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Aquamarine Fund

Aquamarine Zurich AG
18 Ramistrasse
8001, Zurich
Switzerland
Tel +41 44 210 1900
Fax +41 44 210 1901
Aquamarine Capital
1345 Avenue of the Americas, 2nd Floor
New York, NY 10105
United States
Tel +1 212 716 1350
Fax +1 212 716 1353

Annual Report 2013

www.aquamarinefund.com

Annual Report 2013

Aquamarine Fund
Annual Percentage Appreciation

Year
Aquamarine Fund
S&P 500 with
Relative Results

Class A Shares*
Dividends Included*
(1) - (2)

(1)
(2)

2013

34.9%

32.4%

2.5%

2012

27.8%

16.0%

11.8%

2011

-3.1%

2.1%

-5.2%

2010

19.2%

14.8%

4.4%

2009

39.3%

25.9%

13.4%

2008

-46.7%

-36.6%

-10.1%

2007

17.0%

5.5%

11.5%

2006

37.1%

15.6%

21.5%

2005

7.2%

4.8%

2.4%

2004

11.2%

10.7%

0.5%

2003

29.5%

28.4%

1.1%

2002

-1.6%

-22.0%

20.4%

2001

1.9%

-11.9%

13.8%

2000

21.4%

-9.0%

30.4%

1999

-6.7%

20.9%

-27.6%

1998

26.1%

28.3%

-2.2%

1997*

2.5%

6.0%

-3.5%

Notes:
*1997 is based on September 15 – December performance.
*Represents the performance of Class A Shares. Performance may differ depending on Class and Series.
We have selected the S&P Index because it is a widely known, well understood, and commonly used benchmark
of performance. We could just as easily have selected the Dow Jones Industrial Average or the Morgan Stanley
World Index which would have given a more favorable comparison. The vast majority of professional investors
underperform the S&P Index. Similarly, we have ensured that the presentation of index returns includes the
dividends, to ensure an apples-to-apples comparison. By the same token, the returns in Aquamarine Fund are
calculated net of all fees.

Table of Contents
Management’s Letter to Partners
Investing Principles

3

18

Aquamarine Fund Assets Under Management

27

Financial Statements

28-78

- Aquamarine Master Fund, L. P.

28

- Aquamarine Fund, Inc.

50

- Aquamarine Value Fund, L. P.

66

Team Aquamarine

79

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And. I mention this not in a spirit of self-congratulation. long-term compounding is the name of the game. These figures are calculated net of all expenses and fees. I haven’t delivered an Omaha number like that. The wisdom of this patient approach comes directly from Warren Buffett and Charlie Munger. Commentary On These Results When I started running this fund in 1997. Indeed. we recently calculated that $1 million invested in the Aquamarine Fund back in 1997 was worth $5.7% in 2008 during the global financial crisis. I had dreams of delivering gains of 30% a year — the kind of dazzling returns that Warren Buffett racked up when he ran limited partnerships early in his career. In my view.63 million as of March 31. This should help to explain why I am not willing to take risks (such as leverage) that could potentially damage our returns. versus 6% annually for the S&P 500. the Aquamarine Fund returned 34.Dear Partner and Investor. versus 32. making this an apples-to-apples comparison. It’s extraordinary for me to think that my family and fellow shareholders who invested in the fund at inception have quintupled their money — despite the fact that the fund fell 46. he told us: “Charlie and I always knew we would become very wealthy. Since the fund’s inception in September 1997.” He then explained: “If you’re even a slightly above average investor who spends less than you earn.9%. so these are the actual returns.4% for the S&P 500. Investment Results In 2013. When Mohnish Pabrai and I had our charity lunch with Buffett in 2008.” I’ve taken that advice very much to heart. 2014. our investors’ capital has compounded at a rate of 11% annually.7 million if that money had been invested in the S&P 500. but we weren’t in a hurry. 3 . The numbers for the S&P index include dividends. versus $2. but simply to demonstrate the power of compounding decent returns over a long period. thanks to the miracle of compounding. but I’ve outperformed the market by a decent margin. over a lifetime you cannot help but get very wealthy — if you’re patient. an outperformance of 5 percentage points a year adds up to a lot over time.

200 came from twelve new partners. when several shareholders cashed out of the fund at a time when I was finding extraordinary bargains to buy. The fund’s outperformance over the past few years is a direct result of the opportunities that arose amid the turmoil of 2008-09. Redemptions. This ability to ride through tough periods is enormously important. Aquamarine’s Ratio of Wins to Losses Before we get into a couple of post mortems of stocks that we recently sold.961 was for complete withdrawals from three of our partners.355. and I’m delighted that you are now enjoying the fruits of your fortitude. so it’s critical to stick around. I wanted to share with you some analysis on the fund that we did in 2013. I don’t need any extra capital to manage. and I’m pleased that you are now enjoying the fruits of your fortitude. We sold these 96 stocks for a 4 I’m very grateful to all of our investors who held firm during the financial crisis. As I discovered in 200809. of which $689. The chart on the following page shows that we have held 96 money-making positions since the fund’s inception in 1997. Welcome! We also received redemption requests of $4. They need to be patient. I’m also delighted with the quality of our new partners. but I’m pleased that there is a net inflow of money to invest in new ideas. But I’m confident that we will do well over time if we stick to our discipline of buying undervalued stocks and holding them. I’m always sorry to see shareholders go.908. The rewards of investing tend to come in lumps like this. It’s also important to keep this long-term perspective at a time when our returns have been good. long-term investors who understand that there will be ups and downs in this endeavor. I never try to convince people to invest in the fund. . and I sometimes decline requests to invest with us. regardless of the ups and downs we will encounter along the way.164. our portfolio isn’t as cheap as it was several years ago. But we’re invested in excellent companies that are wellpositioned to continue appreciating in value. I’m very grateful to all of our investors who held firm during the financial crisis. but life circumstances change and I’m delighted that these investors have done well in the fund.269.Subscriptions. it’s important to attract the right partners.886. and Net New Capital In 2013 we received new subscriptions for $11. I have no idea how the stock market will perform over the coming years. of which $9. After a period of significant gains.

We didn’t make this money by darting in and out of stocks or trying to predict where the market was headed. Meanwhile. This is not a matter of guarding our secrets to prevent other investors from stealing them. once a person has made a public statement. We also had a 100% loss in Delta Financial.000 (Delta Financial) • Ratio of Wins to Losses = 11 to 1 • 126 positions bought and sold total to date • Includes spin-offs and rights issues • More than half of the returns from 7 investments Post Mortems In recent years.” 5 . Still. As you can see. We made it by investing in good companies that were mispriced and then holding them.total profit of $71 million. which helps to show the benefits of investing globally. I’ve found that it works better not to talk publicly about current holdings in the fund. Ratio of Wins to Losses Since 1997 Positions Number $ million Profit 96 $70. Raffles Education. for every $10 we made. In other words. In his seminal book The Psychology of Influence.8 Loss 30 $6.7 million (Crosstex Energy) • One total loss: $400.5 million. I was also struck by the fact that more than half of our returns came from seven of our investments. the largest realized gain was from a Singaporean company. The real issue is that. it’s psychologically difficult for them to back away from it — even if they’ve realized that their stated opinion was wrong. our largest dollar loss was in Crosstex Energy.5 • Largest Realized Gain: $18 million (Raffles Education) • Largest Realized Loss: $1. it’s a healthy reminder that investing is not an exact science and that I will inevitably continue to make mistakes. Of these. which we sold for a total loss of $6. though the sum involved was relatively modest. Robert Cialdini called this the “commitment and consistency principle. we have also owned 30 moneylosing positions. we lost about $1.

without making it any harder for me to invest rationally. In addition. To increase the intensity. since sales had been hurt by the global economic slowdown and by lower demand from China and India. there are strong secular trends that are likely to boost demand for potash for many years to come. my conviction waned. But things didn’t turn out as I had hoped. without making it any harder for me to invest rationally. In retrospect. Post-Mortem 1: Potash of Saskatchewan The general thesis behind the purchase of Potash of Saskatchewan was that rising incomes and urbanization in the developing world are changing the way that people eat. I eventually sold the stock so that I could use the cash for more compelling opportunities.With his research findings in mind. Gradually. I expected the stock to rise as demand for potash recovered. As they get richer. Two of my more recent sales from the fund have been: Potash of Saskatchewan and Crosstex Energy. The goal is to give you a clearer insight into how your money is invested. the price of Potash had collapsed before I invested. 6 The goal is to give you a clearer insight into how your money is invested. To do that. people tend to consume more protein. I’m not suggesting that this is illegal. either they need more agricultural land or they need to increase the intensity of their existing land holdings. they need potash — a group of chemicals used for fertilizer production. . and I waited patiently for this to happen. Potash of Saskatchewan’s stock more or less tracked the price of potash. in which a handful of powerful producers can cut supplies to control prices. a bit like OPEC. This means that farmers must grow more arable-type products. So I was able to invest in the company in the second half of 2008 at what seemed like an extremely low valuation. as it became clear that I must not fully understand the dynamics of the industry. Potash of Saskatchewan is the low-cost producer. and so it is well placed to profit from them. I prefer to provide a post mortem of stocks that the fund has already sold. What’s more. The company’s management kept saying that a hike in prices was around the corner. In other words. part of the problem was that the potash industry is effectively a global cartel.

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these two groups control about 70% of the potash market.but governments can do little about it because the cartel operates across international boundaries. I think it’s better not to hang around with people who have bad karma. but cartels distort the market and operate in ways that can easily backfire. A disagreement had apparently caused Uralkali to back out of its partnership with Belaruskali. not worse. regardless of whether they’re acting legally. I began to wonder if the weak price of potash was a result of cheating by cartel members. The dangers of investing in a market controlled by a cartel became even clearer after I sold the stock: in 2013. so I can have a successful career without ever having to invest in cartels again. Essentially. This has also kept me from owning stocks like Philip Morris. by a cartel that can manipulate prices. Potash is a key agricultural ingredient that does benefit society. another between the Belarus joint venture and Canpotex Ltd. Buffett 8 Essentially. the potash market was no longer tightly controlled and the expected price fix could no longer be relied upon. there are plenty of attractive places to invest. Between them. Determined to learn from my mistake. Without wanting to sound sanctimonious. which is a joint venture among Saskatchewan’s potash producers. not worse. I decided that I didn’t ever want to invest again in a market where the profits depend upon collusion. even if it is legal. the news broke that the cartel had fallen apart. I want to invest in companies that make society better. There are sound financial reasons for this. Once the cartel had broken down. In any case. In retrospect. Indeed. I want to invest in companies that make society better. But I also think it’s bad karma to invest in companies that make society worse. companies that benefit everyone from their customers to their suppliers to their shareholders. The potash market is basically controlled by two alliances: one between a Russian company called Uralkali and a company from Belarus called Belaruskali. one item on my investment checklist is a reminder that I only want to invest in companies that are a win-win for their entire ecosystem — in other words. . it’s clear that I hadn’t sufficiently understood the idiosyncratic economics — or politics — of the potash sector.

Crosstex Energy (which has since changed its name following a merger) owned and operated gas pipelines.10 30 20 2008 2009 2010 2011 2012 2013 Post-Mortem 2: Crosstex Energy Inc.1 $2 million Purchased $28. Crosstex Energy Inc.6 $1. This is a relatively low-tech business with incredible economics. But at least our low entry price had provided us with a healthy margin of safety. which was entitled to a share of the 9 . not a great one. it’s hard to be displaced and there are also extraordinary opportunities to reinvest at high rates of return. I had become familiar with the pipeline business as a result of an earlier successful investment in Kinder Morgan.3 million 60 50 40 32.3 million in Potash of Saskatchewan in 2008. Fortunately. In the gas pipeline business.has done just fine investing in companies that benefit society. In the end. Potash of Saskatchewan 80 70 Sold $42. and I’m comfortable following his example. once you’re established in a particular location and own the rights of way. The underlying assets held by Crosstex Energy LP were extremely attractive. But I was even more attacted to the parent company. By the time I cashed out a few years later.. The company also had exceptional management. this was not a costly mistake. it had risen to $2 million. I saw an opportunity to repeat this success by investing in Crosstex. I had invested $1. it was a solid investment.

