Вы находитесь на странице: 1из 84

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
Managements Letter to Partners
Investing Principles

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

Dear Partner and Investor,


Investment Results

In 2013, the Aquamarine Fund returned 34.9%, versus 32.4% for the S&P
500. Since the funds inception in September 1997, our investors capital has
compounded at a rate of 11% annually, versus 6% annually for the S&P 500.
These figures are calculated net of all expenses and fees, so these are the
actual returns. The numbers for the S&P index include dividends, making
this an apples-to-apples comparison.
Commentary On These Results

When I started running this fund in 1997, 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. I havent delivered an Omaha
number like that, but Ive outperformed the market by a decent margin. And,
thanks to the miracle of compounding, an outperformance of 5 percentage
points a year adds up to a lot over time. Indeed, we recently calculated that
$1 million invested in the Aquamarine Fund back in 1997 was worth $5.63
million as of March 31, 2014, versus $2.7 million if that money had been
invested in the S&P 500.
Its 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 46.7% in 2008 during the global financial crisis. I
mention this not in a spirit of self-congratulation, but simply to demonstrate
the power of compounding decent returns over a long period. This should
help to explain why I am not willing to take risks (such as leverage) that could
potentially damage our returns. In my view, long-term compounding is the
name of the game.
The wisdom of this patient approach comes directly from Warren Buffett
and Charlie Munger. When Mohnish Pabrai and I had our charity lunch with
Buffett in 2008, he told us: Charlie and I always knew we would become
very wealthy, but we werent in a hurry. He then explained: If youre even a
slightly above average investor who spends less than you earn, over a lifetime
you cannot help but get very wealthy if youre patient. Ive taken that
advice very much to heart.

Subscriptions, Redemptions, and Net New Capital

In 2013 we received new subscriptions for $11,355,908, of which $9,269,200


came from twelve new partners. Welcome! We also received redemption
requests of $4,886,164, of which $689,961 was for complete withdrawals
from three of our partners. Im always sorry to see shareholders go, but life
circumstances change and Im delighted that these investors have done
well in the fund.
I dont need any extra capital to manage, but Im pleased that there is a net
inflow of money to invest in new ideas. Im also delighted with the quality
of our new partners. I never try to convince people to invest in the fund, and
I sometimes decline requests to invest with us. As I discovered in 200809, when several shareholders cashed out of the fund at a time when I was
finding extraordinary bargains to buy, its important to attract the right
partners. They need to be patient, long-term investors who understand
that there will be ups and downs in this endeavor.
This ability to ride through tough periods is enormously important. The
funds outperformance over the past few years is a direct result of the
opportunities that arose amid the turmoil of 2008-09. The rewards of
investing tend to come in lumps like this, so its critical to stick around. Im
very grateful to all of our investors who held firm during the financial crisis,
and Im pleased that you are now enjoying the fruits of your fortitude.
Its also important to keep this long-term perspective at a time when our
returns have been good. I have no idea how the stock market will perform
over the coming years. But Im confident that we will do well over time if
we stick to our discipline of buying undervalued stocks and holding them.
After a period of significant gains, our portfolio isnt as cheap as it was
several years ago. But were invested in excellent companies that are wellpositioned to continue appreciating in value, regardless of the ups and
downs we will encounter along the way.
Aquamarines Ratio of Wins to Losses

Before we get into a couple of post mortems of stocks that we recently sold,
I wanted to share with you some analysis on the fund that we did in 2013.
The chart on the following page shows that we have held 96 money-making
positions since the funds inception in 1997. We sold these 96 stocks for a

Im very grateful to all


of our investors who
held firm during the
financial crisis, and Im
delighted that you are
now enjoying the fruits
of your fortitude.

total profit of $71 million. As you can see, we have also owned 30 moneylosing positions, which we sold for a total loss of $6.5 million. In other
words, for every $10 we made, we lost about $1.
We didnt make this money by darting in and out of stocks or trying to predict
where the market was headed. We made it by investing in good companies
that were mispriced and then holding them. I was also struck by the fact
that more than half of our returns came from seven of our investments. Of
these, the largest realized gain was from a Singaporean company, Raffles
Education, which helps to show the benefits of investing globally.
Meanwhile, our largest dollar loss was in Crosstex Energy. We also had
a 100% loss in Delta Financial, though the sum involved was relatively
modest. Still, its a healthy reminder that investing is not an exact science
and that I will inevitably continue to make mistakes.

Ratio of Wins to Losses Since 1997


Positions

Number

$ million

Profit

96

$70.8

Loss

30

$6.5

Largest Realized Gain: $18 million (Raffles Education)


Largest Realized Loss: $1.7 million (Crosstex Energy)
One total loss: $400,000 (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, Ive found that it works better not to talk publicly about
current holdings in the fund. This is not a matter of guarding our secrets
to prevent other investors from stealing them. The real issue is that, once a
person has made a public statement, its psychologically difficult for them
to back away from it even if theyve realized that their stated opinion
was wrong. In his seminal book The Psychology of Influence, Robert Cialdini
called this the commitment and consistency principle.

With his research findings in mind, I prefer to provide a post mortem of


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

The goal is to give


you a clearer insight
into how your money
is invested, without
making it any harder
for me to invest
rationally.

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

Essentially, I want to
invest in companies
that make society
better, not worse.

has done just fine investing in companies that benefit society, and Im
comfortable following his example.
Fortunately, this was not a costly mistake. I had invested $1.3 million in
Potash of Saskatchewan in 2008. By the time I cashed out a few years later,
it had risen to $2 million. In the end, it was a solid investment, not a great
one. But at least our low entry price had provided us with a healthy margin
of safety.

Potash of Saskatchewan
80
70

Sold $42.1
$2 million
Purchased $28.6
$1.3 million

60
50
40
32.10
30
20

2008

2009

2010

2011

2012

2013

Post-Mortem 2: Crosstex Energy Inc.

Crosstex Energy (which has since changed its name following a merger)
owned and operated gas pipelines. This is a relatively low-tech business
with incredible economics. In the gas pipeline business, once youre
established in a particular location and own the rights of way, its hard to be
displaced and there are also extraordinary opportunities to reinvest at high
rates of return. The company also had exceptional management.
I had become familiar with the pipeline business as a result of an earlier
successful investment in Kinder Morgan. I saw an opportunity to repeat this
success by investing in Crosstex. The underlying assets held by Crosstex
Energy LP were extremely attractive. But I was even more attacted to the
parent company, Crosstex Energy Inc., which was entitled to a share of the

gains from improved operating performance. This struck me as a smart way


to leverage what was already a phenomenal business without using debt.
So I made a major investment that amounted to $8.3 million. My
understanding at the time was that we were not exposed to the price of
natural gas, since we were in a fixed-fee pipeline business where you got
paid regardless of the gas price. I also didnt think we were exposed to the
financial markets. But I was wrong on both counts. When the financial
crisis occurred in 2008, it turned out that the decline in gas prices had
various unexpected effects that I hadnt considered.
First of all, Crosstex was not entirely hedged in a part of its business that
involved cleaning and treating gas. So the company was wrong-footed by
the plunge in gas prices, which affected its results. Also, many companies
that were drilling for gas stopped drilling when prices dropped, since these
endeavors were no longer profitable. Moreover, companies that needed
to raise capital to drill also had to stop drilling. As for Crosstex, depressed
markets meant that it couldnt raise capital for new projects either. All of
this had a profoundly dampening effect on Crosstexs business outlook.
I couldnt have predicted these extreme events. But our investment was
clearly not as conservative as I had believed. For one thing, I had convinced
myself that we owned the pipelines, but all we really owned was the right
to a revenue stream from these pipelines. In other words, there was no
collateral land value in the particular vehicle that we owned. For a value
investor, its critical to have this sort of collateral asset value. With Crosstex,
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.
This was a perfect storm for Crosstex and the stock price fell dramatically.
In fact, it was the most extraordinary price decline Ive ever lived through.
I held on to the stock amid all this turmoil and it recovered to a remarkable
degree. In the end, I sold our investment for $6.6 million a loss of $1.7
million. If I had waited several months longer, we would have done better,
since Crosstex was acquired by Devon Energy in October 2013. But I dont
regret leaving the additional money on the table because I used the cash to
invest in other stocks that were exceptionally cheap.

10

In retrospect, Im 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. One reason why I was able to do this was that
I consciously stopped looking at the share price. I also stopped talking about
the company to my investors. Instead of trying to defend this investment,
I focused on the fact that the company possessed an underlying asset that
was remarkably valuable and that had not been destroyed.
This focus on the high quality of the underlying assets reassured me that
the business would recover if only I gave it enough time. A patient, rational
approach during a period of extreme turmoil saved us from a much larger

For me, 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.

loss. So, in the end, this wasnt a successful investment but it wasnt nearly
as bad as it could have been. For me, 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.

Crosstex Energy
40
30
20
19.96
10
0
2005

2006

2007

2008

2009

2010

2011

2012

2013

Looking Forward

Im happy with the companies in our portfolio and their prospects for price
appreciation. Im also constantly assessing new opportunities. But I feel
no pressure at all to buy anything until the right stock comes along. In the
past several months, Ive invested in only one new company. As Charlie
Munger explained at Berkshire Hathaways most recent annual meeting,
one reason for Berkshires success is that he and Buffett are happy to sit
and wait until something makes sense.

