You are on page 1of 7

January 29, 2009 Dear Investor, In the wake of the Lehman Brothers bankruptcy, the global financial and economic

system broke down in a fashion not seen in the developed world since the early 1930’s. Lending between financial institutions ceased as LIBOR spreads spiked to unprecedented levels and the equity markets broke through their 2002 lows as the financial crisis finally morphed into a significant economic downturn. Capital injections and the “ad hoc” restructuring of the financial services industry failed to halt the free fall of the markets in October and November. Against this backdrop, our portfolios continued to struggle as all risky assets were shunned by investors in an environment that was dominated by technical factors and fear. With the VIX at record levels, our large cash positions were our primary defense against the market down draft. While we did get a bounce off of the November 20th lows at the end of the year, our portfolios experienced modest declines in December as we marked our private book to reflect the current economic environment. Historically, major market dislocations tend to expose “bad behavior” by market participants and this period was clearly no exception; from Porsche’s market manipulation of VW stock, to the many hedge funds that inexplicably gated or suspended redemptions, and finally to Bernie Madoff’s epic fraud. All of these events combined for a volatile quarter and resulted in significant technical pressure on our industry. Notwithstanding these pressures, the firm has met all of its redemption requests in full for all of its Funds. Below is a summary of estimated performance of the York Funds for the 4th quarter of 2008.
Performance¹ As of December 31, 2008 Multi-Strategy Select Credit Opportunities Global Value European Opportunities European Focus Asian Opportunities Total Return S&P 500 Barclays High Yield Index MSCI Europe MSCI Asia 4th Quarter 2008 (12.38)% (22.59)% (7.68)% (15.60)% (23.65)% (25.90)% (9.01)% (15.48)% (21.95)% (17.88)% (16.95)% (15.97)% 2008 (26.39)% (41.57)% (13.61)% (38.59)% (26.66)% (22.90)% (29.40)% (28.63)% (37.00)% (26.15)% (38.52)% (41.78)% 3 Year (Annualized) (0.12)% (6.25)% 8.94% (3.70)% (2.07)% N/A N/A N/A (8.36)% (5.59)% (7.81)% N/A Since Inception (Annualized) 13.89% 14.86% 18.46% 10.36% 6.54% (4.38)% 10.89% (2.69)% N/A N/A N/A N/A
1

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

The key question for investors is whether the Fed’s reflation policy and the “Obama stimulus” will stop the current deflationary spiral and instill some measure of confidence in the American consumer, so as to end the “paradox of thrift” that has emerged since the Lehman collapse. If the stimulus is successful, the current market environment will be viewed as the buying opportunity of a lifetime as corporate bond spreads are at historically wide levels and many companies are trading below their cash value. However, we will continue to position the portfolios defensively with relatively high cash positions and low net exposures as the stimulus is not certain to revive the economy. We do not expect to re-engage fully in the equity markets until we see signs of improving consumer confidence. An important indicator will be the rate of job loss change as job insecurity seems to be weighing most heavily on the psyche of the U.S. consumer. With volatility still soaring, our approach in the equity book will be to emphasize short term, hard catalyst trades with stock specific risk rather than systematic risk. To the extent that we maintain long term “value” positions, we will seek to take advantage of market volatility by trading around core positions. In the credit book, we remain focused on taking advantage of what will likely be a deep and prolonged distressed cycle that will present tremendous opportunities for investors who have the capital and fortitude to remain engaged. Below is a summary of discussions with our portfolio managers, highlighting current positioning and the opportunity set for 2009.