For one thing. it’s critical to have this sort of collateral asset value. If I had waited several months longer. All of this had a profoundly dampening effect on Crosstex’s business outlook. I sold our investment for $6. which affected its results. My understanding at the time was that we were not exposed to the price of natural gas. So I made a major investment that amounted to $8.7 million. But I don’t regret leaving the additional money on the table because I used the cash to invest in other stocks that were exceptionally cheap. it turned out that the decline in gas prices had various unexpected effects that I hadn’t considered. With Crosstex. it was the most extraordinary price decline I’ve ever lived through. depressed markets meant that it couldn’t raise capital for new projects either. I held on to the stock amid all this turmoil and it recovered to a remarkable degree. But our investment was clearly not as conservative as I had believed. This was a perfect storm for Crosstex and the stock price fell dramatically. Also. I had convinced myself that we owned the pipelines.6 million — a loss of $1. I had fallen into the trap of buying an apparently rosy future when I should have focused more on whether the company in its current state provided us with an adequate margin of safety. I also didn’t think we were exposed to the financial markets. First of all. So the company was wrong-footed by the plunge in gas prices. we would have done better.gains from improved operating performance. since Crosstex was acquired by Devon Energy in October 2013. 10 . Moreover. companies that needed to raise capital to drill also had to stop drilling. In other words. since we were in a fixed-fee pipeline business where you got paid regardless of the gas price. Crosstex was not entirely hedged in a part of its business that involved cleaning and treating gas.3 million. I couldn’t have predicted these extreme events. As for Crosstex. In the end. This struck me as a smart way to leverage what was already a phenomenal business without using debt. but all we really owned was the right to a revenue stream from these pipelines. there was no collateral land value in the particular vehicle that we owned. since these endeavors were no longer profitable. many companies that were drilling for gas stopped drilling when prices dropped. But I was wrong on both counts. When the financial crisis occurred in 2008. For a value investor. In fact.

it was a powerful reminder of the importance of shutting out the noise of the marketplace and focusing on the economics of the business itself.96 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Looking Forward I’m happy with the companies in our portfolio and their prospects for price appreciation. A patient. rational approach during a period of extreme turmoil saved us from a much larger For me. this wasn’t a successful investment but it wasn’t nearly as bad as it could have been. I’m pleased that I managed to hold on to Crosstex during a tumultuous time when the stock fell by more than 90% and almost everyone else was bailing out.In retrospect. Crosstex Energy 40 30 20 19. I’m also constantly assessing new opportunities. As Charlie Munger explained at Berkshire Hathaway’s most recent annual meeting.” 11 . I also stopped talking about the company to my investors. One reason why I was able to do this was that I consciously stopped looking at the share price. In the past several months. I focused on the fact that the company possessed an underlying asset that was remarkably valuable and that had not been destroyed. it was a powerful reminder of the importance of shutting out the noise of the marketplace and focusing on the economics of the business itself. Instead of trying to defend this investment. This focus on the high quality of the underlying assets reassured me that the business would recover if only I gave it enough time. in the end. I’ve invested in only one new company. But I feel no pressure at all to buy anything until the right stock comes along. loss. So. one reason for Berkshire’s success is that he and Buffett are “happy to sit” and wait “until something makes sense. For me.

but instead have benefited from the addition of several people. We also engaged Nadia Menezes at Appleby. I have set them out in the following section (see pages 20-25) for you to read and I plan to reproduce them in each annual report. Prime Management. Our experience so far has been that the Dentons team is superb. the sale to SS&C came at the right time: with increased compliance requirements — especially FATCA — it was a good time to access the deeper resources and technology of a larger firm. so it’s worth spelling them out explicitly. 12 . who had done excellent work for us while at a previous employer. fiduciary and administration services. Walter Van Dorn and Curtis Stefanak — to update and rewrite our documents. I was happy to follow her and welcome her back onto our team. But I can give you a very clear sense of what to expect in terms of the Aquamarine Fund’s approach to investing. although I was sad to part company with Joe Kelly. Prime Management under Joe was the best administrator I could have hoped for: his staff paid scrupulous attention to detail and they were always true to their word. I met Mike Froy through Mohnish Pabrai five years ago. The key characteristics and guiding principles of the fund won’t change. We are still using the Prime Management Limited name as it is a division of SS&C GlobeOp. which is a global leader in services to funds like ours. Teresa Gallant and Jonathan Gazzard. moved to Appleby a couple of years ago and was restricted from soliciting us. Mohnish had great things to say about Mike who has helped the Pabrai Funds in all sorts of ways. including Patti Griffin. a company in the British Virgin Islands that provides offshore legal. who have already provided first-rate support for Lorna Nicolas-Bernier. But having discovered where she went.I can’t predict what other opportunities will arise in the future. our administrator. Organizational and Regulatory Update Service Providers: Last year we engaged a team at the law firm Dentons — Michael Froy. David Reid. Nadia. We have had no change in our front line staff. That said. In 2013. I believe we are in very good hands with SS&C. I hope they give you a helpful understanding of what it really means to be a partner in the fund and why we operate as we do. was acquired by SS&C Technologies.

There has been one other organizational change that’s also worth mentioning. I should also say something about regulatory issues. When it comes to taxes. In the future. Our new team at Deloitte consists of Mark Baumgartner. I’m only too happy to piggyback off him. so he certainly has the right roots. We have registered successfully with the SEC. I think the best words were said by the famous federal judge Billings Learned Hand: “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep 13 . which became necessary once our assets reached $100 million. One is Ajay Desai and his team at UBS in Chicago. part of our lives in the financial world.S. government to help identify people who might be seeking to use the offshore fund industry as a way of not paying U. Andrew Lindblom and Frank Pellicori. we are also complying with the requirements of the Foreign Account Tax Compliance Act (FATCA). I think the quality of the relationship we have is more important than the institution itself. Meanwhile. The basic upshot of FATCA is that we are being asked by the U. Ajay is a phenomenal guy who grew up in Omaha. Nebraska. Tia Beckmann. One could argue that I’ve concentrated risk in Switzerland by using two Swiss banks as custodians. taxes.S. But Mark has now retired from Deloitte. Foreign Account Tax Compliance Act (FATCA): While we’re discussing these organizational issues. Mark Chapman at Deloitte & Touche audited the fund’s accounts for the last 16 years. I was introduced to Ajay by Mohnish Pabrai. Tim Dillow. Our other custodian is Credit Suisse.Custodians: We have two custodians. which are an increasingly prominent Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. these requirements are also quite likely to expand to other countries. But I don’t believe that’s the case. Lewis Lo and Tonya Guishard. who has an incredible ability to select great people. and I’m very happy with the group that takes care of us at Credit Suisse. including Melissa Wilczak.

and I want to thank you in advance for your co-operation in this. there is a certain number of dedicated staff that we are supposed to have in Switzerland. To demand more in the name of morals is mere cant. not voluntary contributions. The law seeks to ensure that investors managing more than CHF 100 million do not become a liability or a burden to the financial markets. rich or poor. 14 The law seeks to ensure that investors managing more than CHF 100 million do not become a liability or a burden to the financial markets. we also have to comply with increasingly demanding requirements under the Swiss Collective Investment Schemes Act. Part of the problem is that the wording of the law was adopted from European legislation and Swiss lawyers are very uncertain about how it will be or ought to be applied.taxes as low as possible. our regulatory requirements do not end with SEC registration and FATCA. So there is a very legitimate question as to what a risk manager would do all day. .S. for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions. and all do right. These regulations will require us to keep a complete set of information on our investors and to provide summary information to the IRS (and. unSwiss and are written in a way that makes it very hard for a small fund like Aquamarine to comply without completely changing the way we operate. But they are looking to discourage people who seek to exploit grey areas of the law as a means of not paying taxes. including a risk officer. In Switzerland. The Swiss Financial Market Supervisory Authority (FINMA): Unfortunately. we may have to follow up with you to get extra information. I run a simple. But the regulators have a very specific vision of how to achieve this: for example. long-only portfolio of 20 or so stocks. We don’t enjoy doing this. thereby incurring all manner of unpleasant consequences. For our books to be complete. Not to provide the information would result in us becoming non-compliant with FATCA. and other governments will not be going after people who seek to arrange their affairs in a legal manner so as to keep their taxes as low as possible. in my opinion. Everybody does so. potentially. but it is necessary in order to run a fund like Aquamarine.” The U. These CISA regulations are. other tax revenue authorities) as and when they require it.

In any case. unfolding debate about the best way to regulate the financial industry. I had hoped for a private equity exemption for the Aquamarine Fund. given time. represented by Ingmar Snijders and Thomas Iseli are helping us with this. But this exemption appears not to be available to us. In our opinion. Bratschi Wiederkehr & Buob. in the end. but the halcyon days of the budding stock picker running his friends and family partnership from the sunroom at home at 5505 Farnam Street. I may have to move the primary base of my operations out of Switzerland. regulation is expensive to do) but consolidation will. he wrote the following: “It seems to us that the regulatory landscape is not supportive of small. to paraphrase Nassim Taleb. Our Swiss legal counsel. on an anecdotal basis. concomitant increase in market fragility. 15 . and it does not take into account how we work or that we have a long history of scrupulous compliance with the law. We might wish otherwise. we are moving forward with an application and hope that FINMA will grant us the relevant exemptions. of course. Discussing regulation in a letter to his investors. the barrier to entry presented by the new rules may cause considerable industry consolidation (a desired outcome from a regulatory standpoint – let’s face it. then that is not healthy either. In essence we are required to now prove that we are not Bernard Madoff but. if the proprietor has abdicated responsibility to the point of not knowing what is going on. part of a broader. All this has come about because other people have lied and stolen. simple investment boutiques that are not part of whatever problem the regulation seeks to solve. I agree wholeheartedly with the perspective of my friend Nick Sleep.This legislation has not been thought out clearly. that those who increasingly populate the industry are the types who pay others to do their work for them (just witness the Cambrian explosion of service providers offering to act as intermediaries). Omaha (an image so important to Zak and me) are long gone. bring with it an unintended. It also seems to us. As some complex financial institutions may be discovering today. If we do not get the requisite FINMA license. who runs a renowned firm called Nomad Investment Partners. These issues are.

Sincerely. tax short term investing. our youngest participant was an 11-yearold who had flown in from Norway. In New York. Nor is any allowance made for the fact that we invest for the very long term or that we are a simple fund. detectives-cum-regulators asking questions of those whose practices don’t sniff right. in our opinion.” Partnership Meetings In 2013. Guy Spier 16 . long/short hedge fund complex that deals in exotica and trades constantly. Instead. Madoff. almost). There were also people who had traveled some distance to join us. And if you really want to change industry behaviour. there is no potential for us to earn our way to a lighter regime through good behaviour. I’ll whisper this. I could not have a better set of partners.unlike Mr. the regulation seeks to moderate all behaviour for the general good. what is really required in order to bear down on the liars and cheats are empowered. Even so. Like traffic speed limits. There was a great (but different) energy and vibe in each of those three locations. I was delighted to see so many shareholders. Zurich and New York. friends and relatives coming together for these meetings. Indeed. Your steadfast support makes it possible for me to focus on compounding value over the long term. Thanks All that remains is for me to thank you for your investment and your trust. Nomad is treated the same as a leveraged. and I am sincerely grateful. we get more blanket rules for everyone. we had an excellent set of partnership meetings in London. I look forward to welcoming you all again at our 2014 shareholder meetings. and we have lived with those restrictions quite happily (well.

000 $ 50.000 $100. Performance Relative to the S&P Index Comparison of changes in $100.000 $150.000 invested Aquamarine Fund Inc.P.000 $200.000 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997* $0 *1997 results are based on September performance.000 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 $0 17 .P.000 $ 50.000 $250.000 $250. S&P 500 $500.000 invested Aquamarine Value Fund L.000 $100.000 $200.000 $450.000 $300.000 $150.000 $400. S&P 500 $350.000 $300.000 $350. Performance Relative to the S&P Index Comparison of changes in $100.Aquamarine Fund Inc. Aquamarine Value Fund L.

and Marcus Aurelius 26 18 .Investing Principles In 1996. it is to emphasize parts of the body of worldly wisdom that I see as particularly relevant to me and the fund’s investors at this point. since a number of studies have shown that by writing something down we increase the probability of it happening. rather. Work with Great Partners 23 8. Warren Buffett. Adversity: Edison. including Ben Graham. which is a compilation of Munger’s teachings. Avoid Leverage 21 4. Table of Contents 1. How best to acquire it and use it effectively for a life well lived is the subject of the book Poor Charlie’s Almanack. The Miracle of Compound Interest 20 2. Berkshire Hathaway issued its shareholders with a booklet entitled “An Owner’s Manual. Become a Hydra of the Investing World 25 10. Buy Better Businesses at Bargain Prices 23 7. I wanted to set down a similar set of principles and share them with our partners in the Aquamarine Fund. Pay Attention to Incentives 21 5.” Psychologically. Play Centre Court 22 6. The goal here is not to be complete or comprehensive. Munger has drawn from many sources. Use a Checklist 25 9. this was a great move on Berkshire’s part. and Robert Cialdini. “Worldly wisdom” is a phrase used by Charlie Munger. Don’t Lose Money 20 3. Shackleton. In his search for worldly wisdom.

19 .

My goal is to compound wealth at the highest possible rate. 2. The only metric I find useful is thinking of long-term increases in net worth. Don’t Lose Money Another way to frame the investment challenge is to ask the following question: how can I compound my investors’ wealth at the highest possible rate but in a manner that minimizes the probability of a loss? Investment Result . Financially sophisticated investors may even talk about the search for alpha (a fancy way of referring to above average returns) or the pursuit of superior risk-adjusted returns. while minimizing the risk of permanent capital loss. or year. They might compare quarterly or annual results to an index or to the results of other funds.As a Multiple of Original Investment Years of Operation Rate of Return 7% 12% 20 4 10 40 15 93 60 58 898 Initial Loss 20 Gain Required to Be Whole 25% 33% 40% 67% 50% 100% 18% 27 750 20. I frame the investing challenge as follows: I seek to double the price per share as many times as possible over the course of my investing lifetime. The Miracle of Compound Interest When it comes to investment results. quarter. I pay as little attention as possible to these metrics because they distract me from the true task at hand. The following table illustrates the point that seemingly modest differences in the annual rate of return can generate profound differences in the ultimate gain over long periods of time.555 . many investors have a tendency to focus on what happened over the past month.1. In order to keep my sights on the horizon. or getting the miracle of compound interest to work in our favor.

Whatever the investment returns might be. 4. This creates a powerful incentive to minimize the risk of loss. as Warren Buffett has said: Rule number one: do not lose money. my sister. and I also avoid overly leveraged investments. The overwhelming majority of my family’s wealth is invested in the Aquamarine Fund. It is easy enough to identify and avoid the most egregious ways in which ignoring 21 . This is my only fund and I can focus on it without any distractions. Big losses are a real killer. Many investment partnerships are run by managers who do not have a substantial personal investment in their own partnership and who work primarily with other people’s money. Pay Attention to Incentives Charlie Munger once said that while he has certainly understood the paramount importance of incentives in human behavior. I do not lever the portfolio. It is also important to note that my family — including my father. Avoid Leverage The fastest and most effective way to violate the previous rule is to take risks with capital that we do not already own. Or.As this chart illustrates. and I — are all invested in exactly the same vehicle as the fund’s other shareholders. and virtually all of my own money is in the fund. This creates an incentive to maximize short-term performance. Rule number two: do not forget rule number one. the more you lose. and it ultimately leads to increased risk. even he has grossly underestimated their importance. my uncle. An important component of the set-up at Aquamarine is to make sure that my incentives are appropriately aligned with the interests of my shareholders. the harder it is to get back to where you started. which it often does. There is nothing wrong with getting rich slowly — especially if trying to do it fast could end badly. 3. Another important component of this alignment of interests is the fund’s zeromanagement-fee share class in which I make money only if our shareholders make money. we are partners in this venture and we are all invested alongside one another in the same vehicle. Thus.