11

I cant predict what other opportunities will arise in the future. But I can give
you a very clear sense of what to expect in terms of the Aquamarine Funds
approach to investing. The key characteristics and guiding principles of
the fund wont change, so its worth spelling them out explicitly. 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. 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.
Organizational and Regulatory Update
Service Providers:

Last year we engaged a team at the law firm Dentons Michael Froy, Walter
Van Dorn and Curtis Stefanak to update and rewrite our documents. I
met Mike Froy through Mohnish Pabrai five years ago. Mohnish had great
things to say about Mike who has helped the Pabrai Funds in all sorts of
ways. Our experience so far has been that the Dentons team is superb.
We also engaged Nadia Menezes at Appleby, a company in the British
Virgin Islands that provides offshore legal, fiduciary and administration
services. Nadia, who had done excellent work for us while at a previous
employer, moved to Appleby a couple of years ago and was restricted from
soliciting us. But having discovered where she went, I was happy to follow
her and welcome her back onto our team.
In 2013, our administrator, Prime Management, was acquired by SS&C
Technologies, which is a global leader in services to funds like ours. We
are still using the Prime Management Limited name as it is a division of
SS&C GlobeOp. I believe we are in very good hands with SS&C, 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.
That said, 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. We have had no change
in our front line staff, but instead have benefited from the addition of
several people, including Patti Griffin, David Reid, Teresa Gallant and
Jonathan Gazzard, who have already provided first-rate support for Lorna
Nicolas-Bernier.

12

Custodians:

We have two custodians. One is Ajay Desai and his team at UBS in Chicago,
including Melissa Wilczak, Tim Dillow, Andrew Lindblom and Frank
Pellicori. I was introduced to Ajay by Mohnish Pabrai, who has an incredible
ability to select great people. Im only too happy to piggyback off him. Ajay
is a phenomenal guy who grew up in Omaha, Nebraska, so he certainly has
the right roots.
Our other custodian is Credit Suisse. One could argue that Ive concentrated
risk in Switzerland by using two Swiss banks as custodians. But I dont
believe thats the case. I think the quality of the relationship we have is more
important than the institution itself, and Im very happy with the group that
takes care of us at Credit Suisse.
There has been one other organizational change thats also worth
mentioning. Mark Chapman at Deloitte & Touche audited the funds
accounts for the last 16 years. But Mark has now retired from Deloitte. Our
new team at Deloitte consists of Mark Baumgartner, Tia Beckmann, Lewis
Lo and Tonya Guishard.
Foreign Account Tax Compliance Act (FATCA):

While were discussing these organizational issues, I should also say


something about regulatory issues, which are an increasingly prominent

Over and over again


courts have said
that there is nothing
sinister in so arranging
ones affairs as to
keep taxes as low as
possible.

part of our lives in the financial world.


We have registered successfully with the SEC, which became necessary
once our assets reached $100 million. Meanwhile, we are also complying
with the requirements of the Foreign Account Tax Compliance Act
(FATCA).
The basic upshot of FATCA is that we are being asked by the U.S. government
to help identify people who might be seeking to use the offshore fund
industry as a way of not paying U.S. taxes. In the future, these requirements
are also quite likely to expand to other countries.
When it comes to taxes, 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 ones affairs as to keep

13

taxes as low as possible. Everybody does so, rich or poor; and all do right,
for nobody owes any public duty to pay more than the law demands: taxes
are enforced exactions, not voluntary contributions. To demand more in
the name of morals is mere cant.
The U.S. 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. But they are looking to discourage people who seek to exploit grey
areas of the law as a means of not paying taxes.
These regulations will require us to keep a complete set of information on our
investors and to provide summary information to the IRS (and, potentially,
other tax revenue authorities) as and when they require it. For our books to
be complete, we may have to follow up with you to get extra information, and
I want to thank you in advance for your co-operation in this. We dont enjoy
doing this, but it is necessary in order to run a fund like Aquamarine. Not
to provide the information would result in us becoming non-compliant with
FATCA, thereby incurring all manner of unpleasant consequences.
The Swiss Financial Market Supervisory Authority (FINMA):

Unfortunately, our regulatory requirements do not end with SEC


registration and FATCA. In Switzerland, we also have to comply with
increasingly demanding requirements under the Swiss Collective
Investment Schemes Act. These CISA regulations are, in my opinion, 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.
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.
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. But
the regulators have a very specific vision of how to achieve this: for example,
there is a certain number of dedicated staff that we are supposed to have
in Switzerland, including a risk officer. I run a simple, long-only portfolio
of 20 or so stocks. So there is a very legitimate question as to what a risk
manager would do all day.

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.

This legislation has not been thought out clearly, and it does not take
into account how we work or that we have a long history of scrupulous
compliance with the law.
I had hoped for a private equity exemption for the Aquamarine Fund. But
this exemption appears not to be available to us. In any case, we are moving
forward with an application and hope that FINMA will grant us the relevant
exemptions.

If we do not get the requisite FINMA license, I may have to move the
primary base of my operations out of Switzerland. Our Swiss legal counsel,
Bratschi Wiederkehr & Buob, represented by Ingmar Snijders and Thomas
Iseli are helping us with this.
These issues are, of course, part of a broader, unfolding debate about
the best way to regulate the financial industry. I agree wholeheartedly
with the perspective of my friend Nick Sleep, who runs a renowned firm
called Nomad Investment Partners. Discussing regulation in a letter to his
investors, he wrote the following:
It seems to us that the regulatory landscape is not supportive of small, simple
investment boutiques that are not part of whatever problem the regulation
seeks to solve. We might wish otherwise, but the halcyon days of the budding
stock picker running his friends and family partnership from the sunroom at
home at 5505 Farnam Street, Omaha (an image so important to Zak and me)
are long gone. In our opinion, given time, the barrier to entry presented by the
new rules may cause considerable industry consolidation (a desired outcome
from a regulatory standpoint lets face it, regulation is expensive to do) but
consolidation will, in the end, bring with it an unintended, concomitant
increase in market fragility, to paraphrase Nassim Taleb. It also seems to
us, on an anecdotal basis, 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).
As some complex financial institutions may be discovering today, if the
proprietor has abdicated responsibility to the point of not knowing what is
going on, then that is not healthy either.
All this has come about because other people have lied and stolen. In
essence we are required to now prove that we are not Bernard Madoff but,

15

unlike Mr. Madoff, there is no potential for us to earn our way to a lighter
regime through good behaviour. Nor is any allowance made for the fact
that we invest for the very long term or that we are a simple fund. Indeed,
Nomad is treated the same as a leveraged, long/short hedge fund complex
that deals in exotica and trades constantly. Like traffic speed limits, the
regulation seeks to moderate all behaviour for the general good, and we
have lived with those restrictions quite happily (well, almost). Even so, in
our opinion, what is really required in order to bear down on the liars and
cheats are empowered, detectives-cum-regulators asking questions of
those whose practices dont sniff right. And if you really want to change
industry behaviour, Ill whisper this, tax short term investing. Instead, we
get more blanket rules for everyone.
Partnership Meetings

In 2013, we had an excellent set of partnership meetings in London, Zurich


and New York. There was a great (but different) energy and vibe in each of
those three locations.
I was delighted to see so many shareholders, friends and relatives coming
together for these meetings. There were also people who had traveled some
distance to join us. In New York, our youngest participant was an 11-yearold who had flown in from Norway. I look forward to welcoming you all
again at our 2014 shareholder meetings.
Thanks

All that remains is for me to thank you for your investment and your trust.
Your steadfast support makes it possible for me to focus on compounding
value over the long term, and I am sincerely grateful. I could not have a
better set of partners.
Sincerely,

Guy Spier

16

Aquamarine Fund Inc. Performance Relative to the S&P Index


Comparison of changes in $100,000 invested

Aquamarine Fund Inc.

S&P 500

$500,000
$450,000
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$ 50,000

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.

Aquamarine Value Fund L.P. Performance Relative to the S&P Index


Comparison of changes in $100,000 invested
Aquamarine Value Fund L.P.

S&P 500

$350,000
$300,000

$250,000

$200,000
$150,000

$100,000

$ 50,000

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

$0

17

Investing Principles
In 1996, Berkshire Hathaway issued its shareholders with a booklet entitled
An Owners Manual. Psychologically, this was a great move on Berkshires part,
since a number of studies have shown that by writing something down we increase
the probability of it happening. I wanted to set down a similar set of principles and
share them with our partners in the Aquamarine Fund. The goal here is not to
be complete or comprehensive; rather, it is to emphasize parts of the body of
worldly wisdom that I see as particularly relevant to me and the funds investors
at this point.
Worldly wisdom is a phrase used by Charlie Munger. How best to acquire it
and use it effectively for a life well lived is the subject of the book Poor Charlies
Almanack, which is a compilation of Mungers teachings. In his search for worldly
wisdom, Munger has drawn from many sources, including Ben Graham, Warren
Buffett, and Robert Cialdini.

Table of Contents
1. The Miracle of Compound Interest

20

2. Dont Lose Money

20

3. Avoid Leverage

21

4. Pay Attention to Incentives

21

5. Play Centre Court

22

6. Buy Better Businesses at Bargain Prices

23

7. Work with Great Partners

23

8. Use a Checklist

25

9. Become a Hydra of the Investing World

25

10. Adversity: Edison, Shackleton, and Marcus Aurelius

26

18

19

1. The Miracle of Compound Interest


When it comes to investment results, many investors have a tendency to focus on what
happened over the past month, quarter, or year. They might compare quarterly or annual
results to an index or to the results of other funds. 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.
I pay as little attention as possible to these metrics because they distract me from the
true task at hand. The only metric I find useful is thinking of long-term increases in net
worth, or getting the miracle of compound interest to work in our favor. 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.
My goal is to compound wealth at the highest possible rate, while minimizing the risk of
permanent capital loss. In order to keep my sights on the horizon, 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.

2. Dont 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 - As a Multiple of Original Investment


Years of Operation

Rate of Return

7%

12%

20

10

40

15

93

60

58

898

Initial Loss

20

Gain Required to Be Whole

25%

33%

40%

67%

50%

100%

18%
27

750
20,555

As this chart illustrates, the more you lose, the harder it is to get back to where you
started. Big losses are a real killer. Or, as Warren Buffett has said:
Rule number one: do not lose money.
Rule number two: do not forget rule number one.

3. 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. Thus, I do not lever the portfolio, and I also avoid overly
leveraged investments. There is nothing wrong with getting rich slowly especially if
trying to do it fast could end badly, which it often does.

