Asset Allocation
In 2008, not only were most funds down, but most wealth management and asset allocationstrategies were down more than investors would have expected. In the past few years, it wasbecoming increasingly evident that various asset classes were becoming more correlated witheach other. During the bull market, the increased risk inherent in holding these increasinglycorrelated assets was not identified by most. Many of the most sophisticated asset managers inthe world had created portfolios of diversified assets. They did not, however, create portfolios of diversified
risks
. Their asset diverse portfolios were essentially one directional, correlated betsthat did not protect investors from downside. The following is an illustration of how assetdiversification and risk diversification differed.
12%12%12%9%9%13%18%15%
"Smart"
 
Endowment
 
Allocation
Domestic
 
EquityForeign
 
EquityPrivate
 
EquityEmerging
 
Mkt
 
EquityCommoditiesReal
 
EstateHedge
 
FundsBonds
 
(Munis)
 The above is the allocation a major university endowment held in mid 2008. During the recentmarket turmoil, this portfolio has lost approximately thirty percent. One can easily see that thisportfolio is asset diverse. However, even the highly sophisticated endowment managers did notrealize that this portfolio was not
risk 
diverse. In fact, it is quite the opposite. Almost everythingin this portfolio ended up being correlated.Looking at the allocation, one immediately notices that the first four categories are equities.Domestic, foreign, emerging and private equity all are correlated with each other. These directequity invests comprise 45% of the portfolio. Then there are commodities, real estate and otherhedge funds. All three of these asset classes have become correlated as well. If we think aboutthis allocation in terms of risk exposure, the allocation looks more like the chart on the next page.
2
 
85%15%
Real
 
Endowment
 
Allocation
Economically
 
CorrelatedBonds
 One question potential investors often have is “How does Lakefront fit into my overallallocation?” As we highlighted earlier, Lakefront has outperformed the market and has done sowith lower volatility and no correlation over time. The following illustration will help tovisualize how these attributes might affect ones allocation:
$700,000
 
$800,000
 
$900,000
 
$1,000,000
 
$1,100,000
 
$1,200,000
 
$1,300,000
 
$1,400,000
 
     F    e     b
      ‐
     0     5     M    a    y
      ‐
     0     5     A    u    g
      ‐
     0     5     N    o    v
      ‐
     0     5     F    e     b
      ‐
     0     6     M    a    y
      ‐
     0     6     A    u    g
      ‐
     0     6     N    o    v
      ‐
     0     6     F    e     b
      ‐
     0     7     M    a    y
      ‐
     0     7     A    u    g
      ‐
     0     7     N    o    v
      ‐
     0     7     F    e     b
      ‐
     0     8     M    a    y
      ‐
     0     8     A    u    g
      ‐
     0     8     N    o    v
      ‐
     0     8
Lakefront
 
in
 
a
 
Portfolio
 
Allocation
S&P
 
500 65%
 
Stocks
 
35%
 
Bonds 40%
 
Stocks
 
35%
 
Bonds
 
25%
 
Lakefront
 The chart above shows three scenarios since the inception of Lakefront: The market, a typical65/35 allocation, and an allocation where equities were reduced and placed in LakefrontPartners. As we can see, for the first eighteen months, in a bull market, the Lakefront enhancedportfolio acted very similarly to the market. As speculation and valuations continued to increasein 2007, the Lakefront enhanced portfolio participated in the upside of the market, but to aslightly lesser extent. As the excess of the market dissipated and the bear market took hold, theLakefront enhanced portfolio performed much better, and since inception has significantlyoutperformed the market and a typical 65/35 allocation.
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