5. Due to the uncertainty as to where the foul line actually is. 6. it contains unnecessary complications that in most states of the world should be fine. Also. 22 . However. playing centre court usually does not require huge amounts of legal. accountants and lawyers do not like it when their clients play centre court — they would much rather have their clients push the boundaries. However. I can take with a pinch of salt a barber’s comment that I need a haircut. but in extreme states of the world could lead to problems. and truly desires the best for the Aquamarine Fund and its partners. I also need to be on guard for this kind of subtly imperfect advice. but highly negative outcomes. hard-working. I can steer clear of the sell-side broker who wants to churn my account. In addition to becoming more attuned to these factors. here is something much harder to spot: consider an advisor who is honest. When the foul line was moved by Eliot Spitzer. someone with good intentions and deep knowledge is still capable of giving imperfect advice.incentives can be damaging. AIG and the Greenberg family discovered this in the realm of finite insurance. One problem with playing the game close to the foul line is that the foul line moves around. it’s not his downside. and I have become active in a number of organizations that have helped me to acquire this input. but I might not. While the course of action that he counsels is generally sound and well-considered. In such circumstances he will tend to discount the downside (hey. accounting. like betting on a horse race. Similarly. they found themselves on the wrong side of it. At the races. and it might even lead to more work down the road). Indeed. While I might catch the egregiously imperfect advice. it’s not that hard to identify the fastest horse that will most probably win the race on any given day. Buy Better Businesses at Bargain Prices One of the hardest things for me to learn and truly internalize has been to see the market as a pari-mutuel system. I have learned that a very valuable source of input on important business decisions is that of my peers. Play Centre Court Donald Keough has a great discussion of this issue in his book The Ten Commandments for Business Failure. My job is not to discount that downside: the advisor would certainly survive the hidden but fatal flaw. Often. and other types of advice. playing close to it is a specific example of how you can expose yourself to the possibility of low probability. For example.

but substantively. Do not participate in roadshows or beauty contests designed to attract more assets. the fund is attracting a group of people who have already thought carefully about equities and about what they are looking for in a money manager. the focus of my investment research is now more oriented towards finding businesses that are mispriced. and the opportunities to place such bets are much rarer than most people think. In our case. No management fee — only a performance fee. thereby reducing our ability to buy stocks at extraordinarily cheap prices. I have succeeded in attracting a phenomenal group of investors who 23 . Work With Great Partners This is the subject of a book by Michael Eisner. 3. Here is the explanation for these rules: with only annual redemptions and no management fee. Allow only annual redemptions. The real skill is to find the mispriced bet: the horse whose chances of winning are much greater than the odds suggest. Relationship with Investors During the financial crisis. While time is the friend of a great business. 4.that horse is unlikely to be the best bet. rather than identifying great businesses and trying to justify paying a high price for them. several people redeemed their partnership interests in the Aquamarine Fund at the worst possible time. and I have seen the same principles play out in my own life. 7. Thus. rather than communicating frequently with nothing more than rewarmed market commentary. This is much harder. By putting the above rules in place. since the probability of its winning will typically already be factored into the odds offered by the bookmakers. if the business was purchased when it was priced to perfection it has as much potential to impair returns as a much less decent business. This experience taught me a lot about the importance of having the right sort of partners. The book carries the message that when it comes to working with other people. one plus one often equals three. this means: 1. One way to achieve this is to create the best possible structure for the fund. Communicate infrequently. 2. since this affects the quality of the investors the fund attracts.

there are a few ground rules that are key: 1. Never tell anyone what to do. not off them. Do not trade investment ideas sourced elsewhere until there is clear permission to do so from the originator. whenever I have gone beyond the call of duty regarding someone’s well-being. I also work hard at developing great relationships with a broad group of people who can help me to evaluate investment ideas. but the investing business: the regular pressure to look smart — in a newsletter. 4. Idea Generation and Investment Research Similarly. or other types of fundraising activity — is a distraction and is inimical to good investment returns. Keep confidential the ideas that are shared with me. it has resulted in all sorts of remarkable. • I want to make money with my partners. 8. but give thoughtful and value-added feedback on ideas.understand much. That has been true for me in all areas of my life. I am in neither the newsletter-writing business nor the fundraising business. • My wondering who will want to redeem every quarter is a needless distraction. 2. Always give credit when and where possible.” The benefits of behaving in this way are cumulative. perhaps the best way to find a great partner is to be a great partner. and only a performance fee) is a substantial boon to good long-term results and is also fair and decent. To paraphrase Hillel. One of the great lessons I’ve learned throughout my career is that all business is personal. The vast majority of the time. when it comes to investment research. Before making an investment I run the idea through a checklist that summarizes as 24 . • The fee structure (zero management fee. The human mind is filled with all sorts of evolutionary quirks that seriously degrade the rational decision-making ability of even the most intelligent investors. Use a Checklist This subject is discussed in Atul Gawande’s excellent book The Checklist Manifesto. These are really just applications of Hillel’s advice: “What is hateful to you. of the following: • In order to do my job well. I have to be able to think long term. 3. do not do to your neighbor. a roadshow. As with attracting a great set of investors. unexpected and fortuitous results for me. if not all.

25 . Most of the work on the checklist was done by Mohnish Pabrai. Thomas Edison made a virtue of his failures. are inevitable. But if and when it comes. Sir Ernest Shackleton succeeded in getting all of his men home safely from the Antarctic — despite horrendous conditions and his own grievous misjudgments and mistakes. 10. which would grow back two heads for each one that was cut off. I very much intend to be a part of that group. It is my firm intent to do so. many of the changes I have implemented. While the Aquamarine Fund was emphatically not the hydra of the investing world in 2008. our virtues are theoretical. Shackleton. But people who learn their lessons. Mistakes and misjudgments. but my experience in the past few years is that it has reduced my error rate dramatically. cutting off the head would be a disaster. we will be much better off. Adversity: Edison. and this has prevented me from making a number of bad investments. 9. But not for the mythical hydra. his writings were a constant companion. It is only when we actually have to act courageously. as described in this list of principles.many known investment mistakes as possible — mistakes made in the past either by me or by other money managers. We would all prefer not to deal with adversity. as in life. pick themselves up and keep going. have earned the right to consider themselves truly successful. Marcus Aurelius. have made the fund more capable of benefiting in all states of the world. for most animals. the historical subject of the popular movie Gladiator. and Marcus Aurelius Adversity in investing. honestly and with forthrightness that we get to prove that we have those virtues in reality. I ask myself whether I might be committing the same mistakes again. it’s an important opportunity. As he describes it. For his part. famously stating that he would continue to fail to make an electric light bulb until he eventually succeeded. like adversity. is a certainty. Amid the turmoil of 2008–09. Nobody likes to fail. teaching me that until adversity comes along. What is the investment equivalent? To be a fund that profits from all states of the world — even the disasters. instead of merely aspiring to have them. has taught me that the only real question is how we handle it. This method isn’t foolproof. and I am deeply grateful to him for the collaboration. Nassim Nicholas Taleb published a book entitled Antifragile: Things That Gain from Disorder. Become a Hydra of the Investing World In 2012. Likewise. If I handle them the way Shackleton did on his great voyage. Using a checklist acts as a circuit breaker.

Aquamarine Fund Assets Under Management ($ in millions) $180 $160 $140 $120 $100 $80 $60 $40 $20 26 12/13 12/12 12/11 12/10 12/09 12/08 12/07 12/06 12/05 12/04 12/03 12/02 12/01 12/00 12/99 12/98 12/97 $0 .

L. 50 Aquamarine Value Fund. 28 Aquamarine Fund. Inc. P. 66 . L. P.Financial Statements Aquamarine Master Fund.

2013 and Independent Auditors’ Report Table of Contents Independent Auditors’ Report 30 Financial Statements For The Year Ended December 31. L.P. 2013 Statement of Assets and Liabilities Condensed Schedule of Investments 31 32-34 Statement of Operations 35 Statement of Changes in Partners’ Capital 36 Statement of Cash Flows 37 Notes to the Financial Statements 28 38-49 .Aquamarine Master Fund. (A BRITISH VIRGIN ISLANDS INTERNATIONAL LIMITED PARTNERSHIP) Financial Statements for the year ended December 31.

29 .

but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control. Please see www. and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement. and the related statements of operations. In making those risk assessments. 2013.   April 30. each of which is a legally separate and independent entity. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. which comprise the statement of assets and liabilities. Opinion In our opinion. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. we express no such opinion.deloitte. L. a UK private company limited by guarantee. the financial position of the Master Fund as of December 31. and the results of its operations. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit.P. (the “Master Fund”). including the assessment of the risks of material misstatement of the financial statements. Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited. 2014 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited.  Tel: + 1 (441) 292 1500 Fax: + 1 (441) 292 0961 www.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. L. and its network of member firms. changes in partners’ capital and cash flows for the year then ended (all expressed in United States dollars). 30 . in all material respects. as well as evaluating the overall presentation of the financial statements. whether due to fraud or error. Box 1556 Hamilton HM FX Bermuda INDEPENDENT AUDITORS’ REPORT  To the General Partner and Limited Partners of  Aquamarine Master Fund.deloitte. this includes the design. in conformity with accounting principles generally accepted in the United States of America. a member firm of Deloitte Touche Tohmatsu Limited. including the condensed schedule of investments as of December 31. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.Deloitte & Touche Ltd. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.O.P. The procedures selected depend on the auditors’ judgment. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America. the financial statements referred to above present fairly.bm We have audited the accompanying financial statements of Aquamarine Master Fund. and the related notes to the financial statements. implementation. whether due to fraud or error. 2013. the auditor considers internal control relevant to the Master Fund’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. Accordingly. changes in partners’ capital and its cash flows for year then ended. Chartered Accountants Corner House 20 Parliament Street P. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.

106 55.498 Partners’ Capital 31 .784) 4. L.P.AQUAMARINE MASTER FUND.722 6 169.202.187 11.212.752.283.830 954.539.468.786 Total liabilities 2. at fair value (cost: $97.220 Liabilities Capital withdrawals payable Due to related parties 7 Accrued expenses and other payables 1.823 210 Total assets 171. 5 Due from brokers Receivables and prepayments 160. 2013 (Expressed in United States dollars) Notes Assets Investments in securities.734. STATEMENT OF ASSETS AND LIABILITIES For the year ended December 31.

536 3. At Fair Value Common Stocks United States of America Commercial Services 3.430 Diversified Financial Services American Express Co Com (cost: $14. 2013 (Expressed in United States dollars) Principal amount of shares Description Percentage of partners’ capital Fair value Investments In Securities.000 590.204 .745 140.200 106. L.186.150 272. at fair value 1.006.000 (cost $62.53 9.428.776.24% 5.300 16.337.000 Mining Horsehead Holding Corp (cost $13.98 Media 2.717.100) Berkshire Hathaway Inc.574 Consumer Finance 5.15 Total Insurance 12.337.67% See notes to the financial statements 32 19. Class A (cost $3.820) Other Insurance Berkshire Hathaway Inc.238.480. CONDENSED SCHEDULE OF INVESTMENTS For the year ended December 31. Class B (cost: $10. Com (cost: $4.83 3.493.04 22.445 Total Consumer Finance 14.847) 62.269.858.95 25.089.220.000 Pipelines 0.968) 11.42 9.02 25.043.999 Total United States.112.58 24.600 30 16.66 Oil & Gas 3.536 5.700) 9.000 Bank of America Corp.P.20 5.546) 14.453.AQUAMARINE MASTER FUND.669.151.

454 Jordan Mining.347. at fair value (cost: $91.000. At Fair Value (continued) Common Stocks (continued) Brazil Commercial Services. at fair value (cost: $9.44% China Italy Auto Manufacturers.596.360.872 7. L.986.378.050.64% $16.340. at fair value (cost: $7. at fair value (cost: $4.51% $ 872.302) Singapore Switzerland Food. at fair value (cost: $4. 2013 (Expressed in United States dollars) Principal amount of shares Description Percentage of partners’ capital Fair value Investments In Securities.545 See notes to the financial statements 33 .P.297.844.48% 2.526 Commercial services.24% $ 404.000 Auto Manufacturers Fiat Spa Eur5. CONDENSED SCHEDULE OF INVESTMENTS For the year ended December 31.092) 85.979.636) 0.014.177 9.73% $ 8.360) 4.800) 4.267) 5.427 0.75% Total Common Stocks.885 145. at fair value (cost $1. at fair value (cost: $919.538) 3.AQUAMARINE MASTER FUND.

963 Food.699 0. at fair value (cost: $65.25 Financial Total United States. CONDENSED SCHEDULE OF INVESTMENTS For the year ended December 31. at fair value (cost: $97. at fair value (cost: $1.662 Total American Depository Receipt (ADR).980 160. 2013 (Expressed in United States dollars) Principal amount of shares Description Percentage of partners’ capital Fair value Investments In Securities.P.40% 674.784) 94.AQUAMARINE MASTER FUND.41% Total Investments In Securities.980 14.580 Auto Manufacturers 450.31% Switzerland 521.308.206) 6.122. L.000 General Motors Co 07/2019 Call 18.759) Warrants United States of America Agriculture 0. at fair value (cost: $1.283.09% $ 152.15 10.400 14.411.422.41% Total Warrants.54% See notes to the financial statements 34 3.933) 8.260.699) 0. at fair value (cost: $5. at fair value (cost: $5.33 (cost: $3.819.187 .01% 19.060) 0. At Fair Value (continued) American Depository Receipt (ADR) Egypt Diversified financial services.933) 8.260.346.308.000 2.734.

896.618.P.755.024. 5 Foreign exchange 53.629) Net change in unrealized appreciation: Investments in securities 4.146 48.078 33.971 50.982 (53.266) 557.807 Expenses Management fee 7 Administration fee 8 Brokerage and bank expenses Professional fees Other expenses 2.411 (1.564 164.116 2.858. STATEMENT OF OPERATIONS For the year ended December 31. 2013 (Expressed in United States dollars) Notes Investment Income Dividends (net of withholding taxes of $228.618 136.507 11.723.397 Interest 410 557.AQUAMARINE MASTER FUND. L.604) Net Investment loss Net realized loss and net change in unrealized appreciation from investments and foreign currencies: Net realized loss from: Investments in securities Foreign currency transactions (1.621) (157.367 See notes to the financial statements 35 .281.600) Net realized loss and net change in unrealized appreciation from investments and foreign currencies Net increase in partners’ capital resulting from operations 51.739.008) (1.135.