4. Pay Attention to Incentives


Charlie Munger once said that while he has certainly understood the paramount
importance of incentives in human behavior, even he has grossly underestimated their
importance.
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 peoples
money. This creates an incentive to maximize short-term performance, and it ultimately
leads to increased risk.
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 overwhelming
majority of my familys wealth is invested in the Aquamarine Fund, and virtually all
of my own money is in the fund. This creates a powerful incentive to minimize the risk
of loss.
It is also important to note that my family including my father, my sister, my uncle,
and I are all invested in exactly the same vehicle as the funds other shareholders.
Whatever the investment returns might be, we are partners in this venture and we are all
invested alongside one another in the same vehicle. This is my only fund and I can focus
on it without any distractions.
Another important component of this alignment of interests is the funds zeromanagement-fee share class in which I make money only if our shareholders make
money.
It is easy enough to identify and avoid the most egregious ways in which ignoring

21

incentives can be damaging. For example, I can take with a pinch of salt a barbers
comment that I need a haircut. Similarly, I can steer clear of the sell-side broker who
wants to churn my account.
However, here is something much harder to spot: consider an advisor who is honest,
hard-working, and truly desires the best for the Aquamarine Fund and its partners.
While the course of action that he counsels is generally sound and well-considered,
it contains unnecessary complications that in most states of the world should be fine,
but in extreme states of the world could lead to problems. In such circumstances he
will tend to discount the downside (hey, its not his downside, and it might even lead
to more work down the road). My job is not to discount that downside: the advisor
would certainly survive the hidden but fatal flaw, but I might not. Indeed, someone
with good intentions and deep knowledge is still capable of giving imperfect advice.
While I might catch the egregiously imperfect advice, I also need to be on guard for
this kind of subtly imperfect advice.
In addition to becoming more attuned to these factors, I have learned that a very valuable
source of input on important business decisions is that of my peers, and I have
become active in a number of organizations that have helped me to acquire this input.

5. Play Centre Court


Donald Keough has a great discussion of this issue in his book The Ten Commandments
for Business Failure. One problem with playing the game close to the foul line is that the
foul line moves around. AIG and the Greenberg family discovered this in the realm of
finite insurance. When the foul line was moved by Eliot Spitzer, they found themselves
on the wrong side of it.
Due to the uncertainty as to where the foul line actually is, playing close to it is a specific
example of how you can expose yourself to the possibility of low probability, but highly
negative outcomes. Also, playing centre court usually does not require huge amounts of
legal, accounting, and other types of advice. Often, accountants and lawyers do not like
it when their clients play centre court they would much rather have their clients push
the boundaries.

6. 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, like betting on a horse race. At the races, its not that hard to
identify the fastest horse that will most probably win the race on any given day. However,

22

that horse is unlikely to be the best bet, since the probability of its winning will typically
already be factored into the odds offered by the bookmakers.
The real skill is to find the mispriced bet: the horse whose chances of winning are much
greater than the odds suggest. This is much harder, and the opportunities to place such
bets are much rarer than most people think.
While time is the friend of a great business, 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. Thus, the focus of my investment research is now more oriented towards
finding businesses that are mispriced, rather than identifying great businesses and trying
to justify paying a high price for them.

7. Work With Great Partners


This is the subject of a book by Michael Eisner, and I have seen the same principles play
out in my own life. The book carries the message that when it comes to working with
other people, one plus one often equals three.
Relationship with Investors

During the financial crisis, several people redeemed their partnership interests in the
Aquamarine Fund at the worst possible time, thereby reducing our ability to buy stocks
at extraordinarily cheap prices. This experience taught me a lot about the importance
of having the right sort of partners. One way to achieve this is to create the best possible
structure for the fund, since this affects the quality of the investors the fund attracts. In
our case, this means:
1. Allow only annual redemptions.
2. No management fee only a performance fee.
3. Communicate infrequently, but substantively, rather than communicating frequently
with nothing more than rewarmed market commentary.
4. Do not participate in roadshows or beauty contests designed to attract more assets.
Here is the explanation for these rules: with only annual redemptions and no management
fee, 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. By putting the above
rules in place, I have succeeded in attracting a phenomenal group of investors who

23

understand much, if not all, of the following:


In order to do my job well, I have to be able to think long term.
My wondering who will want to redeem every quarter is a needless distraction.
The fee structure (zero management fee, and only a performance fee) is a substantial
boon to good long-term results and is also fair and decent.
I want to make money with my partners, not off them.
I am in neither the newsletter-writing business nor the fundraising business, but the investing
business: the regular pressure to look smart in a newsletter, a roadshow, or other types of
fundraising activity is a distraction and is inimical to good investment returns.
Idea Generation and Investment Research

Similarly, when it comes to investment research, I also work hard at developing great
relationships with a broad group of people who can help me to evaluate investment
ideas. As with attracting a great set of investors, there are a few ground rules that are key:
1. Keep confidential the ideas that are shared with me.
2. Do not trade investment ideas sourced elsewhere until there is clear permission to
do so from the originator.
3. Never tell anyone what to do, but give thoughtful and value-added feedback on ideas.
4. Always give credit when and where possible.
These are really just applications of Hillels advice: What is hateful to you, do not do
to your neighbor. The benefits of behaving in this way are cumulative.
One of the great lessons Ive learned throughout my career is that all business is
personal. The vast majority of the time, whenever I have gone beyond the call of duty
regarding someones well-being, it has resulted in all sorts of remarkable, unexpected
and fortuitous results for me. To paraphrase Hillel, perhaps the best way to find a great
partner is to be a great partner. That has been true for me in all areas of my life.

8. Use a Checklist
This subject is discussed in Atul Gawandes excellent book The Checklist Manifesto.
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.
Before making an investment I run the idea through a checklist that summarizes as

24

many known investment mistakes as possible mistakes made in the past either by
me or by other money managers. I ask myself whether I might be committing the
same mistakes again. Using a checklist acts as a circuit breaker, and this has prevented
me from making a number of bad investments. This method isnt foolproof, but my
experience in the past few years is that it has reduced my error rate dramatically. Most
of the work on the checklist was done by Mohnish Pabrai, and I am deeply grateful to
him for the collaboration.

9. Become a Hydra of the Investing World


In 2012, Nassim Nicholas Taleb published a book entitled Antifragile: Things That Gain
from Disorder. As he describes it, for most animals, cutting off the head would be a
disaster. But not for the mythical hydra, which would grow back two heads for each one
that was cut off. What is the investment equivalent? To be a fund that profits from all
states of the world even the disasters. While the Aquamarine Fund was emphatically
not the hydra of the investing world in 2008, many of the changes I have implemented,
as described in this list of principles, have made the fund more capable of benefiting in
all states of the world.

10. Adversity: Edison, Shackleton, and Marcus Aurelius


Adversity in investing, as in life, is a certainty. Marcus Aurelius, the historical subject of
the popular movie Gladiator, has taught me that the only real question is how we handle
it. Amid the turmoil of 200809, his writings were a constant companion, teaching me
that until adversity comes along, our virtues are theoretical. It is only when we actually
have to act courageously, honestly and with forthrightness that we get to prove that we
have those virtues in reality, instead of merely aspiring to have them. We would all prefer
not to deal with adversity. But if and when it comes, its an important opportunity.
For his part, 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. Mistakes and misjudgments, like adversity, are inevitable. If I handle
them the way Shackleton did on his great voyage, we will be much better off. It is my
firm intent to do so.
Likewise, Thomas Edison made a virtue of his failures, famously stating that he would
continue to fail to make an electric light bulb until he eventually succeeded. Nobody
likes to fail. But people who learn their lessons, pick themselves up and keep going,
have earned the right to consider themselves truly successful. I very much intend to be
a part of that group.

25

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

Financial Statements
Aquamarine Master Fund, L. P.

28

Aquamarine Fund, Inc.

50

Aquamarine Value Fund, L. P.

66

Aquamarine Master Fund, L.P.


(A BRITISH VIRGIN ISLANDS INTERNATIONAL LIMITED PARTNERSHIP)

Financial Statements for the


year ended December 31, 2013
and Independent Auditors Report

Table of Contents
Independent Auditors Report

30

Financial Statements For The Year Ended December 31, 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

29

Deloitte & Touche Ltd.


Chartered Accountants
Corner House
20 Parliament Street
P.O. Box 1556
Hamilton HM FX
Bermuda

INDEPENDENT AUDITORS REPORT


To the General Partner and Limited Partners of
Aquamarine Master Fund, L.P.

Tel: + 1 (441) 292 1500


Fax: + 1 (441) 292 0961
www.deloitte.bm

We have audited the accompanying financial statements of Aquamarine Master Fund, L.P. (the Master Fund), which comprise the
statement of assets and liabilities, including the condensed schedule of investments as of December 31, 2013, and the related statements of
operations, changes in partners capital and cash flows for the year then ended (all expressed in United States dollars), and the related notes
to the financial statements.

Managements 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; this includes the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Master
Funds preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Funds internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Master Fund as
of December 31, 2013, and the results of its operations, changes in partners capital and its cash flows for year then ended, in conformity with
accounting principles generally accepted in the United States of America.

April 30, 2014

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche
Tohmatsu Limited and its member firms.
Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte
Touche Tohmatsu Limited.

30

AQUAMARINE MASTER FUND, L.P.

STATEMENT OF ASSETS AND LIABILITIES

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

Notes

Assets

Investments in securities, at fair value (cost: $97,734,784)


4, 5
Due from brokers
Receivables and prepayments

160,283,187
11,468,823
210

Total assets

171,752,220

Liabilities

Capital withdrawals payable


Due to related parties
7
Accrued expenses and other payables

1,202,830
954,106
55,786

Total liabilities

2,212,722

169,539,498

Partners Capital

31

AQUAMARINE MASTER FUND, L.P.