Credit

Despite maintaining relatively high cash positions and protection from a sizable CDS allocation, the credit book struggled during the quarter as any positions that we purchased prior to the credit crisis declined in value as spreads hit all time highs. Towards the end of the quarter, we were able to recover some of these losses by taking profits in core bank debt positions where we thought the recovery was over done. We will likely add to these core positions as we expect prices to return to pre-rally levels. Also, our private equity stakes in Chrysler and GMAC were marked down following the significant deterioration of the automotive sector. Our challenge in 2009 will be to balance our desire to buy distressed assets with our expectation that there are likely to be future waves of forced selling from banks, hedge funds, CDO’s and CLO’s as the downgrade cycle escalates. For the early part of 2009, we expect our core themes of long first lien bank debt and short credit via CDS to remain intact as corporate credits continue to implode. In the coming months, we will likely enter the restructuring phase of the corporate credit distressed cycle. We anticipate using a meaningful portion of our cash position to increase our exposure to distressed corporates as weaker credits with limited access to capital ultimately result in defaults.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

2

With the mortgage distressed cycle already in the restructuring phase, we have been active in the whole loan mortgage space through our majority investment in a specialty servicer, Arch Bay. Whole loans offer significant benefits over mortgage backed securities as investors with access to servicing expertise can restructure the loans to create value. Arch Bay enables York to purchase loans at steep discounts, rehabilitate those loans through loan modification and principal forgiveness, and resell the modified loans at a profit. In 2008, Arch Bay purchased approximately $300mm in loans at discounts steep enough to substantially offset further declines in home prices. In 2008, Arch Bay closed on 2.8% of bid requests, representing $600 million (face value) of mortgages out of $21.4 billion (face value) of mortgages analyzed.
Cumulative Asset Growth Cumulative Asset Growth – Arch Bay 
600 $ in millions 400 200 0 Ja n Feb Ma r Apr Ma y Jun Jul Aug Sep Oct Nov Dec 2008 Unpa i d Pri nci pa l Ba la nce (fa ce va l ue) Purcha s e Pri ce

In 2009 and 2010, we expect to substantially increase our allocation to whole loans both through our hedge funds and a new fund, the York Distressed Mortgage Fund that is dedicated to investing in whole loans. We plan to launch the fund during the first quarter of 2009. North America

The North American equity book struggled during the 4th quarter primarily due to continued selling pressure in the industrial commodities sector, particularly during the month of October. During November and December, the book stabilized and began to perform more in line with its net exposure to public and private equities. In keeping with our efforts to emphasize positions with stock specific risk, we generated some profits by investing in a number of high quality insurance companies that have taken mark to market losses in their investment grade corporate bond portfolios as spreads hit all time highs. We believe that the investment grade market offers tremendous value and with little supply of investment grade bonds available, we viewed the insurance sector as a cheap way to capture those spreads.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

3

As we begin 2009, volatility is still at extreme levels and we will continue to position the book defensively. However, we will remain engaged, both on the long and short side, as we believe that the recent market dislocations combined with the disengagement of both hedge fund and mutual fund investors will present a number of relative value and deep value opportunities. Currently, we are assembling lists of attractive new potential investment opportunities with compelling valuations and are waiting for the markets to stabilize before establishing significant positions. We have already seen some signs that investors are willing to re-engage in the corporate bond markets and would like to see similar signs in the equity markets before increasing our net exposures. Given the current state of the markets, we do not expect a significant amount of merger activity in the first half of 2009. However, to the extent that there are strategic deals with a high level of complexity, spreads are likely to be large and will present opportunities to generate outsized returns.

Asia

Despite being relatively underinvested with low net exposures, the book struggled during the quarter as global financial deleveraging continued and the Asian markets experienced severe pressure. The portfolio lost money on a number of illiquid mid cap Chinese stocks as hedge fund and retail redemptions continued to pressure Asian equity markets The book was able to generate profits from short positions in Japan and Hong Kong, where shorting is still permitted, and a number of merger arbitrage deals that closed during the quarter. As we begin 2009, the book will likely maintain a neutral stance on the markets as we anticipate continued volatility. We believe the withdrawal of substantial capital and the exodus of many market participants from Asia will allow the portfolio to have the potential to make reasonable returns without taking significant market risk. The book is out of all illiquid stocks with the exception of two which we believe have near term events and which have been reduced to percentages where they are no longer illiquid relative to their average daily trading volume. In addition, the book has no private placements. We believe that the increased liquidity of the portfolio will avoid the basis risk that punished the portfolio in 2008, as well as position it to change its posture in the event that we develop higher conviction regarding market direction. In general, our approach will be to continue to focus on hard catalyst events with an increased focus on arbitrage and credit.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