272.000) 9.936. January 1.AQUAMARINE MASTER FUND.576.520 1. 2013 Total - 1.498 .029.259 159. 2013 (Expressed in United States dollars) Special General Limited Limited Partner Partner Partners Partners’ Capital.656.288 (5.655 115.507. 2013 See notes to the financial statements 36 - 1.135.539.965.367 - - (1.886.363 Increase/(Decrease) in Partners’ Capital: From operations Net increase in partners’ capital Incentive allocation From capital transactions Capital contributions Capital withdrawals Partners’ Capital. December 31. L. STATEMENT OF CHANGES IN PARTNERS’ CAPITAL For the year ended December 31.094.479.706) 50.P.002 (8.708 113.186 48.288 (3.936.821.886.032.239 169.640.520) - 10.520) - - 9.365 7.

467 Decrease in receivables and prepayments 2.904) Proceeds from investments sold 14. STATEMENT OF CASH FLOWS For the year ended December 31.621 Net change in unrealized appreciation on investments (53.739.721 Decrease in accrued expenses and other payables (529) Net cash used in operating activities (2.651. L.367 Adjustments to reconcile net increase in partners’ capital resulting from operations to net cash used in operating activities: Net realized loss from investments 1.P. net of changes in capital withdrawals payable (7.288 Capital withdrawals paid.250 Net change in cash and cash equivalents - Cash and cash equivalents.618) Payments for investments purchased (11.135.822 Increase in due to related parties 802.858.695.250) Financing Activities Capital contributions received 9. end of the year See notes to the financial statements 37 .858.048 Increase in due from brokers (4.886.AQUAMARINE MASTER FUND. beginning of the year Cash and cash equivalents.028.245) Decrease in due from related party 3.038) Net cash provided by financing activities 2. 2013 (Expressed in United States dollars) Cash flow provided by/(used in): Operating Activities: Net increase in partners’ capital from operations 50.424.618.

NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. a BVI Business Company (the “Offshore Feeder”). 2007 in accordance with the Partnership Act. Fair Value Measurements for further discussion relating to the Master Fund’s investments. The Master Fund’s feeders are Aquamarine Fund.P. Investments valuation The Master Fund values its investments in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820. The Master Fund is also registered under the BVI Securities and Investment Business Act 2010. in an orderly transaction between market participants at the measurement date. Organization and Business Activity Aquamarine Master Fund.. Securities listed on national securities exchanges are valued at their last sales price on the day of valuation. this translates into the goal of outperforming most equity indices by 5-15% annually. Significant Accounting Policies Basis of preparation The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and are stated in the United States (“US”) dollars. (collectively the “Feeder Funds”). and requires certain disclosures about fair value measurements. (the “Master Fund GP”) an affiliate of the Investment Manager. Fair value is the amount that would be received to sell an asset or paid to transfer a liability. The principal decision maker of the Investment Manager is Guy Spier.P. The general partner of the Master Fund is Aquamarine GP Ltd. the objective is to “double” investors’ wealth several times over the course of a lifetime. If no bid or asked prices are quoted on such date. (the “Master Fund”) was formed as an International Limited Partnership in the Territory of the British Virgin Islands (“BVI”) on February 7. The investment objective of the Master Fund is to compound wealth for investors over the long term.AQUAMARINE MASTER FUND. a Delaware Limited Partnership (the “Onshore Feeder”). and commenced trading on April 1. Practically. Aquamarine Capital Management. the 38 . LLC. 2. See note 4. L.. The Master Fund operates under a “master/feeder” structure where its investors invest substantially all of their investable assets in the Master Fund. L.P. Fair Value Measurements and Disclosures (“ASC 820”) which defines fair value. Entirely consistent with this goal is a strict focus on the potential downside for any investment.. 2007. 1996. Actual results could differ from those estimates and the differences could be material. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements. such securities shall be valued at the last closing bid prices for investments if held long and their last closing asked prices for securities sold short. establishes a framework for measuring value. Inc. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. as a “professional” mutual fund. and Aquamarine Value Fund. a New York limited liability company serves as the investment manager (the “Investment Manager”) to the Master Fund and is responsible for certain administrative and investment advisory services for the Master Fund. Conceptually. If no sales occurred on that day. 2013 (Expressed in United States dollars) 1. L.

Derivative financial instruments are recorded at fair value at the reporting date. Derivative financial instruments The Master Fund enters into derivative financial instruments such as warrants. 2013 (Expressed in United States dollars) security shall be fair valued by certain methods as the Investment Manager shall determine in good faith to reflect its fair market value. Accounting Standards Update In June 2013. The ASU revised the definition of what the characteristics of an investment company are. The change in unrealized loss on investments in securities is reflected in the statement of operations. Cash and cash equivalents The Master Fund considers cash at bank. Financial Services – Investment Companies (“ASC 946”). A company which meets the definition of an investment company and applies the guidance under ASC 946 must disclose that it meets this definition. Fair value of financial instruments The fair value of the Master Fund’s assets and liabilities which qualify as financial instruments under ASC 825. The Master Fund does not believe this ASU will have a significant impact on its financial statements. The Master Fund records a realized gain or loss when the short position is closed out. While the transaction is open. The proceeds received for a short sale are recorded as a liability and the Master Fund records an unrealized gain or loss to the extent of the difference between the proceeds received and the fair value at the reporting date of the open short position. and that it is applying this guidance in the notes to its financial statements. approximates the carrying amounts presented in the statement of assets and liabilities. and Disclosure Requirements. The ASU is effective for years beginning on or after December 15. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in the statement of operations as they arise. A short sale is a transaction in which the Master Fund sells a security it does not own. certain of which must be met in order to classify for the accounting treatment under Accounting Standards Codification (“ASC”) Topic 946. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. the Master Fund bears the market risk of an unfavorable change in the price of the security sold short in excess of the proceeds received.P. L. Securities sold short The Master Fund engages in short sales as part of its investment strategy. the Master Fund will also incur an expense for any dividends and/or interest which will be paid to the lender of the securities. See Note 5 for quantitative and qualitative disclosures on the Master Fund’s derivative financial instruments. short-term deposits and other short-term highly liquid investments with 39 .AQUAMARINE MASTER FUND. Measurement. Geographical and industry classifications The geographical and industry classifications included in the condensed schedule of investments represent the Investment Manager’s belief as to the most meaningful presentation of the classification of the Master Fund’s investments. By entering into short sales. 2013. Investment Companies (Topic 946) Amendments to the Scope. Financial Instruments: Disclosure about Fair Value of Financial Instruments. the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08.

Distinguishing Liabilities from Equity (“ASC 480”). Interest expense and other operating expenses are recorded on the accrual basis. such capital withdrawal notices represent an unconditional obligation of the Master Fund at December 31. other than investments in securities at fiscal year end. 2013. resulting from changes in exchange rates. interest and foreign withholding taxes recorded on the Master Fund’s books and the US dollar equivalent of the amounts actually received or paid. Income taxes Under the current laws of the BVI. L. the Master Fund received redemption notices to be paid after year end but based on December 31. Within the context of ASC 480. The Master Fund intends to 40 . The Master Fund receives interest on cash balances and pays interest on margin debit balances as determined by the brokers based on market rates. Capital withdrawals payable The Master Fund recognizes capital withdrawals payable in accordance with ASC 480. including short sale of securities. the Master Fund is not subject to income taxes. The cash at brokers may partially relate to securities sold short and its use may be therefore restricted until securities are purchased to cover the outstanding short position. 2013 capital balances.AQUAMARINE MASTER FUND. 2013 (Expressed in United States dollars) original maturities of three months or less to be cash and cash equivalents. Prior to December 31. 2013.P. where applicable. Such fluctuations are included with the net realized and unrealized gain or loss from investments in the statement of operations. Capital withdrawals are recognized as liabilities when the amount requested in the capital withdrawal notice becomes fixed. Due from brokers Due from brokers includes cash. foreign cash and margin balances with the Master Fund’s clearing brokers. dollar amounts at the date of valuation. Foreign currency Investment in securities and other assets and liabilities denominated in foreign currencies are translated into U.S. on a trade date basis. Dividend income is recognized on the ex-dividend date and is recorded net of withholding taxes. Reported net realized foreign exchange gains or losses arise from sales of foreign currencies. The liability to such partners is presented in the statement of assets and liabilities as “capital withdrawals payable”. Net unrealized foreign exchange gain and loss arise from changes in the fair values of assets and liabilities. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into US dollar amounts on the respective dates of such transactions. The Master Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Realized gains and losses on investment transactions are determined based on the first in. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. first out cost basis. and the difference between the amounts of dividends. Revenue and expense recognition The Master Fund records its transactions in securities. currency gains or losses realized between the trade and settlement dates on securities transactions. Interest income is recorded on the accrual basis.

where applicable. Based on its review. 3. Due From Brokers The “Due from brokers” balance in the statement of assets and liabilities includes the net cash and cash equivalents due from brokers at December 31. 2013 (Expressed in United States dollars) conduct its affairs such that it will not be subject to taxation in any jurisdiction. In certain cases. which gives priority to observable inputs in the marketplace that are more objective.487) at December 31. This amount includes cash denominated in foreign currencies with a fair value of $2. 4. Market price observability is affected by a number of factors. The Master Fund distinguishes between inputs that are based on market data obtained from independent sources and inputs that reflect assumptions from one market participant as to actions of other market participants and emphasizes those valuation inputs based on market data. 2013. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices. provides general characteristics and examples of measurement inputs associated with 41 . rather than inputs that are more subjective because they have been derived through extrapolation or interpolation from market data. Inputs to valuation techniques used by the Master Fund to determine the fair value of an asset or a liability are prioritized based upon a hierarchy. L. The following describes the three levels of the fair value hierarchy. the Master Fund considers where it is organized and where it makes investments.408. including matters that are subject to interpretation. In such cases. including the type of investment and the characteristics specific to the investment. an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Fair Value Measurement The Master Fund selects an appropriate valuation technique for the market conditions and for which sufficient.348 (cost $2. In determining the major tax jurisdictions. the inputs used to measure fair value may fall into different levels of the fair value hierarchy. other than withholding taxes on investment income and capital gains. The Master Fund is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months. The Master Fund reviews and evaluates tax positions in its major jurisdictions and determines whether or not there are uncertain tax positions that require financial statement recognition. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. reliable data inputs are available. General Partner and Special Limited Partner of the Master Fund are taxed on their proportionate share of the Master Fund’s income. Income Taxes (“ASC 740”) has not impacted the Master Fund’s financial statements for the year ended December 31. Individual partners of the Onshore Feeder.AQUAMARINE MASTER FUND. The Master Fund’s US Federal and state tax returns for 2010 to 2013 remain open for examination by tax authorities and tax positions associated with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations. the Master Fund has determined that ASC 740. The determination of income taxes is based on complex analyses of many factors. A determination of what constitutes “observable market data” requires significant judgment.274.P. generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. 2013 and therefore no provision for income taxes was recorded. 2013.

some brokered markets). interest rates and yield curves observable at commonly quoted intervals. The types of investments included in Level 1 are exchange traded equities and derivatives. prepayment speeds. Derivatives and Hedging (“ASC 815”) is intended to improve financial reporting about derivative instruments by requiring enhanced disclosures to enable investors to better understand how and why the Master Fund uses derivative instruments.. elements of risk in excess of the amounts recognized for financial statement purposes. or price quotations vary substantially either over time or among market makers (e. ASC 815.. volatilities.P.AQUAMARINE MASTER FUND. Derivative Financial Instruments The Master Fund may trade in derivative financial instruments with off-balance sheet risk in the normal course of its investing activities. all of the Master Fund’s investments were valued using Level 1 inputs. Level 3 inputs are based on the best information available in the circumstances. The value of a warrant has two components: time value and intrinsic value. These derivative financial instruments may involve. Level 2 Inputs are inputs that are observable.g. quoted prices in active markets for similar assets or liabilities. how these derivative instruments are accounted for and their effects on the Master Fund’s statements of assets and liabilities. 5. either directly or indirectly. operations and cash flows. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. and default rates) • Inputs that are derived principally from or corroborated by observable market data through correlation or by other means (market-corroborated inputs) Level 3 Inputs that are inputs both significant to the fair value measurement and unobservable. A warrant has a limited life and expires 42 . credit risks. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. combinations of market values or proprietary data. Level 1 investments are primarily securities that are listed or traded on a national or global exchange. loss severities. Investments measured and reported at fair value are classified and disclosed in one of the following categories: Level 1 Inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical and unrestricted assets or liabilities.. 2013.g. or in which little information is released publicly (e. Level 3 inputs reflect the Master Fund’s assumptions that it believes market participants would use in pricing the asset or liability. and inputs other than quoted prices that are observable or can be corroborated by observable market data. The inputs into the determination of fair value require significant management judgment or estimation. including inputs that are not derived from market data or cannot be corroborated by market data. which may include indirect correlation to a market value. At December 31. a principal-to-principal market) • Inputs other than quoted prices that are observable for the asset or liability (e.g. but do not qualify as Level 1 inputs and may include: • Quoted prices in markets that are not considered to be active for identical or similar assets or liabilities. to a varying degree. L. 2013 (Expressed in United States dollars) each hierarchical level as well as valuation techniques used by the Master Fund for components of its financial instrument inventory. The notional or contractual amounts of these instruments represent the investment the Master Fund has in particular classes of financial instruments and does not necessarily represent the amounts potentially subject to risk.

the intrinsic value of an “in the money” warrant will decline. first-out basis. The following table also identifies the net realized gain/(loss) and net unrealized appreciation/(depreciation) amounts included in investment in securities in the Statement of operations. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. 2013. if the price of the stock underlying the warrant does not exceed the strike price of the warrant on the expiration date. 2013 Underlying Risk Type Equity warrants Statement of assets and liabilities location Derivative assets Investment in securities.189 Total $ 5. 2013 Amount of realized Change in unrealized gains/(losses) appreciation/(depreciation) on derivatives on derivatives Underlying Risk Type recognized in income recognized in income Equity warrants - $ 5.189 As of December 31. As a result. For the year ended December 31. Fair value of derivative Instruments as of December 31. In addition. L.AQUAMARINE MASTER FUND. Any gains and losses realized from the purchase and sale of these securities were computed on a first-in. 2013.980 - The effect of derivative instruments on the Statement of Operations for the year ended December 31. categorized by primary underlying risk. if the stock underlying the warrant declines in price.P. 2013 (Expressed in United States dollars) on a certain date. Master Fund traded warrants in equity securities which were listed on a major stock exchange. The following table identifies the fair value amounts of derivative instruments included in the Statement of assets and liabilities as well as in the Condensed schedule of investments. at fair value Derivative liabilities $ 14. the Fund did not have any transaction in equity warrants. As the expiration date of a warrant approaches. there is the potential for the Master Fund to lose its entire investment in a warrant. the warrant will expire worthless. the time value of a warrant will decline.260.768.768. 43 . categorized by primary underlying risk. the derivatives held by the Master Fund were not subject to any master netting or similar agreements. Further. The warrants are reported in investment in securities at fair value in the statement of assets and liabilities with the resulting net unrealized gains and losses in investment in securities reflected in the statement of operations.