CONDENSED SCHEDULE OF INVESTMENTS

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

Principal
amount of
shares
Description

Percentage of
partners
capital

Fair value

Investments In Securities, At Fair Value


Common Stocks

United States of America


Commercial Services

3.24%

5,493,150


272,430

Diversified Financial Services


American Express Co Com (cost: $14,480,546)

14.58

24,717,574

Consumer Finance

5.42
9.53

9,186,300
16,151,445


Total Consumer Finance
14.95

25,337,745

140,600
30

16,669,536
5,337,000

590,000

Bank of America Corp. Com (cost: $4,043,820)


Other

Insurance

Berkshire Hathaway Inc. Class B (cost: $10,112,100)


Berkshire Hathaway Inc. Class A (cost $3,269,700)

9.83
3.15


Total Insurance
12.98


Media
2.04

22,006,536

3,453,000

Mining

Horsehead Holding Corp (cost $13,858,968)

11.66

Oil & Gas

3.20

5,428,000

Pipelines

0.02

25,999

Total United States,


at fair value

1,220,000


(cost $62,089,847)
62.67%

See notes to the financial statements

32

19,776,200

106,238,204

AQUAMARINE MASTER FUND, L.P.

CONDENSED SCHEDULE OF INVESTMENTS

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

Principal
amount of
shares
Description

Percentage of
partners
capital

Fair value

Investments In Securities, At Fair Value (continued)


Common Stocks (continued)

Brazil

Commercial Services, at fair value (cost $1,360,538) 3.44%

China

Italy

Auto Manufacturers, at fair value (cost: $4,986,800) 4.48%



2,000,000

Auto Manufacturers
Fiat Spa Eur5, at fair value (cost: $9,979,267)

5,844,872

7,596,177

9.64%

$16,340,427

0.24%

$ 404,526

Commercial services, at fair value (cost: $7,378,636) 0.51%

$ 872,454

Jordan

Mining, at fair value (cost: $919,302)


Singapore

Switzerland


Food, at fair value (cost: $4,297,360)
4.75%


Total Common Stocks,

at fair value

(cost: $91,014,092)
85.73%

$ 8,050,885

145,347,545

See notes to the financial statements

33

AQUAMARINE MASTER FUND, L.P.

CONDENSED SCHEDULE OF INVESTMENTS

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

Principal
amount of
shares
Description

Percentage of
partners
capital

Fair value

Investments In Securities, At Fair Value (continued)


American Depository Receipt (ADR)
Egypt


Diversified financial services, at fair value


(cost: $1,346,060)
0.31%

Switzerland

521,963


Food, at fair value (cost: $65,699)
0.09%

$ 152,699

0.40%

674,662

Total American Depository


Receipt (ADR), at fair
value (cost: $1,411,759)

Warrants


United States of America

Agriculture


0.01%

19,580



Auto Manufacturers
450,000
General Motors Co 07/2019

Call 18.33 (cost: $3,122,206)

6.15

10,422,000

2.25

Financial


Total United States, at fair value

(cost: $5,308,933)
8.41%

Total Warrants,

at fair value (cost: $5,308,933)
8.41%


Total Investments In Securities,

at fair value (cost: $97,734,784)
94.54%

See notes to the financial statements

34

3,819,400

14,260,980

14,260,980

160,283,187

AQUAMARINE MASTER FUND, L.P.


STATEMENT OF OPERATIONS

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

Notes

Investment Income

Dividends (net of withholding taxes of $228,266)


557,397
Interest 410


557,807

Expenses

Management fee
7
Administration fee
8
Brokerage and bank expenses
Professional fees
Other expenses

2,024,564
164,146
48,078
33,507
11,116


2,281,411


(1,723,604)
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

(1,739,621)
(157,008)


(1,896,629)
Net change in unrealized appreciation:
Investments in securities
4, 5
Foreign exchange

53,618,618
136,982


(53,755,600)
Net realized loss and net change
in unrealized appreciation
from investments
and foreign currencies
Net increase in partners capital
resulting from operations

51,858,971

50,135,367

See notes to the financial statements

35

AQUAMARINE MASTER FUND, L.P.

STATEMENT OF CHANGES IN PARTNERS CAPITAL

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


Special

General Limited Limited

Partner
Partner
Partners

Partners Capital,
January 1, 2013

Total

- 1,821,708 113,272,655 115,094,363

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, 2013

See notes to the financial statements

36

-
1,936,520

1,656,365
7,029,186

48,479,002
(8,965,706)

50,135,367
-

-
(1,936,520)

-
-

9,886,288
(3,640,000)

9,886,288
(5,576,520)

- 10,507,259

159,032,239

169,539,498

AQUAMARINE MASTER FUND, L.P.


STATEMENT OF CASH FLOWS

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

Cash flow provided by/(used in):


Operating Activities:
Net increase in partners
capital from operations

50,135,367

Adjustments to reconcile net increase


in partners capital resulting from operations
to net cash used in operating activities:

Net realized loss from investments


1,739,621
Net change in unrealized appreciation on investments
(53,618,618)
Payments for investments purchased
(11,695,904)
Proceeds from investments sold
14,424,048
Increase in due from brokers
(4,651,245)
Decrease in due from related party
3,467
Decrease in receivables and prepayments
2,822
Increase in due to related parties
802,721
Decrease in accrued expenses and other payables
(529)

Net cash used in operating activities
(2,858,250)

Financing Activities
Capital contributions received

9,886,288

Capital withdrawals paid,


net of changes in capital
withdrawals payable
(7,028,038)

Net cash provided by financing activities
2,858,250

Net change in cash and cash equivalents
-

Cash and cash equivalents, beginning of the year



Cash and cash equivalents, end of the year

See notes to the financial statements

37

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

1. Organization and Business Activity


Aquamarine Master Fund, L.P. (the Master Fund) was formed as an International Limited Partnership in the
Territory of the British Virgin Islands (BVI) on February 7, 2007 in accordance with the Partnership Act, 1996, and
commenced trading on April 1, 2007. The Master Fund is also registered under the BVI Securities and Investment
Business Act 2010, as a professional mutual fund.
The Master Fund operates under a master/feeder structure where its investors invest substantially all of their
investable assets in the Master Fund. The Master Funds feeders are Aquamarine Fund, Inc., a BVI Business
Company (the Offshore Feeder), and Aquamarine Value Fund, L.P., a Delaware Limited Partnership (the
Onshore Feeder), (collectively the Feeder Funds).
The investment objective of the Master Fund is to compound wealth for investors over the long term. Entirely
consistent with this goal is a strict focus on the potential downside for any investment. Conceptually, the objective
is to double investors wealth several times over the course of a lifetime. Practically, this translates into the goal
of outperforming most equity indices by 5-15% annually.
Aquamarine Capital Management, LLC, 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. The principal decision maker of the Investment Manager is Guy Spier. The general
partner of the Master Fund is Aquamarine GP Ltd., (the Master Fund GP) an affiliate of the Investment Manager.

2. 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. The following is a
summary of the significant accounting and reporting policies used in preparing the financial statements.

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. Actual results
could differ from those estimates and the differences could be material.

Investments valuation
The Master Fund values its investments in accordance with Financial Accounting Standards Board (the FASB)
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820)
which defines fair value, establishes a framework for measuring value, and requires certain disclosures about fair
value measurements. Fair value is the amount that would be received to sell an asset or paid to transfer a liability, in
an orderly transaction between market participants at the measurement date. See note 4, Fair Value Measurements
for further discussion relating to the Master Funds investments.
Securities listed on national securities exchanges are valued at their last sales price on the day of valuation. If no
sales occurred on that day, 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. If no bid or asked prices are quoted on such date, the

38

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 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. The change in unrealized loss on investments in securities is reflected in the statement of
operations.

Accounting Standards Update


In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2013-08, Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure
Requirements. The ASU revised the definition of what the characteristics of an investment company are, certain
of which must be met in order to classify for the accounting treatment under Accounting Standards Codification
(ASC) Topic 946, 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, and that it is applying this guidance in the notes to its financial statements. The ASU is effective for
years beginning on or after December 15, 2013. The Master Fund does not believe this ASU will have a significant
impact on its financial statements.

Geographical and industry classifications


The geographical and industry classifications included in the condensed schedule of investments represent the
Investment Managers belief as to the most meaningful presentation of the classification of the Master Funds
investments.

Derivative financial instruments


The Master Fund enters into derivative financial instruments such as warrants. Derivative financial instruments
are recorded at fair value at the reporting date. 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. See Note 5 for
quantitative and qualitative disclosures on the Master Funds derivative financial instruments.

Securities sold short


The Master Fund engages in short sales as part of its investment strategy. A short sale is a transaction in which the
Master Fund sells a security it does not own. 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. The Master Fund records a realized gain or loss
when the short position is closed out. By entering into short sales, 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. While the transaction
is open, the Master Fund will also incur an expense for any dividends and/or interest which will be paid to the
lender of the securities.

Fair value of financial instruments


The fair value of the Master Funds assets and liabilities which qualify as financial instruments under ASC 825,
Financial Instruments: Disclosure about Fair Value of Financial Instruments, approximates the carrying amounts
presented in the statement of assets and liabilities.

Cash and cash equivalents


The Master Fund considers cash at bank, short-term deposits and other short-term highly liquid investments with

39

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

original maturities of three months or less to be cash and cash equivalents.

Due from brokers


Due from brokers includes cash, foreign cash and margin balances with the Master Funds clearing brokers. The
Master Fund receives interest on cash balances and pays interest on margin debit balances as determined by the
brokers based on market rates. 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.

Capital withdrawals payable


The Master Fund recognizes capital withdrawals payable in accordance with ASC 480, Distinguishing Liabilities
from Equity (ASC 480). Capital withdrawals are recognized as liabilities when the amount requested in the
capital withdrawal notice becomes fixed.
Prior to December 31, 2013, the Master Fund received redemption notices to be paid after year end but based on
December 31, 2013 capital balances. Within the context of ASC 480, such capital withdrawal notices represent an
unconditional obligation of the Master Fund at December 31, 2013. The liability to such partners is presented in the
statement of assets and liabilities as capital withdrawals payable.

Revenue and expense recognition


The Master Fund records its transactions in securities, including short sale of securities, on a trade date basis.
Realized gains and losses on investment transactions are determined based on the first in, first out cost basis.
Interest income is recorded on the accrual basis. Dividend income is recognized on the ex-dividend date and is
recorded net of withholding taxes, where applicable. Interest expense and other operating expenses are recorded
on the accrual basis.