4

Europe

The European book performed poorly during the quarter primarily due to its short position in the German automaker Volkswagen. Between the close on Friday, October 24th, and early trading on Tuesday, October 28th, the price of the ordinary shares rose almost five-fold, from €210 to as high as €1,005, in what was an unprecedented move for a large, liquid company listed in a developed country. Prior to this rise, the company was already the largest European automaker with a market capitalization of over $80 billion. At €1,005 per share, Volkswagen’s market capitalization was $400 billion (around 89 times consensus earnings estimates for 2009 of $4.5 billion), making it the world’s largest company by market value, ahead of Exxon Mobil. Belatedly BaFin, the German regulator, announced on October 29th that it had opened a formal investigation into Volkswagen’s stock price movements. The book was also negatively impacted by a markdown in our private equity investment in Psagot, an Israeli based mutual fund company, as its valuation was reduced to reflect the diminished valuations of publicly traded asset management firms. While Psagot endured a difficult market environment in 2008, the firm successfully increased its assets under management by approximately 17%, not including additional assets secured through a strategic acquisition earlier this year. The VW position aside, much of the alpha generated in 2008 came from short positions, particularly in financials. Still months behind the US in responding to the crisis with monetary and fiscal policy, our outlook for the European markets is quite cautious. As we enter the New Year, we will continue to run a portfolio that is defensively positioned with an emphasis on shorting companies with broken business models or that are directly or indirectly exposed to the ongoing financial crisis. We are focused on taking advantage of short term, hard catalyst events on the equity side and are finding increased opportunities for longer term value investments in the distressed credit arena.

Firm Update

After paying out all year end redemptions, firm wide assets were approximately $8.7 billion. Net redemptions for the 4th quarter were approximately 30% of assets, which were in line with reported industry averages. Unfortunately, we became the source of liquidity for investors who could not access their cash at hedge funds that raised gates or suspended redemptions. As always, we are committed to honoring the spirit of our partnership agreements and paying out all redemption requests in cash.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

5

Despite the general turmoil surrounding hedge funds, we enter 2009 with a healthy business and optimism about our ability to take advantage of market opportunities in a much less competitive environment. We did not have any personnel turnover among our senior investment professionals and at year end named four new equity partners. Please join us in congratulating the new partners of the firm: • Zalmie Jacobs – Co-head of Private Equity • Luis Medeiros – Co-head of Private Equity • Brooke Parish – Global Head, Investor Relations • Christian Reyntjens – Co-Portfolio Manager, European Focus Fund

In early 2008, we opened an office in Moscow in anticipation of investment opportunities in emerging Europe. However, as the political and economic circumstances in Russia have changed dramatically, we decided to close the office as of year end. Opportunities in emerging Europe will be covered out of our London office. In 2007, we moved our Asian team to Hong Kong and our Singapore office remained open primarily for administrative functions. At year end, we also closed our Singapore office and transferred the remaining administrative functions to our Hong Kong office. Due to recent tax law changes amending Section 409A of the tax code, and expected tax law changes during the next administration, we are accelerating a significant portion of our offshore deferred compensation plan. While we are accelerating a significant portion of our deferred compensation into 2009, we are also re-deferring portions of our deferred compensation for ten years, until 2017, as recent amendments to Section 409A also permit. Additionally, again for tax reasons, our partners are selectively withdrawing portions of their capital from our domestic funds, to realize long-term capital gains at what we expect may be a historically low rate. A substantial portion of the after-tax proceeds are being re-invested across the York platform, reflecting our long term commitment to our business and our investment strategies.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

6

In addition, for tax efficiency, we are creating a “master-feeder” structure for York Investment Limited, York Select Unit Trust, York Credit Opportunities Unit Trust, York Global Value Unit Trust and York Total Return Unit Trust. These funds will “feed” into newly created Cayman limited partnerships. There will be no change in the management fees or incentive fees which will be charged for these funds. The only difference will be that, instead of charging management and incentive fees at the offshore fund (feeder fund) level, the same management fee and an equivalent incentive allocation will be charged at the Cayman limited partnership (master fund) level. Any unrecouped net losses attributable to your investment in the feeder funds on account of this year’s market turmoil (i.e., the “high water mark”) will carry forward to the master fund, and must be recouped before we will be entitled to any incentive allocation going forward. We thank all of our investors for your continued support during these challenging markets, and as always, we welcome your questions and comments. Sincerely,

James G. Dinan Please note that the Firm’s Form ADV Part II is available upon request.