The minimum initial and additional contribution to the Master Fund by each investor shall be such minimum as determined by the Master Fund GP from time to time.885 from the Offshore Feeder. For the year ended December 31. related parties elected to pay management fee of 2%. in order to ensure that the Investment Manager had the required funds for operations. and Class A/B shareholders of the Offshore Feeder.416 is payable at the reporting date. 2013 (Expressed in United States dollars) 6. Allocation of net profits and net losses Net profits or net losses during any fiscal period shall be allocated as of the end of such fiscal period to the capital accounts of all the partners in the proportion that the balance of each partner’s capital account as of the beginning of such fiscal period bore to the aggregate of the capital accounts of all the partners as of the beginning of such fiscal period.P. 2013. Related Party Transactions and Balances Management fees Under the terms of an investment management agreement dated April 1. The Investment Manager receives a monthly management fee in arrears of an amount equal to approximately 0.AQUAMARINE MASTER FUND. No management fees are paid by the Special LP. 2013. At December 31. Management fee is payable by Class A limited partners of the Onshore Feeder. Class B limited partners of the Onshore Feeder and Class C shareholders of the Offshore Feeder. the Special LP’s proportionate interest in the partners’ capital of the Master Fund is approximately 6.679 from the Onshore Feeder and $1. Partners’ Capital Capital contributions The Master Fund GP may admit new limited partners and permit limited partners to make additional capital contributions on the first business day of each calendar month or at any other time in the Master Fund GP’s sole discretion.1667% (2% per annum) for related parties. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. Capital withdrawals A limited partner has the right upon five days prior written notice to the Master Fund GP to make a partial or total withdrawal from its capital account as of the last business day of each calendar quarter or such other date as determined by the Master Fund GP. the Investment Manager earned $39. 2007 the Investment Manager has agreed to render investment management services to the Master Fund. 7. regardless of the class in which investments are held. as of the last business day of each calendar month. During the financial crisis. The Investment Manager expects that this arrangement will be terminated in due course. of which $190.984. Special Limited Partner The Master Fund’s Special Limited Partner (“Special LP”) is an affiliate of the Investment Manager and is entitled to receive a portion of the incentive allocation with respect to the Offshore Feeder’s capital account in the Master Fund.0833% (1% per annum) for applicable nonrelated party investors and approximately 0.2%. L. 44 .

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 2013 (Expressed in United States dollars)

Incentive allocation
Offshore Feeder
Incentive allocation is calculated on the Offshore Feeder in accordance with the confidential information
memorandum dated October 1, 2008 as amended in July 2010.
Subject to the “loss recovery account provisions” discussed below, the following amounts will be reallocated (in
the aggregate) from the Offshore Feeder’s capital account in the Master Fund collectively to the Master Fund GP’s
and Special LP’s capital accounts in the Master Fund:
(i) at the end of each calendar quarter of the Master Fund, 20% of the Class A/B aggregate net increase, in excess
of the Class A/B hurdle return;
(ii) at the end of each calendar year of the Master Fund, 25% of the Class C aggregate net increase in excess of the
Class C hurdle return.
The incentive allocation shall be allocated as follows: 15% will be allocated to the capital account of the Master
Fund GP, and 85% will be allocated to the capital account of the Special LP.
Class A/B hurdle return means an amount equal to one percent (1%) of the portion of the Offshore Feeder capital
account balance in the Master Fund which is attributable to Class A/B shareholders, calculated as of the beginning
of each calendar quarter. The Class A/B hurdle return will be adjusted throughout the applicable period to reflect
additional contributions and withdrawals by the Class A/B shareholders of the Offshore Feeder in the Master
Fund. The Class A/B hurdle return is cumulative with respect to each quarter during a calendar year but not from
year to year.
Class C hurdle return means an amount equal to six percent (6%) of the portion of the Offshore Feeder capital
account balance in the Master Fund which is attributable to Class C shareholders, calculated as of the beginning
of each calendar year.
The Class C hurdle return will be adjusted throughout the applicable period to reflect additional contributions and
withdrawals by the Class C shareholders of the Offshore Feeder in the Master Fund. The Class C hurdle return is
non-cumulative with respect to each calendar year.
Under a loss carry forward recovery account, no incentive allocation is made from the sub-capital account of a
particular shareholder of the Offshore Feeder until any net loss previously allocated to the sub-capital account of
such shareholder has been offset by subsequent net profits. Any such loss carry forward will be subject to reduction
for redemptions on a pro rata basis.
Incentive allocation shall be credited as of the end of the performance period to the capital account of the Master
Fund GP and Special LP. The Master Fund GP and Special LP may, at their sole discretion, waive or reduce the
incentive allocation with respect to any shareholder.
For the year ended December 31, 2013, $7,029,186 and $1,240,445 were allocated from the Offshore Fund to the
Special LP and the Master Fund GP respectively.
Onshore Feeder
Incentive allocation is calculated on the Onshore Feeder in accordance with the amended and restated confidential
private placement memorandum dated January 1, 2008.

45

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 2013 (Expressed in United States dollars)

Subject to the “loss recovery account provisions” discussed below, the following amounts will be reallocated (in the
aggregate) from the Onshore Feeder’s capital account in the Master Fund to the Master Fund GP’s capital account
in the Master Fund:
(i) at the end of each calendar quarter, 20% of the Class A aggregate net increase, in excess of the Class A hurdle
return;
(ii) at the end of each calendar year of the Master Fund, 25% of the Class B aggregate net increase in excess of the
Class B hurdle return.
Class A hurdle return means an amount equal to one percent (1%) of the portion of the Onshore Feeder’s capital
account balance in the Master Fund which is attributable to Class A limited partners, as of the beginning of each
calendar quarter. The Class A hurdle return will be adjusted throughout the applicable period to reflect additional
capital contributions and withdrawals by the Class A limited partners in the Master Fund. The Class A hurdle return
is cumulative with respect to each quarter during a calendar year but not from year to year.
Class B hurdle return means an amount equal to six percent (6%) of the portion of the Onshore Feeder’s capital
account balance in the Master Fund which is attributable to Class B limited partners, calculated as of the beginning
of each calendar year. The Class B hurdle return will be adjusted throughout the applicable period to reflect
additional capital contributions and withdrawals by the Class B limited partners in the Master Fund. The Class B
hurdle return is non-cumulative with respect to each calendar year.
Under a loss carry forward recovery account, no incentive allocation is made from the sub-capital account of a
limited partner of the Onshore Feeder until any net loss previously allocated to the sub-capital account of such
limited partner has been offset by subsequent net profits. Any such loss carry forward will be subject to reduction
for withdrawals on a pro rata basis.
Incentive allocation shall be credited as of the end of the performance period to the capital account of the Master
Fund GP. The Master Fund GP may, at its sole discretion, waive or reduce the incentive allocation with respect to
any partners. For the year ended December 31, 2013, an incentive allocation of $696,076 was made to the Master
Fund GP from the Onshore Feeder.

Related party balances
A summary of the related party balances at the reporting date is as follows:

Due to Investment Manager
Due to General Partner

$ 190,416
$ 763,690

$ 954,106

8. Administration Agreement
The Master Fund and the Feeder Funds entered into an administration agreement with Prime Management Limited
(the “Administrator”) a subsidiary of SS&C Globe Op for the provision of certain accounting, administrative and
investor services. The Master Fund pays the Administrator an annual fee calculated and payable on a monthly basis.
The fee is calculated based on certain percentages of the partners’ capital of the Master Fund at the beginning of
each month and is subject to a monthly minimum of $5,000.

46

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 2013 (Expressed in United States dollars)

For the year ended December 31, 2013, total administration fees of $164,146 were incurred of which $19,489 was
payable at the reporting date.

9. Risk Factors
Investment in the Master Fund involves significant risk factors and is suitable only for persons who can bear the
economic risk of the loss of their investment, who have limited need for liquidity in their investment and who meet
the conditions set forth in the private placement memorandum. There can be no assurances that the Master Fund
will achieve its investment objective.
Investment in the Master Fund carries with it the inherent risks associated with investments in securities, as well
as additional risks including, but not limited to, the following:

Short sales
The Master Fund’s investment portfolio includes short positions. Short selling involves selling securities which
may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation
to replace the borrowed securities at a later date. Short selling allows the investor to profit from a decline in the
price of a particular security. A short sale creates the risk of a theoretically unlimited loss, in that the price of the
underlying security could theoretically increase without limit, thus increasing the cost to the Master Fund of
buying those securities necessary to cover the short position.
There can be no assurance that the security necessary to cover a short position will be available for purchase.
Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby
exacerbating the loss. As a result, short sales create the risk that the Master Fund’s ultimate obligation to satisfy
the delivery requirements may exceed the amount of the proceeds initially received or the liability recorded in the
statement of assets and liabilities.
The Master Fund had no short sales during the year ended December 31, 2013.

Borrowings and leverage
The Master Fund may utilize leverage in its investment program by entering into short sales, options and other
similar techniques.
The concept of leverage is based on the premise that the Master Fund’s cost of borrowing will be at rates that
normally will be lower than the rate of return earned on the longer term investments it holds.
While the use of leverage may increase the returns on capital invested in the Master Fund, the use of leverage also
increases the risk of loss of such capital, because the claims of lenders on assets and income of the Master Fund
will be senior to the claims of the investors.

Financial instruments and associated risks
The Master Fund maintains active trading positions in a variety of derivative and non-derivative instruments as
directed by its investment management strategy. The investing activities of the Master Fund expose it to various
types of risk, which are associated with the financial instruments and markets in which it invests. Such risks
include, but are not limited to, market risk, credit risk and liquidity risk.

47

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 2013 (Expressed in United States dollars)

Market risk
Market risk is the risk that future changes in equity and commodity prices, interest rates and foreign exchange
rates may make an instrument less valuable or more onerous. Market risk includes price risk, interest rate risk and
currency risk. All investments held are subject to market risk, are recognized at fair value, and all changes in market
condition directly affect net increase/decrease in partners’ capital resulting from operations.
The Master Fund manages its exposure to market risk in accordance with risk management principles set by the
Investment Manager for buying or selling instruments.
Price risk – The Master Fund is exposed to market risk on financial instruments that are valued at market prices.
Specifically, a risk exists that the ultimate selling price of such financial instruments may differ from their estimated
fair values at December 31, 2013.
Interest rate risk – Certain of the Master Fund’s financial assets and liabilities are interest bearing and as a result the
Master Fund is subject to risk due to fluctuations in the prevailing levels of market interest rates.
Currency risk – The functional currency of the Master Fund is the US dollar. The Master Fund invests in financial
instruments denominated in currencies other than its functional currency. Consequently, the Master Fund is
exposed to risks that the exchange rate of its currency relative to other currencies may change in a manner that has
an adverse effect on the value of the portion of the Master Fund’s assets or liabilities denominated in currencies
other than US dollars.

Credit risk
Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or
commitment that it has entered into with the Master Fund. Credit risk is generally higher when a non-exchange
traded financial instrument is involved because the counterparty for non-exchange traded financial instruments is
not backed by an exchange clearing house.
Substantially all financial instruments are cleared through and held in custody primarily by two major international
institutions. The Master Fund is subject to credit risk to the extent that these institutions may be unable to fulfill
their obligations either to return the Master Fund’s securities or repay amounts owed.
The risk that counterparties to both derivative and other instruments might default on their obligations is
monitored on an ongoing basis. To manage the level of credit risk, the Master Fund seeks to conduct business with
counterparties of good credit standing.

Liquidity risk
Liquidity risk is the risk that the Master Fund may have difficulty in liquidating its positions due to existing or
unforeseen market constraints. The Master Fund’s financial instruments may include investments that are traded
over-the-counter, which are not traded in an organized public market and may generally be illiquid. As a result, the
Master Fund may not be able to quickly liquidate investments or to respond to specific events such as deterioration
in the credit worthiness of any particular issuer.
At December 31, 2013, the Master Fund’s listed securities are considered to be readily realizable as they are listed
on major United States and international stock exchanges.
These risks are monitored on an ongoing basis and the composition of the portfolio is amended accordingly while
adhering to the investment guidelines set forth in the Master Fund’s confidential information memorandum.

48

27)% (6. the date that these financial statements were available for issue and found that there were no significant events which would have a material bearing on these financial statements.09% (8. 2014. different management fees and incentive allocation arrangements.97% (1. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. Subsequent Events Management has evaluated subsequent events occurring through April 30.59)% (6.56) Operative expenses after incentive allocation (8.56) Net investment loss after incentive allocation (7.P.15)% Net investment loss before incentive allocation Incentive allocation (1. 11. Individual limited partner’s returns will vary due to the timing of capital contributions and withdrawals.83)% *Ratios of operating expenses and net investment loss are computed based on the monthly average of the partners’ capital of all limited partners for the year. Financial Highlights The following financial highlights are calculated for the limited partners taken as a whole and exclude data for the Master Fund GP and Special LP. Total return Total return before incentive allocation Incentive allocation Total return after incentive allocation Ratio to average limited partners’ capital* Operating expenses before incentive allocation Incentive allocation 44.12) 35. 49 . L. 2013 (Expressed in United States dollars) 10.AQUAMARINE MASTER FUND.