Foreign currency
Investment in securities and other assets and liabilities denominated in foreign currencies are translated into U.S.
dollar amounts at the date of valuation. 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. Such
fluctuations are included with the net realized and unrealized gain or loss from investments in the statement of
operations.
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities transactions, and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the Master Funds books and the US
dollar equivalent of the amounts actually received or paid.
Net unrealized foreign exchange gain and loss arise from changes in the fair values of assets and liabilities, other
than investments in securities at fiscal year end, resulting from changes in exchange rates.

Income taxes
Under the current laws of the BVI, the Master Fund is not subject to income taxes. The Master Fund intends to

40

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

conduct its affairs such that it will not be subject to taxation in any jurisdiction, other than withholding taxes on
investment income and capital gains, where applicable.
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. In determining the major tax jurisdictions,
the Master Fund considers where it is organized and where it makes investments. The Master Funds 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.
Based on its review, the Master Fund has determined that ASC 740, Income Taxes (ASC 740) has not impacted
the Master Funds financial statements for the year ended December 31, 2013 and therefore no provision for
income taxes was recorded.
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 determination of
income taxes is based on complex analyses of many factors, including matters that are subject to interpretation.
Individual partners of the Onshore Feeder, General Partner and Special Limited Partner of the Master Fund are
taxed on their proportionate share of the Master Funds income.

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. This amount includes cash denominated in foreign currencies with a fair
value of $2,408,348 (cost $2,274,487) at December 31, 2013.

4. Fair Value Measurement


The Master Fund selects an appropriate valuation technique for the market conditions and for which sufficient,
reliable data inputs are available. 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. A determination of
what constitutes observable market data requires significant judgment.
Market price observability is affected by a number of factors, including the type of investment and the characteristics
specific to the investment. Investments with readily available active quoted prices or for which fair value can be
measured from actively quoted prices, generally will have a higher degree of market price observability and a
lesser degree of judgment used in measuring fair value.
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, which gives priority to observable inputs in the marketplace that are more
objective, rather than inputs that are more subjective because they have been derived through extrapolation or
interpolation from market data. In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement. The following describes the three levels
of the fair value hierarchy, provides general characteristics and examples of measurement inputs associated with

41

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 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. 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. The types of investments included in Level 1 are exchange traded
equities and derivatives. Level 1 investments are primarily securities that are listed or traded on a national or global
exchange.
Level 2 Inputs are inputs that are observable, either directly or indirectly, 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,
quoted prices in active markets for similar assets or liabilities, and inputs other than quoted prices that are
observable or can be corroborated by observable market data, or price quotations vary substantially either
over time or among market makers (e.g., some brokered markets), or in which little information is released
publicly (e.g., a principal-to-principal market)

Inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves
observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, 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, including inputs
that are not derived from market data or cannot be corroborated by market data. The inputs into the determination
of fair value require significant management judgment or estimation. Level 3 inputs reflect the Master Funds
assumptions that it believes market participants would use in pricing the asset or liability. Level 3 inputs are based
on the best information available in the circumstances, which may include indirect correlation to a market value,
combinations of market values or proprietary data.
At December 31, 2013, all of the Master Funds investments were valued using Level 1 inputs.

5. 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. These derivative financial instruments may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. 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 measurement of the risks associated with
these instruments is meaningful only when all related and offsetting transactions are considered.
ASC 815, 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, how these derivative instruments are accounted for and their effects on the
Master Funds statements of assets and liabilities, operations and cash flows.
The value of a warrant has two components: time value and intrinsic value. A warrant has a limited life and expires

42

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

on a certain date. As the expiration date of a warrant approaches, the time value of a warrant will decline. In
addition, if the stock underlying the warrant declines in price, the intrinsic value of an in the money warrant will
decline. Further, if the price of the stock underlying the warrant does not exceed the strike price of the warrant on
the expiration date, the warrant will expire worthless. As a result, there is the potential for the Master Fund to lose
its entire investment in a warrant.
Master Fund traded warrants in equity securities which were listed on a major stock exchange. 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. Any gains and
losses realized from the purchase and sale of these securities were computed on a first-in, first-out basis. For the
year ended December 31, 2013, the Fund did not have any transaction in equity warrants.
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, categorized by primary underlying risk. 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, categorized by primary underlying risk.

Fair value of derivative


Instruments as of December 31, 2013


Underlying Risk Type
Equity warrants

Statement of assets
and liabilities
location

Derivative
assets

Investment in securities, at fair value

Derivative
liabilities

$ 14,260,980

The effect of derivative instruments on


the Statement of Operations for
the year ended December 31, 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

$ 5,768,189

Total
$ 5,768,189

As of December 31, 2013, the derivatives held by the Master Fund were not subject to any master netting or similar
agreements.

43

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

6. 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 GPs sole
discretion. 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.

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.

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 partners 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.

Special Limited Partner


The Master Funds 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 Feeders capital account in the Master
Fund. At December 31, 2013, the Special LPs proportionate interest in the partners capital of the Master Fund is
approximately 6.2%.

7. Related Party Transactions and Balances


Management fees
Under the terms of an investment management agreement dated April 1, 2007 the Investment Manager has agreed
to render investment management services to the Master Fund. The Investment Manager receives a monthly
management fee in arrears of an amount equal to approximately 0.0833% (1% per annum) for applicable nonrelated party investors and approximately 0.1667% (2% per annum) for related parties, as of the last business day
of each calendar month.
Management fee is payable by Class A limited partners of the Onshore Feeder, and Class A/B shareholders of the
Offshore Feeder. No management fees are paid by the Special LP, Class B limited partners of the Onshore Feeder
and Class C shareholders of the Offshore Feeder. During the financial crisis, in order to ensure that the Investment
Manager had the required funds for operations, related parties elected to pay management fee of 2%, regardless of
the class in which investments are held. The Investment Manager expects that this arrangement will be terminated
in due course.
For the year ended December 31, 2013, the Investment Manager earned $39,679 from the Onshore Feeder and
$1,984,885 from the Offshore Feeder, of which $190,416 is payable at the reporting date.

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 Feeders capital account in the Master Fund collectively to the Master Fund GPs
and Special LPs 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 Feeders capital account in the Master Fund to the Master Fund GPs 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 Feeders 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 Feeders 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds 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 Funds confidential information memorandum.

48

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

10. 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.
Individual limited partners returns will vary due to the timing of capital contributions and withdrawals, different
management fees and incentive allocation arrangements.

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

44.09%
(8.12)
35.97%

(1.59)%
(6.56)

Operative expenses after incentive allocation


(8.15)%

Net investment loss before incentive allocation


Incentive allocation

(1.27)%
(6.56)

Net investment loss after incentive allocation

(7.83)%


*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.

11. Subsequent Events


Management has evaluated subsequent events occurring through April 30, 2014, 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.

49

Aquamarine Fund, Inc.


(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, 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

51

Deloitte & Touche Ltd.


Chartered Accountants
Corner House
20 Parliament Street
P.O. Box 1556
Hamilton HM FX
Bermuda

INDEPENDENT AUDITORS REPORT


To the Board of Directors and Shareholders of
Aquamarine Fund, Inc.

Tel: + 1 (441) 292 1500


Fax: + 1 (441) 292 0961
www.deloitte.bm

We have audited the accompanying financial statements of Aquamarine Fund, Inc. (the Offshore Feeder), which comprise the statement
of assets and liabilities as of December 31, 2013, and the related statements of operations, changes in net assets and cash flows for the year
then ended (all expressed in United States dollars), and the related notes to the financial statements.

Managements 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; this includes the design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Offshore Feeders preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Offshore Feeders internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Offshore Feeder
as of December 31, 2013 and the results of its operations, changes in net assets and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

April 30, 2014


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche
Tohmatsu Limited and its member firms.
Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte
Touche Tohmatsu Limited.

52

AQUAMARINE FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES

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

Notes

Assets

Investments in Aquamarine Master Fund, L.P., at fair value


Cash and cash equivalents
Other assets

148,093,022
253,601
208

Total assets

148,346,831

Liabilities

Subscriptions received in advance


Accrued expenses and other payables

250,000
26,240

Total liabilities

276,240

148,070,591

Net assets

See notes to the financial statements

53

AQUAMARINE FUND, INC.

STATEMENT OF OPERATIONS

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

Net Investment Loss Allocated


From Aquamarine Master Fund, L.P.

Notes

Income 492,389
Expenses
4 (10,485,953)


(9,993,564)

Income

Other income

Expenses

Professional fees
Administration fee
5
Office expenses
Directors fee
4

2,468

29,907
19,750
10,311
4,000


63,968

Net Investment Loss
(10,055,064)

Net realized loss and net change in


unrealized appreciation on investments
and foreign currencies allocated from
Aquamarine Master Fund, L.P.

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, L.P.

Net Increase In Partners Capital
Resulting From Operations

See notes to the financial statements

54

(1,735,470)
48,445,975

46,710,505
36,655,441

AQUAMARINE FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS

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

Net Assets, January 1, 2013

105,217,876

Increase/(Decrease) In Net Assets


From operations

Net investment loss


(10,055,064)
Net realized loss on investments and foreign currencies
(1,735,470)
Net change in unrealized appreciation on investments and foreign currencies
48,445,975

Net increase in net assets resulting from operations
36,655,441

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

145,000
61,633
100,000
600,000
250,000
248,075
1,182,000
300,000
850,000
1,319,200
300,000
5,000,000


10,355,908

Redemption of shares
Class A Initial Series
Class A Series 1
Class B Series 9
Class C Series 1

(56,270)
(1,347,240)
(844,880)
(1,910,244)


(4,158,634)

Increase in net assets from capital transactions
6,197,274

Net Assets, December 31, 2013
148,070,591

See notes to the financial statements

55

AQUAMARINE FUND, INC.