Daniel A. Schwartz

1 REFLECTS PERFORMANCE OF ALL DOMESTIC HEDGE FUND STRATEGIES OFFERED TO OUTSIDE INVESTORS SINCE YORK’S INCEPTION. RESPECTIVE PERFORMANCE OF NON-U.S. AND FEEDER FUNDS IN THE SAME INVESTMENT STRATEGY AND MANAGED ACCOUNTS ARE NOT SHOWN ABOVE. PERFORMANCE FIGURES ARE NET AFTER ALL EXPENSES, MANAGEMENT FEES AND INCENTIVE ALLOCATIONS FOR AN INVESTMENT IN EACH FUND’S CLASS A INTERESTS, IF APPLICABLE, AND INCLUDE ALL INCOME FROM INTEREST, DIVIDENDS AND OTHER DISTRIBUTIONS ON THE SECURITIES HELD BY EACH FUND. ACTUAL INVESTOR RESULTS MAY VARY DEPENDING UPON DIFFERENT FEE ARRANGEMENTS (I.E. SHARE CLASS) AND TIMING OF INVESTMENTS. WITH RESPECT TO THE PERFORMANCE OF THE FUNDS ABOVE, ACTUAL RESULTS ARE INCLUDED THROUGH NOVEMBER. DECEMBER’S RESULTS ARE ESTIMATED. THE ESTIMATES FOR DECEMBER REFLECT FAIR MARKET VALUE ESTIMATES AVAILABLE AT THAT TIME. SUBSEQUENT INFORMATION AND EVENTS, PRIMARILY RELATING TO OUR PRIVATE INVESTMENTS MAY CAUSE SOME DOWNWARD REVISIONS IN THE NAV AT DECEMBER 31, 2008, WHICH WILL BE REFLECTED IN OUR FINAL INVESTOR STATEMENTS.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS LETTER IS INTENDED FOR EXISTING INVESTORS ONLY, AND SHOULD NOT BE RELIED UPON WHEN DECIDING WHETHER TO INVEST IN ANY OF THE FUNDS. IF YOU ARE NOT AN INVESTOR IN THESE FUNDS, YOU RECEIVED THIS LETTER ONLY BECAUSE YOU HAVE REQUESTED IT AND UNDERSTAND THAT THE COMMENTARY ABOVE IS NOT INCLUSIVE OF ALL FUND POSITIONS AND THAT THE CLASS A PERFORMANCE SHOWN ABOVE MIGHT HAVE A DIFFERENT FEE STRUCTURE THAN THAT OF THE CLASS IN WHICH YOU MAY INVEST. OTHER FACTORS MIGHT MAKE THE INFORMATION IN THIS LETTER LESS THAN COMPREHENSIVE AND THIS LETTER SHOULD NOT BE RELIED UPON FOR MAKING AN INVESTMENT DECISION. PERFORMANCE FIGURES ARE NET OF ALL EXPENSES, MANAGEMENT FEES AND INCENTIVE ALLOCATIONS FOR AN INVESTMENT IN THE FUNDS’ CLASS A INTERESTS SINCE INCEPTION. THE MOST RECENT MONTH’S PERFORMANCE FIGURES, QUARTER-TO-DATE FIGURES, YEAR-TO-DATE FIGURES, AND ASSET FIGURES ARE ALL ESTIMATES. THE PERFORMANCE SINCE INCEPTION FIGURES ARE ANNUALIZED COMPOUNDED NET RETURNS.

York Capital Management – 4th Quarter, December 31, 2008 – Offshore

7