Inc. 2013 Statement of Assets and Liabilities 53 Statement of Operations 54 Statement of Changes in Net Assets 55 Statement of Cash Flows 56 Notes to the Financial Statements 50 57-65 .Aquamarine Fund. (A BRITISH VIRGIN ISLANDS BUSINESS COMPANY) Financial Statements for the year ended December 31. 2013 and Independent Auditors’ Report Table of Contents Independent Auditors’ Report 52 Financial Statements For The Year Ended December 31.

51 .

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 2014 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited. The procedures selected depend on the auditors’ judgment. as well as evaluating the overall presentation of the financial statements.   April 30.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Accordingly. in all material respects. implementation.Deloitte & Touche Ltd. and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement. but not for the purpose of expressing an opinion on the effectiveness of the Offshore Feeder’s internal control. (the “Offshore Feeder”). Inc. changes in net assets and its cash flows for the year then ended. Chartered Accountants Corner House 20 Parliament Street P. 52 .deloitte.  Tel: + 1 (441) 292 1500 Fax: + 1 (441) 292 0961 www. Opinion In our opinion. in conformity with accounting principles generally accepted in the United States of America. 2013. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.bm We have audited the accompanying financial statements of Aquamarine Fund. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management. Please see www. Box 1556 Hamilton HM FX Bermuda INDEPENDENT AUDITORS’ REPORT  To the Board of Directors and Shareholders of Aquamarine Fund. whether due to fraud or error. a member firm of Deloitte Touche Tohmatsu Limited. changes in net assets and cash flows for the year then ended (all expressed in United States dollars). In making those risk assessments. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. a UK private company limited by guarantee.O. including the assessment of the risks of material misstatement of the financial statements. 2013 and the results of its operations. whether due to fraud or error. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. and the related notes to the financial statements. each of which is a legally separate and independent entity. and the related statements of operations. which comprise the statement of assets and liabilities as of December 31. and its network of member firms.deloitte. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. the financial statements referred to above present fairly. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America. Inc. the financial position of the Offshore Feeder as of December 31. Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited. we express no such opinion. this includes the design. the auditor considers internal control relevant to the Offshore Feeder’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances.

240 3 148. INC.000 26.022 253. 2013 (Expressed in United States dollars) Notes Assets Investments in Aquamarine Master Fund..831 Liabilities Subscriptions received in advance Accrued expenses and other payables 250. L.P.240 Total liabilities 276. at fair value Cash and cash equivalents Other assets 148. STATEMENT OF ASSETS AND LIABILITIES For the year ended December 31.070.093.AQUAMARINE FUND.346.601 208 Total assets 148.591 Net assets See notes to the financial statements 53 .

975 46.441 .P.055.389 Expenses 4 (10.468 29.710.311 4.750 10. 2013 (Expressed in United States dollars) Net Investment Loss Allocated From Aquamarine Master Fund. INC.000 63.445.505 36. L. L.993.064) Net realized loss and net change in unrealized appreciation on investments and foreign currencies allocated from Aquamarine Master Fund. Net Increase In Partners’ Capital Resulting From Operations See notes to the financial statements 54 (1. Net realized loss on investments and foreign currencies Net change in unrealized appreciation on investments and foreign currencies Net realized loss and net change in unrealized appreciation on investments and foreign currencies allocated from Aquamarine Master Fund.470) 48.968 Net Investment Loss (10.P.907 19.AQUAMARINE FUND.735. Notes Income 492. STATEMENT OF OPERATIONS For the year ended December 31.485.655. L.P.564) Income Other income Expenses Professional fees Administration fee 5 Office expenses Director’s fee 4 2.953) (9.

000 250.441 From capital transactions Issuance of shares Class B Series 2 Class B Series 3 Class B Series 4 Class B Series 5 Class B Series 6 Class C Series 2 Class C Series 3 Class C Series 4 Class C Series 5 Class C Series 6 Class C Series 7 Class C Series 8 145. 2013 105.908 Redemption of shares Class A Initial Series Class A Series 1 Class B Series 9 Class C Series 1 (56.319.000 248.655.591 See notes to the financial statements 55 .AQUAMARINE FUND. 2013 (Expressed in United States dollars) Net Assets.244) (4.064) Net realized loss on investments and foreign currencies (1.634) Increase in net assets from capital transactions 6.075 1.182.000 600.000 10.633 100.000 61.000 300.880) (1.735. January 1.445.975 Net increase in net assets resulting from operations 36.470) Net change in unrealized appreciation on investments and foreign currencies 48.270) (1. December 31. INC.000 850.055.200 300.000 5.347.274 Net Assets.000.000 1. 2013 148.240) (844. STATEMENT OF CHANGES IN NET ASSETS For the year ended December 31.197.355.217.910.158.876 Increase/(Decrease) In Net Assets From operations Net investment loss (10.070.

P.915. beginning of the year 153.441 Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Net realized loss on investments and foreign currencies 1.908 Payments on redemption of shares. L.601 See notes to the financial statements 56 .P. (8.392) Financing Activities Proceeds from issuance of shares.735. 9. STATEMENT OF CASH FLOWS For the year ended December 31. L.470 Net change in unrealized appreciation on investments and foreign currencies (48.000 Decrease in accrued expenses and other payables (4.445.655.P.710) Decrease in due to related parties (7.993.975) Net investment loss allocated from Aquamarine Master Fund.824 Increase in cash and cash equivalents 100.967) Net cash used in operating activities (4.000 Decrease in receivable from Aquamarine Master Fund. 2. L.921.020. net of changes in redemptions payable (6.169 Cash and cash equivalents.160.P.084) Net cash provided by financing activities 4.060.564 Payments for purchases of Aquamarine Master Fund.460.300.432 Cash and cash equivalents. end of the year 253. 2.AQUAMARINE FUND. L. net of changes in subscription received in advance 10. INC.215) Proceeds from sales of Aquamarine Master Fund. 2013 (Expressed in United States dollars) Cash Flow Provided By/(Used In): Operating Activities: Net increase in net assets from operations 36.

The Master Fund utilizes the services of the Investment Manager to invest the assets of the Funds. (the “Master Fund”). INC. Organization and Business Activity Aquamarine Fund. is the master fund. Aquamarine Capital Management. The Investment Manager is responsible for certain administrative and investment advisory services for the Feeder Funds and the Master Fund. 1997. the Offshore Feeder was automatically re-registered under the BVI Business Companies Act. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. The Offshore Feeder invests substantially all of its investable assets in the Master Fund. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. L. Significant Accounting Policies Basis of preparation The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and are stated in United States (“US”) dollars. The financial statements of the Master Fund. a New York limited liability company. Valuation of securities held by the Master Fund is disclosed in Note 2 of the Master Fund’s notes to the financial statements (the “Master Fund’s Notes”). 1997 under the International Business Companies Act and commenced operations on June 26. 2013. As at December 31. which has the same investment objectives as the Offshore Feeder. Actual results could differ from those estimates and the differences could be material. serves as the Investment Manager (the “Investment Manager”) of the Offshore Feeder and the Master Fund and the General Partner of the Onshore Feeder. The Offshore Feeder is also registered under the Securities and Investment Business Act. together with Aquamarine Value Fund. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements. The Offshore Feeder operates under a “master/feeder” structure. a Delaware Limited Partnership (collectively. The investment objective of the Offshore Feeder is to compound wealth for shareholders over the long term. On January 1. (the “Offshore Feeder”) was incorporated in the British Virgin Islands on June 26. The performance of the Offshore Feeder is directly affected by the performance of the Master Fund.P.AQUAMARINE FUND. are included at the end of this report and should be read in conjunction with the Offshore Feeder’s financial statements. 2013 (Expressed in United States dollars) 1. where Aquamarine Master Fund. including the condensed schedule of investments. together with the assets of the Onshore Feeder. a BVI International Limited Partnership. 57 . 2010 as a “professional” mutual fund. Valuation of investment in the Master Fund The Offshore Feeder records its investment in the Master Fund at fair value based on its respective percentage of the Master Fund’s partners’ capital.P (the “Onshore Feeder”). 2007. LLC. Inc. L. The Offshore Feeder intends to achieve its investment objectives through its investment in the Master Fund. 2. the Offshore Feeder’s proportionate interest in the partners’ capital of the Master Fund is approximately 87%. the “Feeder Funds”). The principal decision maker of the Investment Manager is Guy Spier. 2004.

other than withholding taxes on investment 58 . Financial Services – Investment Companies (“ASC 946”). Redemptions are recognized as liabilities when the amount requested in the redemption notice becomes fixed. Cash and cash equivalents The Offshore Feeder classifies cash at bank. Additional disclosures due to the impact of ASC 820 on the Offshore Feeder’s underlying investments held within the Master Fund are included in Note 4 of the Master Fund’s Notes. Revenue and expense recognition The Offshore Feeder records its proportionate share of the Master Fund’s income. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. Accounting Standards Update In June 2013. Redemptions payable The Offshore Feeder recognizes redemptions payable in accordance with ASC 480. Accordingly. L.AQUAMARINE MASTER FUND. the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08. 2013 net asset value. and Disclosure Requirements. The Offshore Feeder . Investment Companies (Topic 946) Amendments to the Scope. Fair Value Measurement and Disclosures (“ASC 820”) defines fair value. Income taxes Under current BVI law. such redemption notices represent an unconditional obligation of the Offshore Feeder at December 31. the Offshore Feeder received redemption notice to be paid after year end but based on December 31. the Fund is not required to pay taxes in BVI on either income or capital gains. expenses. 2013. no provision for taxation has been made in these financial statements. The liability to such shareholders is presented in the statement of assets and liabilities as “redemptions payable”. Income and expenses that are directly attributable to the Offshore Feeder are recorded on the accrual basis as incurred. The ASU is effective for years beginning on or after December 15. The Master Fund’s income and expenses recognition policies and allocation are discussed in Note 2 of the Master Fund’s Notes. and realized and unrealized gains and losses. 2013. establishes a framework for measuring fair value and requires certain disclosures about fair value measurements.P. certain of which must be met in order to classify for the accounting treatment under Accounting Standards Codification (“ASC”) Topic 946. 2013. A company which meets the definition of an investment company and applies the guidance under ASC 946 must disclose that it meets this definition. Measurement. Within the context of ASC 480. and that it is applying this guidance in the notes to its financial statements. 2013 (Expressed in United States dollars) ASC 820. Prior to December 31. The Offshore Feeder intends to conduct its affairs such that it will not be subject to taxation in any jurisdiction. The ASU revised the definition of what the characteristics of an investment company are. does not believe this ASU will have a significant impact on its financial statements. Foreign currency The books and records of the Offshore Feeder and the Master Fund are maintained in US dollars. Distinguishing Liabilities from Equity (“ASC 480”). and short-term deposits with original maturities of three months or less as cash and cash equivalents. The foreign currency translation policy is discussed in Note 2 of the Master Fund’s Notes.

The tax returns for 2010 to 2013 remain open for examination by tax authorities. The authorized capital of the Offshore Feeder may be divided into different classes with varying rights attached to each class. The determination of income taxes is based on complex of many factors. The Offshore Feeder is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months. At the end of each quarter or year as applicable. The Offshore Feeder reviews and evaluates tax positions in its major jurisdictions and determines whether or not there are uncertain tax positions that require financial statement recognition. the Offshore Feeder no longer offers Class A shares.000 and consists of 1. The Articles of Association of the Offshore Feeder empowers the Board of Directors (the “Board”) to create different classes of shares. expenses. Based on its review.). which have the same rights. 2013 and therefore no provision for income taxes was recorded.000 voting non-participating. the “Class C shares”.01 each (the “Ordinary shares”) and 9.999. the Offshore Feeder offers Class C shares. B1. L. 2013 (Expressed in United States dollars) income and capital gains allocated from the Master Fund. the “Shares”). Instead. The authorized capital of the Offshore Feeder is $100. Tax positions associated with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations. As of January 1. each a “Class” collectively. participating redeemable shares of par value $0. the “Class B shares”. 2007. 59 . Each of the outstanding series of shares participates ratably with all other outstanding series of the same class in the Offshore Feeder’s fees. Share Capital Authorized share capital of the Offshore Feeder As of April 1. assets and earnings with respect to such series. privileges and terms as the Class A shares. where applicable. C1 etc. the Offshore Feeder considers where it is organized and where it makes investments. The series are issued consecutively per class (i. The Shares are issued in series with a new series being issued on each date that the Offshore Feeder permits subscription for shares.AQUAMARINE MASTER FUND. In determining the major tax jurisdictions.e. The Offshore Feeder is filing a protective return in the United States. Class B and Class C Participating shares (respectively. commencing with A1.01 each (the “Participating shares”). then the next available series that does not have a loss carryforward shall be used in its place. Certain series may not be subject to the conversion at the discretion of the Board. The Shares are issued in various series to reflect equitably the differing incentive allocation attributable to each series. except for the terms of redemption as noted below.000 non-voting. nonredeemable shares of par value $0. 2008. . the “Class A shares”. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. a related party to the Investment Manager. including matters that are subject to interpretation. all series that do not have a loss carryforward available to them will be converted into the initial series of the applicable class of Participating shares unless the initial series has a loss carryforward. the Offshore Feeder has determined that the adoption of ASC 740 Income Taxes (“ASC 740”) has not impacted the Offshore Feeder’s financial statements for the year ended March 31. The Ordinary shares of the Offshore Feeder are held by the Master Fund Special LP (the “Special LP”). The Participating shares are divided into Class A. the Offshore Feeder offers the Class B shares. 3.P.