STATEMENT OF CASH FLOWS

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

Cash Flow Provided By/(Used In):


Operating Activities:
Net increase in net assets from operations

36,655,441

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


1,735,470
Net change in unrealized appreciation on investments and foreign currencies
(48,445,975)
Net investment loss allocated from Aquamarine Master Fund, L.P.
9,993,564
Payments for purchases of Aquamarine Master Fund, L.P.
(8,921,215)
Proceeds from sales of Aquamarine Master Fund, L.P.
2,915,000
Decrease in receivable from Aquamarine Master Fund, L.P.
2,020,000
Decrease in accrued expenses and other payables
(4,710)
Decrease in due to related parties
(7,967)

Net cash used in operating activities
(4,060,392)

Financing Activities

Proceeds from issuance of shares, net of changes


in subscription received in advance

10,460,908

Payments on redemption of shares, net of


changes in redemptions payable
(6,300,084)

Net cash provided by financing activities
4,160,824


Increase in cash and cash equivalents
100,432
Cash and cash equivalents, beginning of the year
153,169

Cash and cash equivalents, end of the year
253,601

See notes to the financial statements

56

AQUAMARINE FUND, INC.

NOTES TO THE FINANCIAL STATEMENTS

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

1. Organization and Business Activity


Aquamarine Fund, Inc. (the Offshore Feeder) was incorporated in the British Virgin Islands on June 26, 1997
under the International Business Companies Act and commenced operations on June 26, 1997. On January 1, 2007,
the Offshore Feeder was automatically re-registered under the BVI Business Companies Act, 2004. The Offshore
Feeder is also registered under the Securities and Investment Business Act, 2010 as a professional mutual fund.
The Offshore Feeder operates under a master/feeder structure, where Aquamarine Master Fund, L.P. (the
Master Fund), a BVI International Limited Partnership, is the master fund. The Offshore Feeder invests
substantially all of its investable assets in the Master Fund, together with Aquamarine Value Fund, L.P (the
Onshore Feeder), a Delaware Limited Partnership (collectively, the Feeder Funds). As at December 31, 2013,
the Offshore Feeders proportionate interest in the partners capital of the Master Fund is approximately 87%.
The investment objective of the Offshore Feeder is to compound wealth for shareholders over the long term. The
Offshore Feeder intends to achieve its investment objectives through its investment in the Master Fund, which has
the same investment objectives as the Offshore Feeder.
Aquamarine Capital Management, LLC, a New York limited liability company, 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 Investment Manager is responsible for certain administrative and investment advisory services for
the Feeder Funds and the Master Fund. The principal decision maker of the Investment Manager is Guy Spier.
The performance of the Offshore Feeder is directly affected by the performance of the Master Fund. The Master
Fund utilizes the services of the Investment Manager to invest the assets of the Funds, together with the assets of
the Onshore Feeder.
The financial statements of the Master Fund, including the condensed schedule of investments, are included at
the end of this report and should be read in conjunction with the Offshore Feeders financial statements.

2. 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 following is a summary
of the significant accounting and reporting policies used in preparing the financial statements.

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. Actual results
could differ from those estimates and the differences could be material.

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 Funds partners capital. Valuation of securities held by the Master Fund is disclosed in Note 2 of the
Master Funds notes to the financial statements (the Master Funds Notes).

57

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

ASC 820, Fair Value Measurement and Disclosures (ASC 820) defines fair value, establishes a framework for
measuring fair value and requires certain disclosures about fair value measurements. Additional disclosures due to
the impact of ASC 820 on the Offshore Feeders underlying investments held within the Master Fund are included
in Note 4 of the Master Funds Notes.

Accounting Standards Update


In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2013-08, Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure
Requirements. The ASU revised the definition of what the characteristics of an investment company are, certain
of which must be met in order to classify for the accounting treatment under Accounting Standards Codification
(ASC) Topic 946, 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, and that it is applying this guidance in the notes to its financial statements. The ASU is effective for years
beginning on or after December 15, 2013. The Offshore Feeder . does not believe this ASU will have a significant
impact on its financial statements.

Cash and cash equivalents


The Offshore Feeder classifies cash at bank, and short-term deposits with original maturities of three months or
less as cash and cash equivalents.

Revenue and expense recognition


The Offshore Feeder records its proportionate share of the Master Funds income, expenses, and realized and
unrealized gains and losses. The Master Funds income and expenses recognition policies and allocation are
discussed in Note 2 of the Master Funds Notes.
Income and expenses that are directly attributable to the Offshore Feeder are recorded on the accrual basis as
incurred.

Redemptions payable
The Offshore Feeder recognizes redemptions payable in accordance with ASC 480, Distinguishing Liabilities from
Equity (ASC 480). Redemptions are recognized as liabilities when the amount requested in the redemption
notice becomes fixed. Prior to December 31, 2013, the Offshore Feeder received redemption notice to be paid
after year end but based on December 31, 2013 net asset value. Within the context of ASC 480, such redemption
notices represent an unconditional obligation of the Offshore Feeder at December 31, 2013. The liability to such
shareholders is presented in the statement of assets and liabilities as redemptions payable.

Foreign currency
The books and records of the Offshore Feeder and the Master Fund are maintained in US dollars. The foreign
currency translation policy is discussed in Note 2 of the Master Funds Notes.

Income taxes
Under current BVI law, the Fund is not required to pay taxes in BVI on either income or capital gains. Accordingly,
no provision for taxation has been made in these financial statements. The Offshore Feeder intends to conduct its
affairs such that it will not be subject to taxation in any jurisdiction, other than withholding taxes on investment

58

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

income and capital gains allocated from the Master Fund, where 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. In determining the major tax
jurisdictions, the Offshore Feeder considers where it is organized and where it makes investments. The Offshore
Feeder is filing a protective return in the United States. The tax returns for 2010 to 2013 remain open for examination
by tax authorities. Tax positions associated with foreign tax jurisdictions remain subject to examination based on
varying statutes of limitations.
Based on its review, the Offshore Feeder has determined that the adoption of ASC 740 Income Taxes
(ASC 740) has not impacted the Offshore Feeders financial statements for the year ended March 31, 2013 and
therefore no provision for income taxes was recorded. 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. The determination of income taxes is based on complex of many factors, including matters
that are subject to interpretation.

3. Share Capital
Authorized share capital of the Offshore Feeder
As of April 1, 2007, the Offshore Feeder no longer offers Class A shares. Instead, the Offshore Feeder offers the
Class B shares, which have the same rights, privileges and terms as the Class A shares, except for the terms of
redemption as noted below. As of January 1, 2008, the Offshore Feeder offers Class C shares.
The authorized capital of the Offshore Feeder is $100,000 and consists of 1,000 voting non-participating, nonredeemable shares of par value $0.01 each (the Ordinary shares) and 9,999,000 non-voting, participating
redeemable shares of par value $0.01 each (the Participating shares). The authorized capital of the Offshore
Feeder may be divided into different classes with varying rights attached to each class. The Participating shares
are divided into Class A, Class B and Class C Participating shares (respectively, the Class A shares, the Class B
shares, the Class C shares, each a Class collectively, the Shares).
The Ordinary shares of the Offshore Feeder are held by the Master Fund Special LP (the Special LP), a related
party to the Investment Manager. The Articles of Association of the Offshore Feeder empowers the Board of
Directors (the Board) to create different classes of shares.
The Shares are issued in series with a new series being issued on each date that the Offshore Feeder permits
subscription for shares. The series are issued consecutively per class (i.e. commencing with A1, B1, C1 etc.). Each
of the outstanding series of shares participates ratably with all other outstanding series of the same class in the
Offshore Feeders fees, expenses, assets and earnings with respect to such series.
The Shares are issued in various series to reflect equitably the differing incentive allocation attributable to
each series.

At the end of each quarter or year as applicable, 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, 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.

59

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

Issued share capital


Ordinary shares
1,000 shares at $0.01 par value issued and fully paid.
Participating shares
18,820.48 Class A shares at a $0.01 par value issued and fully paid.
16,062.59 Class B shares at a $0.01 par value issued and fully paid.
16,819.85 Class C shares at a $0.01 par value issued and fully paid.

Dividends and distribution


It is anticipated that the Offshore Feeder will not declare any dividends or make any distributions to its
shareholders.

Subscriptions
Shares may generally be subscribed to on the first business day of each month by giving two days written notice,
or such other days approved by the Board in its sole discretion. The initial purchase price per share for each series
of shares is $1,000. The minimum initial subscription for shareholders in the Offshore Feeder is $500,000 for
Class A/B shares and $1,000,000 for Class C shares. These amounts are subject to reduction at the discretion
of the Board.

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.
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.
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.
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. A redemption fee of two
percent (2%) will be charged for redemptions made by a Class A and B shareholder, occurring any time following
the first six months and preceding the 12-month anniversary of each subscription. The Board may, in its sole
discretion, waive or reduce the redemption fees.
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, and thereafter, on the last business day of the calendar month on each 12-month anniversary of the
expiration of the Class C lock-up period, or such other date as determined by the Board.

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), without the prior written consent of
the Board.

60

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 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, 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. 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.

61

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

Net asset value per share


The following table summarizes the shares outstanding, the NAV per share and the net asset value for each class of
shares and series at the reporting date.


