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Published by: bert_fresno2454 on Jun 10, 2009
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Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160Managing Partners fax: 240 368 0299www.T2PartnersLLC.com
January 8, 2009Dear Partner,We hope you had wonderful holidays and wish you a happy New Year!In each of our annual letters we seek to frankly assess our performance, reiterate our core investment philosophy and share our latest thinking about various matters. In addition, we disclose and discuss our 10 largest positions in the hopes that you will share the confidence we have in our fund’s future prospects, which in our opinion have never been brighter.Our fund had a poor December, capping a dreadful quarter and a disappointing year:
December 4
Quarter Full Year TotalSinceInceptionAnnualizedSinceInceptionT2 Accredited Fund - gross -4.0% -24.1% -18.1% 128.5% 8.6%T2 Accredited Fund - net -4.0% -23.0% -18.1% 88.3% 6.5%S&P 500 1.1% -22.0% -37.0% -13.1% -1.4%Wilshire 4500 3.5% -27.9% -39.8% -3.0% -0.3%Dow-0.4% -18.4% -31.9% 18.4% 1.7% NASDAQ2.7% -24.4% -40.0% -26.9% -3.1%
This chart shows our performance since inception:
(%)T2 Accredited Fund S&P 500
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2 Accredited Fund was launched on1/1/99. Its returns are after all fees. Gains and losses among private placements are only reflected in the returns since inception.
145 E. 57th Street, 10
Floor, New York, NY 10022
Performance Objectives
In every year-end letter we repeat our performance objectives, which have been the same since our fund’s inception: Our primary goal is to earn you a compound annual return of at least 15%, measuredover a minimum of a 3-5 year horizon.We arrived at that objective by assuming the overall stock market is likely to compound at 5-10%annually over the foreseeable future, and then adding 5-10 percentage points for the value we seek toadd, which reflects our secondary objective of beating the S&P 500 by 5-10 percentage points annuallyover shorter time periods. While a 15% compounded annual return might not sound very exciting, itwould quadruple your investment over the next 10 years, while 7-8% annually – about what we expectfrom the overall market – would only double your money.Since inception 10 years ago, we have not met our 15% objective, thanks in part to a weak market, buthave outperformed the S&P 500 by 7.9 percentage points per year, within our 5-10 percentage pointgoal. There are few funds that have beaten the market by this margin over the past decade, but we arenot satisfied with our performance and aim to improve upon it.
Performance Assessment
Had you told us last January that our prediction of much pain and suffering in the housing sector, whichwould have a devastating impact the nation’s financial institutions, would be proven absolutely correct,and that the resulting gains in our short book would be a major contributor to our fund outperforming theS&P 500 by nearly 20 percentage points (our second-best year ever relative to the markets), we wouldhave eagerly looked forward to a good year. But it wasn’t a good year, especially the last quarter.It is particularly galling to us because we correctly identified the housing bubble and anticipated its bursting, so we avoided nearly all investments in the real estate and financial sectors. Our mistake, aswe discuss in detail below, is that we failed to see how widespread the damage would be. We thoughtthe bursting of the bubble would create a significant economic headwind, to be sure, but not cause thenear-Armageddon fallout that instead occurred, so we left the portfolio exposed to many retail andconsumer-related stocks, which have been crushed.We take pride in our work, have our reputations and financial well being at stake, and are accustomed toconsistently beating the market
making money, so the past year was disappointing.That said, we’ve gone through rough patches before and have always rebounded strongly. Because wemanage a concentrated portfolio, over short periods of time – and we consider one quarter a very brief  period in light of our typical 3-5 year investment horizon – our results can be volatile, so we want to becareful not to overreact. Frustration and its companion, impatience, are the enemies of successful valueinvesting.We are determined to improve our performance, but will not change our core investment philosophy andapproach. Rather, we will work even harder to expand our circle of competence, learn from our experiences – both positive and negative – and patiently seek out the best opportunities.We’re pleased to report that thanks to the unprecedented volatility and carnage in the markets, we’refinding many wonderful investments that we think are deeply undervalued and poised to provide futureoutperformance. We have the highest degree of conviction in our current portfolio that we’ve ever hadand hope that this letter – in particular, the discussion of our 10 largest positions – helps you share our conviction.
An article in
The Wall Street Journal 
last week about the travails of many hedge funds had a paragraphthat summarized the opportunity we believe exists:
All’s not lost for hedge funds, however. Survivors of 2008’s market tsunami likely will enjoy lucrativeopportunities amid much less competition. As many as half the hedge funds that began 2008 could close,or be short of cash, as the new year unrolls. Those with cash on hand and a stable investor base will beable to take advantage of bargains in stocks and various debt markets.
Overview of 2008
It was an extraordinary year – so much so that we suspect we will tell our grandchildren about survivingthe Great Bear Market of 2008. In our 2002annual letter , we wrote that “there were few places to hideas the bear market extended to stocks of nearly every type” – and this was even more true last year.Fortunately, however, we’ve added shorting to our toolkit since then – and, as we discuss below, it madequite a difference.In 2008, the Nasdaq had its worst year since its inception in 1971 while the Dow and S&P had their worst years since the 1930s. The S&P had its 3
worst year ever going back to 1825, as the chart inAppendix A shows. In total, an estimated $7 trillion of U.S. stockholder wealth evaporated in 2008.Even more remarkably, the U.S. was one of the
performing markets in the world, as the averagedeveloped country market (excluding the U.S.) fell 45%, while emerging markets plunged an average of 55%. Japan had its worst year ever, down 42%, while the popular BRIC markets (Brazil, Russia, Indiaand China) tumbled 41%, 67%, 52% and 65%, respectively. Worldwide stock market losses wereapproximately $30 trillion. The average long-short hedge fund was down 26% through November.Market volatility was unprecedented. After Lehman Brothers sank into bankruptcy in September, theS&P 500 had moves of at least 5% on 18 days, more than the 17 such days in the previous
53 years
.To shed light on how the market turbulence impacted our portfolio in 2008, we’d like to focus on threestories that summarize the year: a home run, a costly error and a question mark.
A Home Run
As noted above, we correctly identified the housing bubble and anticipated its bursting, so we avoidednearly all long investments in the real estate and financial sectors and aggressively shorted stocks inthese sectors and beyond. In total, we profitably shorted a wide range of stocks during the year, 23 of which contributed more than 50 basis points of performance during the year vs. only one that cost usmore than 36 basis points (Usana, 59 bps). Thank goodness we did so or 2008 would have been a totaldebacle.As discussed on the next page, we profitably shorted stocks in a wide range of sectors, but the singlegreatest concentration was in the financial sector, where we had profitable shorts among the bondinsurers (Ambac and MBIA), GSEs (Fannie Mae, Farmer Mac and Freddie Mac), investment banks(Bear Stearns and Lehman Brothers), large banks (Bank of America, Wachovia and WashingtonMutual), regional banks (Regions Financial and Zions Bancorp), REITs (Boston Properties, GeneralGrowth, Macerich and Simon Properties), mortgage insurers (MGIC, PMI and Radian), as well as AIG,Allied Capital, Capital One Financial and Moody’s.

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