The Board may. 16. These amounts are subject to reduction at the discretion of the Board. on the last business day of the calendar month on each 12-month anniversary of the expiration of the Class C lock-up period. Class A and B shareholders are subject to a redemption fee of five percent (5%) of the redemption proceeds for redemptions made by a shareholder within the first six months after each subscription. and thereafter. in its sole discretion. The initial purchase price per share for each series of shares is $1. L.820.01 par value issued and fully paid. Class A shareholders have the right upon 20 days prior written notice to request a partial or total redemption of its Class A shares as of the last business day of each calendar month or such other day as determined by the Board.01 par value issued and fully paid.000 for Class A/B shares and $1. or such other days approved by the Board in its sole discretion.85 Class C shares at a $0. Participating shares 18. The minimum initial subscription for shareholders in the Offshore Feeder is $500.000 shares at $0. 2013 (Expressed in United States dollars) Issued share capital Ordinary shares 1.000. Subscriptions Shares may generally be subscribed to on the first business day of each month by giving two days written notice. Redemptions Shares will be redeemed at the redemption price equal to such shares’ net asset value (the “NAV”) as of the close of business on the redemption date. A shareholder may not redeem any series of its Class C shares until the expiration of the 12-month period following the purchase of such series of Class C shares. (the Class C lock-up period).48 Class A shares at a $0. 60 . NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. Dividends and distribution It is anticipated that the Offshore Feeder will not declare any dividends or make any distributions to its shareholders.01 par value issued and fully paid. occurring any time following the first six months and preceding the 12-month anniversary of each subscription.AQUAMARINE MASTER FUND.000.062. Class C shareholders have the right upon 60 days prior written notice to request a partial or total redemption of its Class C shares as of the last business day of the calendar month on the Class C lock-up period (defined below) expires.P.01 par value issued and fully paid. or such other date as determined by the Board.819. 16. without the prior written consent of the Board.59 Class B shares at a $0. A redemption fee of two percent (2%) will be charged for redemptions made by a Class A and B shareholder. Class B shareholders have the right upon 60 days prior written notice to request a partial or total redemption of its Class B shares as of the last business day of each calendar quarter or such other date as determined by the Board.000 for Class C shares. waive or reduce the redemption fees.

NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. 61 . Any increase or decrease in the NAV of the Offshore Feeder will be allocated between the classes and series based on their pro rata NAVs at the previous valuation date adjusted for any subscriptions and redemptions in the relevant period. the NAV per share of each class and series is calculated by determining that part of the NAV of the Offshore Feeder attributable to each class and series and dividing this value by the number of shares of that class and series in issue and rounding the result to two decimal places. L.AQUAMARINE MASTER FUND.P. 2013 (Expressed in United States dollars) Allocation of net profits and losses As the Offshore Feeder is made up of more than one class and series of shares.

819.127 Series 9 10.00 61. the NAV per share and the net asset value for each class of shares and series at the reporting date.15 .AQUAMARINE MASTER FUND. per share $ 1.650 Series 3 74.00 600.20 300.00 300.80 1.620.746.58 248.231.352.107 335.103.823.00 7.94 1.056.751 Series 2 195.00 850.520.15 1.31 1.731 7.570 Series 4 111.499.38 1.154.588. L.63 100.785.48 97.21 2.897 938.000.182.562 2.746 Series 6 264.136.820.062.055. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31.97 18.000 1.510.277.00 1.021.573 16.58 1.95 145.239.85 62 5.637.38 1.998.662.00 Participating shares Class A Class A Initial Series 11.376.350 1.95 1.57 1.51 1.98 1.000.00 250.51 16.00 1.163.109 Class A Series 1 85.P.909.319.671 Class B Series 1 12.07 1.120.118.904 316.664.670 5.838 Series 5 692.891 7.120.00 24.099 371. 2013 (Expressed in United States dollars) Net asset value per share The following table summarizes the shares outstanding.404.497.68 5.589 1.209.349.58 Class C Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 Series 8 15.00 25.58 1.00 5.024. Number of Net asset value Ordinary shares Net asset value $ shares No.96 1.347 16.66 1.

000.97 Class B Series 1 7.600.244.231. The fee is included in the caption “Expenses allocated from Master Fund” in the statement of operations. 2013 Class A Initial Series 2.00 1. a total management fee of $1.491.90 (1.00) - - - - - - (610.00 (13.94 145.00 (1.00 5.000. 2013 - - 312.000.97 7.00 Class C Series 7 1. investment policies and the purchase and sales of investments in securities and derivatives.885 was incurred and $186. Management fee is discussed in Note 7 of the Master Fund’s Notes.00 Class C Series 8 121.00) (250.P.30) (3.785. The amount has been charged to each of the Feeder Funds’ capital accounts in the Master Fund.355.00 600.319.50 Class B Series 3 225.00) (1.63 100.00) (121.20 300.00 600. 63 .182. L.261.984.00 Class C Series 5 1.261.78 Class A Series 1 16.00 Class B Series 4 - Class B Series 5 - Class B Series 6 - Class B Series 9 7. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31.00 5.00) - - - - 6.00 - - 248.51 16.491.620.50) (225.120.30 Class C Series 4 3.64) 10.00) (1.840.63 100.86 Class B Series 2 124.00 Class C Series 6 250.570.07 1.000. 2013.00 250.20 300.730.58 248.00 Class C Series 1 2.AQUAMARINE MASTER FUND. 2013 (Expressed in United States dollars) Share transaction summary Shares Shares Shares outstanding January 1.493 is payable at the reporting date by the Master Fund for the Offshore Feeder.00 250.00 850.08 (124. For the year ended December 31.888.57 Class C Series 2 358.319.00 1.00 300.549. including the composition of its portfolio and furnishes advice and recommendations with respect to investments.473.00 7.07 1.27) (300.93) - - - 145.071.27) 51.00) (1.00 61.93 Shares converted during the year issued/ redeemed/ transferred transferred during the during the year year Shares outstanding December 31.00 7.01 (358.923.00 61.00 850.00 Class C Series 3 1.600.702.90 44.000.91 4.00) - - - - - - - 2. Management fee due to the Investment Manager is recorded in the financial statements of the Master Fund.00) (1.588.182. Related Party Transactions and Balances Management fees The Offshore Feeder as a limited partner in the Master Fund pays a monthly management fee to the Investment Manager who provides the Offshore Feeder with continuous supervision of the Master Fund’s assets.00 300.

P. total return and ratios to average net assets may vary from these amounts and ratios based on different management fee and incentive allocation arrangements and the timing and amount of capital transactions. Share capital The Offshore Feeder has related party shareholders inclusive of the Special Limited Partner of the Master Fund. total administration fees of $19. total return and ratios to average net assets and other supplemental information for the year ended December 31.750 were incurred and $5. total return and ratios to average net assets are calculated for the initial series of each share class. the Offshore Feeder may be materially affected by the risk factors affecting the Master Fund as discussed in Note 9 of the Master Fund’s Notes. Financial Highlights The per share operating performance. 2013. For the year ended December 31. An individual investor’s per share operating performance.029. The amount is allocated to each of the Feeder Funds’ capital accounts in the Master Fund. L.000 were incurred and fully paid. Risks Factors Due to the nature of the “master/feeder” structure. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31.250 was payable at the reporting date.445 and $7. The shareholdings of these related parties total $96.834. The following represents the per share information. administrative and investor services.AQUAMARINE MASTER FUND. 6. the Offshore Feeder pays to the Administrator a monthly fixed fee as of the last business day of each month. 2013: 64 . 2013.598 and represent approximately 65% of net assets at the reporting date. Director’s fee For the year ended December 31.186 respectively. Administration Agreement The Master Fund and the Feeder Funds entered into an administration agreement with Prime Management Limited (the “Administrator”) a subsidiary of SS&C GlobeOp for the provision of certain accounting. 2013. For the year ended December 31. 5. Pursuant to the administration agreement with the Administrator.240. Incentive allocation is discussed in Note 7 of the Master Fund’s Notes. director fees of $4. the incentive allocations to the Master Fund GP and the Special LP from the Offshore Feeder were $1. 7. 2013 (Expressed in United States dollars) Incentive allocation Incentive allocation to the Master Fund GP and the Special LP are recorded in the financial statements of the Master Fund.

72) 528.75 Income from investment operations Net investment loss (343. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. end of the year $ 5.93% Ratios to average net assets * 34. L.51) (1. 2013 (Expressed in United States dollars) Class A Initial Series Class B Series 1 Net asset value.77)% (8.021.92 Net asset value.83 Per share operating performance Total return before incentive fee Incentive fee (104.61) 42. 8.28% Operating expenses before incentive fee Incentive fee (1.93% 35.31)% (0.AQUAMARINE MASTER FUND.87)% (6.984.25 (142.08) Operating expenses after incentive fee Net investment gain/loss before incentive fee Incentive fee (7.26)% (6. 15 Class C Series 1 $ 1.494.07 527. 637.51) (0.213.54% (7.391. the date that these financial statements were available for issue and found that there were no significant events which would have a material bearing on these financial statements.55 $ 1.38)% (7.735.04% (9. 65 .51) 0.61) 45.23)% (8.67 423.26)% (6.91)% * The ratios are computed based upon the weighted average net assets of shares as a whole throughout the year.38 42.94) 670.13 $ 2. beginning of the year $ 3.38)% (7.87)% (6. 2014.90) Net realized and unrealized gain from investments 1.51) (0.77)% (7.08) Net investment loss after incentive fee (7.76) Total return after incentive fee 34.17% (8.54% (7.376. Subsequent Events Management has evaluated subsequent events occurring through April 30.32 Total gain from investment operations 1.P.82 $ 1.

2013 and Independent Auditors’ Report Table of Contents Independent Auditors’ Report 68 Financial Statements For The Year Ended December 31.P. 2013 Statement of Assets and Liabilities 69 Statement of Operations 70 Statement of Changes in Partners’ Capital 71 Statement of Cash Flows 72 Notes to the Financial Statements 66 73-78 . (A DELAWARE LIMITED PARTNERSHIP) Financial Statements for the year ended December 31.Aquamarine Value Fund. L.

67 .

  April 30. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2014 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited. and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement. including the assessment of the risks of material misstatement of the financial statements. Opinion In our opinion. the financial position of the Onshore Feeder as of December 31. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. whether due to fraud or error. we express no such opinion. (the “Onshore Feeder”) which comprise the statement of assets and liabilities of as of December 31.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Box 1556 Hamilton HM FX Bermuda INDEPENDENT AUDITORS’ REPORT  To the Board of Directors and Shareholders of Aquamarine Value Fund. in conformity with accounting principles generally accepted in the United States of America.  Tel: + 1 (441) 292 1500 Fax: + 1 (441) 292 0961 www. Accordingly. changes in partners’ capital and cash flows for the year then ended (all expressed in United States dollars). Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America. L. 2013.O. The procedures selected depend on the auditors’ judgment.deloitte. a member firm of Deloitte Touche Tohmatsu Limited. 68 . and the related statements of operations.deloitte. each of which is a legally separate and independent entity. Chartered Accountants Corner House 20 Parliament Street P. the auditor considers internal control relevant to the Onshore Feeder’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. and the results of its operations. in all material respects. and the related notes to the financial statements. Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited. Please see www. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. whether due to fraud or error.P.Deloitte & Touche Ltd. implementation. the financial statements referred to above present fairly. changes in partners’ capital and its cash flows for the year then ended. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management.P. In making those risk assessments. and its network of member firms. as well as evaluating the overall presentation of the financial statements. L. but not for the purpose of expressing an opinion on the effectiveness of the Onshore Feeder’s internal control.bm We have audited the accompanying financial statements of Aquamarine Value Fund. this includes the design. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. 2013. a UK private company limited by guarantee.

at fair value Cash and cash equivalents Receivable from Aquamarine Master Fund.043 See notes to the financial statements 69 . 2013 (Expressed in United States dollars) Assets Investments in Aquamarine Master Fund.972..000 Total assets 10. L.736 32. STATEMENT OF ASSETS AND LIABILITIES For the year ended December 31. L.P.P.840 Total liabilities 51.P.403 30.216 3. 10.921.AQUAMARINE VALUE FUND.576 Partners’ Capital 10.939. L.619 Liabilities Capital withdrawals payable Accrued expenses and other payables 18.

P.501.P.116) (705.524) Expenses Administration fee Professional fees Other expenses 29.792 Net Investment Loss (760.741. L.P. Income 47.169 54. Net Increase In Partners’ Capital Resulting From Operations See notes to the financial statements 70 (125.AQUAMARINE VALUE FUND. STATEMENT OF OPERATIONS For the year ended December 31.316) Net realized loss and net change in unrealized appreciation on investments and foreign currencies allocated from Aquamarine Master Fund. L. 2013 (Expressed in United States dollars) Net Investment Loss Allocated From Aquamarine Master Fund.627.592 Expenses (753.656) 3.P.384 3. Net realized loss on investments and foreign currencies Net change in unrealized appreciation on investments and foreign currencies Net realized loss and net change in unrealized appreciation on investments and foreign currencies allocated from Aquamarine Master Fund.412 .000 20. L.728 2.623 5. L.

592.000.356 7.568 2. January 1.805 7.P. 2013 96.000 (727.907.000 (727.AQUAMARINE VALUE FUND.043 See notes to the financial statements 71 .530) 1.373 10. 2013 (Expressed in United States dollars) General Limited Partner Partners Partners’ Capital.644.161 Total Increase in Partners’ Capital: From operations Net increase in partners’ capital From capital transactions Capital contributions Capital withdrawals Partners’ Capital.670 10.000.844 2. 2013 231.412 - - 1.741.921. December 31. STATEMENT OF CHANGES IN PARTNERS’ CAPITAL For the year ended December 31. L.675.530) 328.

(965.403 See notes to the financial statements 72 .869) Net cash provided by financing activities 23.000 Capital withdrawals paid. L. 705.412 Adjustments to reconcile net increase in partners’ capital resulting from operations to net cash used in operating activities: Net realized loss on investments 125.131 Decrease In Cash And Cash Equivalents (370) Cash and cash equivalents.P.706) Net cash used in operating activities (23. end of the year 3.000 Decrease in receivable from Aquamarine Master Fund.501) Financing Activities Capital contributions received 1.000. L.P.203) Proceeds from sales of Aquamarine Master Fund. 255.384) Net investment loss allocated from Aquamarine Master Fund. L. 2013 (Expressed in United States dollars) Cash Flow Provided By/(Used In): Operating Activities: Net increase in partners’ capital from operations 2.000 Decrease in due from related party 27.656 Net change in unrealized appreciation on investments (3.627. STATEMENT OF CASH FLOWS For the year ended December 31.773 Cash and cash equivalents.P. net of changes in capital withdrawals payable (976. L. beginning of the year 3.741.AQUAMARINE VALUE FUND.P. L.200 Decrease in accrued expenses and other payables (10.524 Payments for purchases of Aquamarine Master Fund.P. 725.