Number of Net asset value

Ordinary shares

Net asset value


$

shares
No.

per share
$

1,000

1,000.00 1.00


Participating shares

Class A
Class A Initial Series 11,998,109
Class A Series 1
85,664,562

2,231.51
16,588.97

18,820.48

97,662,671


Class B
Series 1
12,746,751
Series 2
195,650
Series 3
74,570
Series 4
111,838
Series 5
692,746
Series 6
264,127
Series 9
10,823,891


7,785.95
145.00
61.63
100.00
600.00
250.00
7,120.00

24,909,573

16,062.58

Class C
Series 1
Series 2
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8

15,404,107
335,589
1,510,099
371,897
938,350
1,499,904
316,670
5,120,731

7,620.58
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00

25,497,347

16,819.85

62

5,376.68
5,163.95

1,637.15
1,349.31
1,209.96
1,118.38
1,154.58
1,056.51
1,520.21

2,021.38
1,352.80
1,277.58
1,239.66
1,103.94
1,136.98
1,055.57
1,024.15

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

Share transaction summary



Shares Shares

Shares
outstanding
January 1,
2013

Class A Initial Series 2,244.78


Class A Series 1
16,888.97
Class B Series 1
7,473.86
Class B Series 2
124.50
Class B Series 3
225.00
Class B Series 4
-
Class B Series 5
-
Class B Series 6
-
Class B Series 9
7,730.00
Class C Series 1
2,071.57
Class C Series 2
358.00
Class C Series 3
1,261.30
Class C Series 4
3,000.00
Class C Series 5
1,600.00
Class C Series 6
250.00
Class C Series 7
1,491.00
Class C Series 8
121.93

Shares
converted
during the
year

issued/
redeemed/
transferred transferred
during the during the
year
year

Shares
outstanding
December 31,
2013

-
-
312.08
(124.50)
(225.00)
-
-
-
-
6,549.01
(358.00)
(1,261.30)
(3,000.00)
(1,600.00)
(250.00)
(1,491.00)
(121.93)

-
-
-
145.00
61.63
100.00
600.00
250.00
-
-
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00

(13.27)
(300.00)
-
-
-
-
-
-
(610.00)
(1,000.00)
-
-
-
-
-
-
-

2,231.51
16,588.97
7,785.94
145.00
61.63
100.00
600.00
250.00
7,120.00
7,620.58
248.07
1,182.00
300.00
850.00
1,319.20
300.00
5,000.00

(1,570.64)

10,355.90

(1,923.27)

51,702.90

44,840.91

4. 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 Funds assets, including the
composition of its portfolio and furnishes advice and recommendations with respect to investments, investment
policies and the purchase and sales of investments in securities and derivatives.
Management fee due to the Investment Manager is recorded in the financial statements of the Master Fund. The
amount has been charged to each of the Feeder Funds capital accounts in the Master Fund. Management fee is
discussed in Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, a total management fee of $1,984,885 was incurred and $186,493 is payable
at the reporting date by the Master Fund for the Offshore Feeder. The fee is included in the caption Expenses
allocated from Master Fund in the statement of operations.

63

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 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. The amount is allocated to each of the Feeder Funds capital accounts in the Master Fund. Incentive
allocation is discussed in Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, the incentive allocations to the Master Fund GP and the Special LP from the
Offshore Feeder were $1,240,445 and $7,029,186 respectively.

Share capital
The Offshore Feeder has related party shareholders inclusive of the Special Limited Partner of the Master Fund.
The shareholdings of these related parties total $96,834,598 and represent approximately 65% of net assets at the
reporting date.

Directors fee
For the year ended December 31, 2013, director fees of $4,000 were incurred and fully paid.

5. 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, administrative and
investor services.
Pursuant to the administration agreement with the Administrator, the Offshore Feeder pays to the Administrator a
monthly fixed fee as of the last business day of each month.
For the year ended December 31, 2013, total administration fees of $19,750 were incurred and $5,250 was payable
at the reporting date.

6. Risks Factors
Due to the nature of the master/feeder structure, the Offshore Feeder may be materially affected by the risk
factors affecting the Master Fund as discussed in Note 9 of the Master Funds Notes.

7. Financial Highlights
The per share operating performance, total return and ratios to average net assets are calculated for the initial series
of each share class. An individual investors per share operating performance, 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.
The following represents the per share information, total return and ratios to average net assets and other
supplemental information for the year ended December 31, 2013:

64

AQUAMARINE MASTER FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

Class A
Initial Series

Class B
Series 1

Net asset value, beginning of the year


$ 3,984.75

Income from investment operations
Net investment loss
(343.90)
Net realized and unrealized gain from investments 1,735.82

$ 1,213.32

Total gain from investment operations


1,391.92

Net asset value, end of the year
$ 5,376.67

423.83

Per share operating performance

Total return before incentive fee


Incentive fee

(104.72)
528.55

$ 1, 637. 15

Class C
Series 1
$ 1,494.25

(142.94)
670.07
527.13

$ 2,021.38

42.54%
(7.61)

42.54%
(7.61)

45.04%
(9.76)

Total return after incentive fee


34.93%

Ratios to average net assets *

34.93%

35.28%

Operating expenses before incentive fee


Incentive fee

(1.26)%
(6.51)

(1.26)%
(6.51)

(0.23)%
(8.08)

Operating expenses after incentive fee



Net investment gain/loss before incentive fee
Incentive fee

(7.77)%

(7.77)%

(8.31)%

(0.87)%
(6.51)

(0.87)%
(6.51)

0.17%
(8.08)

Net investment loss after incentive fee



(7.38)%

(7.38)%

(7.91)%

* The ratios are computed based upon the weighted average net assets of shares as a whole throughout the year.

8. Subsequent Events
Management has evaluated subsequent events occurring through April 30, 2014, 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.

65

Aquamarine Value Fund, L.P.


(A DELAWARE LIMITED PARTNERSHIP)

Financial Statements for the


year ended December 31, 2013
and Independent Auditors Report

Table of Contents
Independent Auditors Report

68

Financial Statements For The Year Ended December 31, 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

67

Deloitte & Touche Ltd.


Chartered Accountants
Corner House
20 Parliament Street
P.O. Box 1556
Hamilton HM FX
Bermuda

INDEPENDENT AUDITORS REPORT


To the Board of Directors and Shareholders of
Aquamarine Value Fund, L.P.

Tel: + 1 (441) 292 1500


Fax: + 1 (441) 292 0961
www.deloitte.bm

We have audited the accompanying financial statements of Aquamarine Value Fund, L.P. (the Onshore Feeder) which comprise the
statement of assets and liabilities of as of December 31, 2013, and the related statements of operations, changes in partners capital and
cash flows for the year then ended (all expressed in United States dollars), and the related notes to the financial statements.

Managements 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; this includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due
to fraud or error.

Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
Onshore Feeders preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Onshore Feeders internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Onshore
Feeder as of December 31, 2013, and the results of its operations, changes in partners capital and its cash flows for the year then ended,
in conformity with accounting principles generally accepted in the United States of America.

April 30, 2014


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by
guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche
Tohmatsu Limited and its member firms.
Deloitte Bermuda is an affiliate of Deloitte Caribbean and Bermuda Limited, a member firm of Deloitte
Touche Tohmatsu Limited.

68

AQUAMARINE VALUE FUND, L.P.

STATEMENT OF ASSETS AND LIABILITIES

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

Assets

Investments in Aquamarine Master Fund, L.P., at fair value


Cash and cash equivalents
Receivable from Aquamarine Master Fund, L.P.

10,939,216
3,403
30,000

Total assets

10,972,619

Liabilities

Capital withdrawals payable


Accrued expenses and other payables

18,736
32,840

Total liabilities

51,576

Partners Capital
10,921,043

See notes to the financial statements

69

AQUAMARINE VALUE FUND, L.P.

STATEMENT OF OPERATIONS

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

Net Investment Loss Allocated


From Aquamarine Master Fund, L.P.
Income 47,592
Expenses (753,116)


(705,524)

Expenses

Administration fee
Professional fees
Other expenses

29,000
20,623
5,169


54,792

Net Investment Loss
(760,316)

Net realized loss and net change in


unrealized appreciation on investments
and foreign currencies allocated from
Aquamarine Master Fund, L.P.

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, L.P.

Net Increase In Partners Capital


Resulting From Operations

See notes to the financial statements

70

(125,656)
3,627,384

3,501,728

2,741,412

AQUAMARINE VALUE FUND, L.P.

STATEMENT OF CHANGES IN PARTNERS CAPITAL

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

General Limited
Partner

Partners

Partners Capital,
January 1, 2013

231,805 7,675,356 7,907,161

Total

Increase in
Partners Capital:
From operations
Net increase in partners capital
From capital transactions
Capital contributions
Capital withdrawals

Partners Capital,
December 31, 2013

96,568

2,644,844

2,741,412

-
-

1,000,000
(727,530)

1,000,000
(727,530)

328,373

10,592,670

10,921,043

See notes to the financial statements

71

AQUAMARINE VALUE FUND, L.P.

STATEMENT OF CASH FLOWS

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

Cash Flow Provided By/(Used In):


Operating Activities:
Net increase in partners capital from operations

2,741,412

Adjustments to reconcile net increase in partners capital


resulting from operations to net cash used in operating activities:

Net realized loss on investments


125,656
Net change in unrealized appreciation on investments
(3,627,384)
Net investment loss allocated from Aquamarine Master Fund, L.P.
705,524
Payments for purchases of Aquamarine Master Fund, L.P.
(965,203)
Proceeds from sales of Aquamarine Master Fund, L.P.
725,000
Decrease in receivable from Aquamarine Master Fund, L.P.
255,000
Decrease in due from related party
27,200
Decrease in accrued expenses and other payables
(10,706)

Net cash used in operating activities
(23,501)

Financing Activities

Capital contributions received

1,000,000

Capital withdrawals paid, net of changes


in capital withdrawals payable
(976,869)

Net cash provided by financing activities
23,131


Decrease In Cash And Cash Equivalents
(370)
Cash and cash equivalents, beginning of the year
3,773

Cash and cash equivalents, end of the year
3,403

See notes to the financial statements

72

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

1. Organization and Business Activity


Aquamarine Value Fund, L.P. (the Onshore Feeder) was organized as a Delaware Limited Partnership on March
15, 2001 and commenced operations on April 26, 2001.
The Onshore Feeder operates under a master/feeder structure, where Aquamarine Master Fund, L.P. (the
Master Fund), a British Virgin Islands (BVI) International Limited Partnership, is the master fund. The
Onshore Feeder invests substantially all of its investable assets in the Master Fund, together with Aquamarine
Fund, Inc. (the Offshore Feeder) a BVI Business Company (collectively, the Feeder Funds). At December 31,
2013, the Onshore Feeders proportionate interest in the partners capital of the Master Fund is approximately 6%.
The investment objective of the Onshore Feeder is to compound wealth for limited partners over the long term.
The Onshore Feeder intends to achieve its investment objectives through its investment in the Master Fund, which
has the same investment objectives as the Onshore Feeder.
Aquamarine Capital Management, LLC, a New York limited liability company, is the general partner (the General
Partner) of the Onshore Feeder and is also the Investment Manager of the Master Fund and Offshore Feeder. The
General Partner is responsible for certain administrative and investment advisory services for the Onshore Feeder
and the Master Fund. The principal decision maker of the General Partner is Guy Spier.
The performance of the Onshore Feeder is directly affected by the performance of the Master Fund. The Master
Fund utilizes the services of the General Partner to invest the assets of the Onshore Feeder, together with the
assets of the Offshore Feeder.
The financial statements of the Master Fund, including the condensed schedule of investments, are included at
the end of this report and should be read in conjunction with the Onshore Feeders financial statements.

2. 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.S.) dollars. The following is a
summary of the significant accounting and reporting policies used in preparing the financial statements.

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. Actual results
could differ from those estimates and the differences could be material.

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 Funds partners capital. Valuation of securities held by the Master Fund is disclosed in Note 2 of the
Master Funds notes to the financial statements (the Master Funds Notes).
ASC 820, Fair Value Measurement and Disclosure (ASC 820) defines fair value, establishes a framework for

73

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

measuring fair value and requires certain disclosures about fair value measurements. Additional disclosures due to
the impact of ASC 820 on the Onshore Feeders underlying investments held within the Master Fund are included
in Note 4 of the Master Funds Notes.

Accounting Standards Update


In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 201308, Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements.
The ASU revised the definition of what the characteristics of an investment company are, certain of which must be
met in order to classify for the accounting treatment under Accounting Standards Codification (ASC) Topic 946,
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, and that it is applying
this guidance in the notes to its financial statements. The ASU is effective for years beginning on or after December
15, 2013. The Onshore Feeder does not believe this ASU will have a significant impact on its financial statements.

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.

Revenue and expense recognition


The Onshore Feeder records its proportionate share of the Master Funds income, expenses, and realized and
unrealized gains and losses. The Master Funds income and expenses recognition policies and allocation are
discussed in Note 2 of the Master Funds Notes.
Income and expenses that are directly attributable to the Onshore Feeder are recorded on the accrual basis as
incurred.

Capital withdrawals payable


The Onshore Feeder recognizes capital withdrawals payable in accordance with ASC 480, Distinguishing
Liabilities from Equity (ASC 480). Capital withdrawals are recognized as liabilities when the amount requested
in the capital withdrawals notice becomes fixed. Prior to December 31, 2013, the Onshore Feeder received capital
withdrawal notices to be paid after year end but based on December 31, 2013 partners capital balances. Within the
context of ASC 480, such capital withdrawal notices represent an unconditional obligation of the Onshore Feeder
at December 31, 2013. The liability to such partners is presented in the statement of assets and liabilities as capital
withdrawals payable.

Foreign currency
The books and records of the Onshore Feeder and the Master Fund are maintained in U.S. dollars. The foreign
currency translation policy is discussed in Note 2 of the Master Funds Notes.

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. In determining the major tax
jurisdictions, the Onshore Feeder considers where it is organized and where it makes investments. The Onshore
Feeders US Federal tax returns for 2010 to 2013 remain open for examination by tax authorities and tax positions

74

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

associated with foreign tax jurisdictions remain subject to examination based on varying statutes of limitations.
Based on its review the Onshore Feeder has determined that ASC 740, Income Taxes (ASC 740) has not
impacted the Master Funds financial statements for the year ended December 31, 2013 and therefore no provision
for income taxes was recorded. 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. The determination of income taxes is based on complex analyses of many factors, including matters that
are subject to interpretation.
Individual partners are taxed on their proportionate share of the Onshore Feeders income.

3. Partners Capital Account


The Onshore Feeder is currently offering limited partnership interests (Interests), which are defined as partners
share of the partners capital as reflected in each limited partners capital account. The Interests are divided into
two classes, A and B. 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.
As of December 31, 2013, there are Class A and Class B Interests for an amount of $2,257,087 and $8,335,583
respectively.

Capital contributions
The minimum investment in the Onshore Feeder is $500,000 by each Class A limited partner and $1,000,000
for each Class B limited partner. The General Partner may in its discretion waive the minimum initial contribution
amount with respect to any partner. Following initial investment, a limited partner may make additional
investments in amounts of not less than $50,000, subject to adjustment at the discretion of the General Partner.
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, or at any other time in the General Partners sole discretion.

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, with 60 days prior written notice to Prime Management Limited a subsidiary of SS&C
GlobeOp (the Administrator).
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, 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.
Additionally, the General Partner, 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, together with the
initial Class A withdrawal fee.
A Class B limited partners may make a complete or partial withdrawal from its capital account as of the last

75

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended December 31, 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. Thereafter, 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,
or such other date as determined by the General Partner.
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 Class B lock-up period), without
the prior written consent of the General Partner.
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. Class B limited partners are not subject to withdrawal fees.
Each withdrawing limited partner will receive, at the General Partners sole discretion, at least 90% of its estimated
withdrawal amount with the balance payable 30 days after the Onshore Feeders annual audit. The General Partner
may in certain circumstances suspend withdrawals from the capital account of the Onshore Feeder.

Allocation of gains/losses and management fees


At the end of each month, 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 partners
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 Feeders partners capital for such month.

4. 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). 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. The Investment Manager
provides the Onshore Feeder with continuous supervision of the Master Funds assets, including the composition
of its portfolio and furnishes advice and recommendations with respect to investments, investment policies and
the purchase and sales of investments in securities and derivatives.
Management fee due to the General Partner is recorded in the financial statements of the Master Fund. The amount
has been charged to each of the Feeder Funds capital account in the Master Fund. Management fee is discussed
in Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, a total management fee of $39,679 was incurred and $3,923 was payable
at the reporting date by the Master Fund for the Onshore Feeder. The fee is included in the caption Expenses
allocated from Master Fund in the statement of operations.

Incentive allocation
Incentive allocation to the General Partner is recorded in the financial statements of the Master Fund. The amount
is allocated to each of the Feeder Funds capital accounts in the Master Fund. Incentive allocation is discussed in
Note 7 of the Master Funds Notes.
For the year ended December 31, 2013, the incentive allocation to the Master Fund GP from the Onshore Feeder

76

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

was $696,076. The fee is included in the caption Expenses allocated from Master Fund in the statement of
operations.

Partners capital
The Onshore Feeder has related party partners inclusive of the General Partner. These partners capital represent
approximately 11% of partners capital at the reporting date of which $389,118 are Class A Interests and $779,782
Class B Interests.

5. Administration Agreement
The Master Fund and the Feeder Funds entered into an administration agreement with the Administrator as of
April 1, 2007 for the provision of certain accounting, administrative and investor services.
The Onshore Feeder pays to the Administrator a monthly fixed fee as of the last business day of each month.
For the year ended December 31, 2013, total administration fees of $29,000 were incurred and $11,875 were
payable at the reporting date.

6. Risk Factors
Due to the nature of the master/feeder structure, the Onshore Feeder may be materially affected by the risk
factors affecting the Master Fund as discussed in Note 9 of the Master Funds Notes.

7. Financial Highlights
The following financial highlights are calculated for the limited partners taken as a whole and exclude data for the
General Partner.
Individual limited partners returns will vary due to the timing of contributions and withdrawals, different
management fees and incentive allocation arrangements. The incentive allocation is borne by the Master Fund.

77

AQUAMARINE VALUE FUND, L.P.

NOTES TO THE FINANCIAL STATEMENTS

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

Total return
Total return before incentive allocation
Incentive allocation

43.97%
(7.63)

Total return after incentive allocation

36.34%

Ratio to average limited partners capital*


Operating expenses before incentive allocation
Incentive allocation

(1.14)%
(7.63)

Operating expenses after incentive allocation

(8.77)%

Net investment loss before incentive allocation


Incentive allocation

(0.63)%
(7.63)

Net investment loss after incentive allocation

(8.26)%


*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.

8. Subsequent Events
Management has evaluated subsequent events occurring through April 30, 2014, 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.

78

Team Aquamarine
Guy Spier, Managing Partner
Office Team
Orly Hindi, Operations & Compliance, New York
Keith Smith, Consultant, London
Lynda Brandt, Events & Administration, Zurich
Director, Aquamarine Fund Inc.
Simon Spier, London
Auditor
Deloitte and Touche, Bermuda
Brokers and Custodians
UBS, The Desai Group, Chicago
Credit Suisse, Zug
General Counsel
Dentons, New York
Bratschi Wiederkehr Buob, Zurich
Ogier, British Virgin Islands
Tax, Accounting and Administration
Prime Management Limited, Bermuda
(Aquamarine Master Fund, L.P., Aquamarine Fund, Inc.,
and Aquamarine Value Fund, L.P.)
Michael J. Liccar & Co., LLC, Chicago
(K1s, US Tax accounting)

79

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

using

started

Swiss

clear

want
understand now
might
along Munger

compounding

complex

million
portfolio

well
people
market

successful

Harley

price

society

getting

high
annual held
comes law
believe

invest Switzerland
Graham

shareholders
control

days

one
give
work

line

current
happy Mohnish
ways
set

businessgoodaround
many
Index rather

outperformance

possible
new
value partners
rate regulatory

investor

positions

world
netnets

complete
take
owned

patient

potash better

York extraordinary

index

types already

Zurich makes

real

land

every

basket global
net capital

invested making

Aquamarine
company
get

ability

class

attracting

confident

benefit prices funds

order assets

return

probability

investors

natural

fact

increase
meetings
without Management

become
regulation trying

Buffett Potash longer

back

stopped

life

looking

sense
team

management need Heineken

excellent sold
continue means
Omaha
Similarly
Investment
mind

things
years
partnership World

best
likely made important
Charlie substantial
reports
words

especially

original

money
great
since
returns

operate
reading

see several
FACTA really

friend

wealth

phenomenal

time

example
quality family interests

potential

worth

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