The investment objective of the Onshore Feeder is to compound wealth for limited partners over the long term. The performance of the Onshore Feeder is directly affected by the performance of the Master Fund. Aquamarine Capital Management.P.AQUAMARINE VALUE FUND. At December 31. Fair Value Measurement and Disclosure (“ASC 820”) defines fair value. ASC 820. The Onshore Feeder invests substantially all of its investable assets in the Master Fund. The General Partner is responsible for certain administrative and investment advisory services for the Onshore Feeder and the Master Fund. (the “Master Fund”). NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. 2. together with the assets of the Offshore Feeder. Use of estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. L. The Onshore Feeder operates under a “master/feeder” structure. (the “Onshore Feeder”) was organized as a Delaware Limited Partnership on March 15. where Aquamarine Master Fund. LLC. The Master Fund utilizes the services of the General Partner to invest the assets of the Onshore Feeder. Inc. L. a New York limited liability company.S. are included at the end of this report and should be read in conjunction with the Onshore Feeder’s financial statements. Organization and Business Activity Aquamarine Value Fund. Valuation of securities held by the Master Fund is disclosed in Note 2 of the Master Fund’s notes to the financial statements (the “Master Fund’s Notes”). (the “Offshore Feeder”) a BVI Business Company (collectively. a British Virgin Islands (“BVI”) International Limited Partnership. the “Feeder Funds”). 2001 and commenced operations on April 26. together with Aquamarine Fund. The Onshore Feeder intends to achieve its investment objectives through its investment in the Master Fund. 2001. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.”) dollars. The financial statements of the Master Fund.P. Significant Accounting Policies Basis of preparation The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and are stated in the United States (“U. Valuation of investment in the Master Fund The Onshore Feeder records its investment in the Master Fund at fair value based on its respective percentage of the Master Fund’s partners’ capital. which has the same investment objectives as the Onshore Feeder. 2013 (Expressed in United States dollars) 1. L. Actual results could differ from those estimates and the differences could be material. The principal decision maker of the General Partner is Guy Spier. 2013.P. including the condensed schedule of investments. is the master fund. is the general partner (the “General Partner”) of the Onshore Feeder and is also the Investment Manager of the Master Fund and Offshore Feeder. establishes a framework for 73 . the Onshore Feeder’s proportionate interest in the partners’ capital of the Master Fund is approximately 6%.

2013. the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 201308. Capital withdrawals are recognized as liabilities when the amount requested in the capital withdrawals notice becomes fixed. and Disclosure Requirements. Within the context of ASC 480. Accounting Standards Update In June 2013. 2013. Financial Services – Investment Companies (“ASC 946”). Measurement. The ASU is effective for years beginning on or after December 15.AQUAMARINE VALUE FUND.P. 2013 (Expressed in United States dollars) measuring fair value and requires certain disclosures about fair value measurements. the Onshore Feeder received capital withdrawal notices to be paid after year end but based on December 31. Cash and cash equivalents The Onshore Feeder classifies cash at bank and short-term deposits with original maturities of three months or less as cash and cash equivalents. Income and expenses that are directly attributable to the Onshore Feeder are recorded on the accrual basis as incurred. The ASU revised the definition of what the characteristics of an investment company are. Distinguishing Liabilities from Equity (“ASC 480”). Prior to December 31. and realized and unrealized gains and losses. Additional disclosures due to the impact of ASC 820 on the Onshore Feeder’s underlying investments held within the Master Fund are included in Note 4 of the Master Fund’s Notes. the Onshore Feeder considers where it is organized and where it makes investments. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. A company which meets the definition of an investment company and applies the guidance under ASC 946 must disclose that it meets this definition. such capital withdrawal notices represent an unconditional obligation of the Onshore Feeder at December 31. In determining the major tax jurisdictions. The Onshore Feeder does not believe this ASU will have a significant impact on its financial statements. expenses. Foreign currency The books and records of the Onshore Feeder and the Master Fund are maintained in U. The Master Fund’s income and expenses recognition policies and allocation are discussed in Note 2 of the Master Fund’s Notes. The liability to such partners is presented in the statement of assets and liabilities as “capital withdrawals payable”. 2013. 2013 partners’ capital balances. dollars. The foreign currency translation policy is discussed in Note 2 of the Master Fund’s Notes. The Onshore Feeder’s US Federal tax returns for 2010 to 2013 remain open for examination by tax authorities and tax positions 74 . and that it is applying this guidance in the notes to its financial statements.S. Investment Companies (Topic 946) Amendments to the Scope. Capital withdrawals payable The Onshore Feeder recognizes capital withdrawals payable in accordance with ASC 480. L. certain of which must be met in order to classify for the accounting treatment under Accounting Standards Codification (“ASC”) Topic 946. Revenue and expense recognition The Onshore Feeder records its proportionate share of the Master Fund’s income. Income taxes The Onshore Feeder reviews and evaluates tax positions in its major jurisdictions and determines whether or not there are uncertain tax positions that require financial statement recognition.

As of December 31.AQUAMARINE VALUE FUND. 2013 and therefore no provision for income taxes was recorded.257.583 respectively.000 for each Class B limited partner. Based on its review the Onshore Feeder has determined that ASC 740. or at any other time in the General Partner’s sole discretion. including matters that are subject to interpretation. A withdrawal fee of five percent (5%) of the withdrawal amount will be charged for withdrawals made by a Class A limited partner within the first six months after each capital contribution.087 and $8. Capital withdrawals Class A limited partners may make a complete or partial withdrawal from its capital account as of the last day of each calendar quarter.000.P. Income Taxes (“ASC 740”) has not impacted the Master Fund’s financial statements for the year ended December 31. with 60 days’ prior written notice to Prime Management Limited a subsidiary of SS&C GlobeOp (the “Administrator”). and two percent (2%) for withdrawals occurring any time following the six (6) months and preceding the twelve (12) month anniversary of each capital contribution. L. Individual partners are taxed on their proportionate share of the Onshore Feeder’s income. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. in its sole discretion may permit any Class A limited partner to withdraw all or any portion of its capital account on a day other than the last day of a calendar quarter and/or on less than 60 days prior written notice subject to a withdrawal fee of two percent (2%) of the withdrawal proceeds. Following initial investment. the General Partner. The limited partners holding Class A Interests are sometimes referred to herein as “Class A limited partners” and the limited partners holding Class B Interests are sometimes referred to herein as “Class B limited partners”. The determination of income taxes is based on complex analyses of many factors.335. together with the initial Class A withdrawal fee. A and B. The Interests are divided into two classes. 2013 (Expressed in United States dollars) associated with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations. The General Partner may in its discretion waive the minimum initial contribution amount with respect to any partner. which are defined as partners’ share of the partners’ capital as reflected in each limited partner’s capital account. 3. subject to adjustment at the discretion of the General Partner. A Class B limited partners may make a complete or partial withdrawal from its capital account as of the last 75 . The Onshore Feeder is additionally not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months. Capital contributions The minimum investment in the Onshore Feeder is $500. Partners’ Capital Account The Onshore Feeder is currently offering limited partnership interests (“Interests”).000 by each Class A limited partner and $1. Additionally. a limited partner may make additional investments in amounts of not less than $50.000. 2013. there are Class A and Class B Interests for an amount of $2. The General Partner may admit new limited partners and permit limited partners to make additional contributions as of the first business day of each calendar month.

The fee is included in the caption “Expenses allocated from Master Fund” in the statement of operations. or such other date as determined by the General Partner. Management fee due to the General Partner is recorded in the financial statements of the Master Fund. without the prior written consent of the General Partner. the incentive allocation to the Master Fund GP from the Onshore Feeder 76 . Management fee is discussed in Note 7 of the Master Fund’s Notes. Class B limited partner may not withdraw any capital contribution (and any appreciation thereon) until the expiration of the 12-month period following the contribution of such capital. The amount has been charged to each of the Feeder Funds’ capital account in the Master Fund. The Investment Manager provides the Onshore Feeder with continuous supervision of the Master Fund’s assets. L. a class B limited partner may make a withdrawal on the last business day of the calendar month for each 12-month anniversary of the expiration of the Class B lock-up period. The amount is allocated to each of the Feeder Funds’ capital accounts in the Master Fund. Related Party Transactions and Balances Management fees The Onshore Feeder as a limited partner in the Master Fund pays a monthly management fee to the General Partner (as the Investment Manager of the Master Fund). For the year ended December 31. Thereafter. at least 90% of its estimated withdrawal amount with the balance payable 30 days after the Onshore Feeder’s annual audit. The management fee is calculated solely on the partners’ capital of Class A limited partners as of the last business day of each calendar month. investment policies and the purchase and sales of investments in securities and derivatives. The General Partner may in certain circumstances suspend withdrawals from the capital account of the Onshore Feeder. For the year ended December 31.P. at the General Partner’s sole discretion. Incentive allocation Incentive allocation to the General Partner is recorded in the financial statements of the Master Fund. the aggregate amount of management fees payable by the Onshore Feeder during such month which are attributable to each Class A limited partner shall be charged to such Class A limited partner’s capital account. and any net capital appreciation or depreciation will be allocated to all partners (including the General Partner) based on their proportionate share of the Onshore Feeder’s partners’ capital for such month. The General Partner in its sole discretion may waive or reduce the Class B lock-up period and/or the notice period required for withdrawals by Class B limited partners.679 was incurred and $3. 2013 (Expressed in United States dollars) business day of the calendar month in which the Class B lock-up period (defined below) expires upon 60 days prior written notice to the Administrator.923 was payable at the reporting date by the Master Fund for the Onshore Feeder. 4.AQUAMARINE VALUE FUND. (the Class B lock-up period). NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. Allocation of gains/losses and management fees At the end of each month. 2013. a total management fee of $39. Incentive allocation is discussed in Note 7 of the Master Fund’s Notes. Each withdrawing limited partner will receive. including the composition of its portfolio and furnishes advice and recommendations with respect to investments. Class B limited partners are not subject to withdrawal fees. 2013.

Administration Agreement The Master Fund and the Feeder Funds entered into an administration agreement with the Administrator as of April 1. 5.118 are Class A Interests and $779.782 Class B Interests. total administration fees of $29. different management fees and incentive allocation arrangements. Partners’ capital The Onshore Feeder has related party partners inclusive of the General Partner. The Onshore Feeder pays to the Administrator a monthly fixed fee as of the last business day of each month. NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31. For the year ended December 31. 2007 for the provision of certain accounting. Individual limited partners’ returns will vary due to the timing of contributions and withdrawals. The fee is included in the caption “Expenses allocated from Master Fund” in the statement of operations. the Onshore Feeder may be materially affected by the risk factors affecting the Master Fund as discussed in Note 9 of the Master Fund’s Notes.076. 2013. L.875 were payable at the reporting date. The incentive allocation is borne by the Master Fund. 6. 77 .AQUAMARINE VALUE FUND. These partners’ capital represent approximately 11% of partners’ capital at the reporting date of which $389. Risk Factors Due to the nature of the “master/feeder” structure. 7. Financial Highlights The following financial highlights are calculated for the limited partners taken as a whole and exclude data for the General Partner.000 were incurred and $11.P. administrative and investor services. 2013 (Expressed in United States dollars) was $696.

14)% (7.63) Net investment loss after incentive allocation (8. 2014. 78 . NOTES TO THE FINANCIAL STATEMENTS For the year ended December 31.77)% Net investment loss before incentive allocation Incentive allocation (0.AQUAMARINE VALUE FUND.63) Total return after incentive allocation 36. Subsequent Events Management has evaluated subsequent events occurring through April 30.26)% *Ratios of operating expenses and net investment loss are computed based on the monthly average of the partners’ capital of all limited partners for the year.34% Ratio to average limited partners’ capital* Operating expenses before incentive allocation Incentive allocation (1.63)% (7.63) Operating expenses after incentive allocation (8. L.97% (7. 2013 (Expressed in United States dollars) Total return Total return before incentive allocation Incentive allocation 43.P. 8. the date that these financial statements were available for issue and found that there were no significant events which would have a material bearing on these financial statements.

US Tax accounting) 79 . Chicago Credit Suisse. New York Keith Smith. L. Consultant. The Desai Group. L.. London Auditor Deloitte and Touche. Bermuda Brokers and Custodians UBS. British Virgin Islands Tax.) Michael J.P. New York Bratschi Wiederkehr Buob. Managing Partner Office Team Orly Hindi. Simon Spier. Liccar & Co. Zurich Director. Chicago (K1’s. and Aquamarine Value Fund. Inc.Team Aquamarine Guy Spier. Aquamarine Fund. Zurich Ogier. Aquamarine Fund Inc.P. Bermuda (Aquamarine Master Fund. Operations & Compliance. Events & Administration. Zug General Counsel Dentons. London Lynda Brandt. LLC.. Accounting and Administration Prime Management Limited..

Credit Suisse Thomas Rohner  Thomas Lauber  Taylor-Ann Messmer  Stefan Huerzeler  Raphael Huber Deloitte & Touche Mark Baumgartner  Tia Beckmann  Lewis Lo  Tonya Guishard Prime Management Limited Lorna Nicolas-Bernier  Barry Mah  Teresa Gallant  Jonathan Gazzard UBS. The Desai Group Ajay Desai  Melissa J Wilczak  Randy Bruns  Tim Dillow  Frank Pellicori  Andrew Lindblom  James Stirling 80 .

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Zurich Switzerland Tel +41 44 210 1900 Fax +41 44 210 1901 Aquamarine Capital 1345 Avenue of the Americas.aquamarinefund. NY 10105 United States Tel +1 212 716 1350 Fax +1 212 716 1353 Annual Report 2013 www.com Annual Report 2013 .Aquamarine Fund Aquamarine Zurich AG 18 Ramistrasse 8001. 2nd Floor New York.