- Filed under the 1933 Act only or under both the 1933 and 1940 Acts: Pursuant to Section 8(c) of the 1933 Act (POS 8C)

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2012

INVESTMENT COMPANY ACT FILE NO. 811-22389

SECURITIES ACT FILE NO. 333-164751

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM N-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

POST-EFFECTIVE AMENDMENT NO. 3

AND

UNDER

THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 6

SALIENT ABSOLUTE RETURN INSTITUTIONAL FUND

(Exact name of Registrant as specified in charter)

4265 San Felipe

Suite 800

Houston, Texas 77027

(Address of Principal Executive Offices)

Registrant’s Telephone Number, including Area Code: (713) 993-4675

John A. Blaisdell

Salient Absolute Return Funds

4265 San Felipe

Suite 800

Houston, Texas 77027

(Name and address of agent for service)

PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:

George J. Zornada

K&L Gates LLP

One Lincoln Street

Boston, Massachusetts 02111

It is proposed that this filing will become effective:

When declared effective pursuant to Section 8(c) under the Securities Act of 1933.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.

Salient Absolute Return Master Fund, as the Master Fund in which the Registrant invests substantially all of its assets, has also executed this Registration Statement.

Cross Reference Sheet

Parts A and B*


Item Number		Caption	Location In Prospectus

	1.	Outside Front Cover	Outside Front Cover Page

	2.	Cover Pages; Other Offering Information	Inside Front and Outside Cover Pages

	3.	Fee Table and Synopsis	Summary; Summary of Fund Expenses; Fund Expenses; Investment Management Fee

	4.	Financial Highlights	Financial Hightlights

	5.	Plan of Distribution	Cover Page; Plan of Distribution

	6.	Selling Shareholders	Not applicable

	7.	Use of Proceeds	Summary; Investment Objective; Investment Strategy

	8.	General Description of the Registrant	Outside Front Cover Page; Investment Objective; Investment Strategies; Additional Investment Policies; General Risks; Special Risks of the Fund of Funds Structure; Investment Related Risks; The Funds and the Master Fund

	9.	Management	Summary; Management of the Fund; Investment Management Fee; Administration; Outstanding Securities; The Board of Trustees, Officers and Portfolio Management

	10.	Capital Stock, Long-Term Debt, and Other Securities	Purchasing Shares; Repurchase of Shares; Outstanding Securities; Additional Information and Summary of the Declaration of Trust

	11.	Defaults and Arrears on Senior Securities	Not applicable

	12.	Legal Proceedings	Not applicable

	13.	Table of Contents of the Statement of Additional Information	Prospectus Table of Contents of Statement of Additional Information

	14.	Cover Page of SAI	Cover Page of SAI

	15.	Table of Contents of SAI	Table of Contents of SAI

	16.	General Information and History	Summary; The Funds and the Master Fund; Performance Information

	17.	Investment Objective and Policies	Investment Objective; Investment Strategies; Management of the Fund

	18.	Management	Management of the Fund; Codes of Ethics

	19.	Control Persons and Principal Holders of Securities	Outstanding Securities

	20.	Investment Advisory and Other Services	Management of the Fund; Investment Management Fee; Fund Expenses; Administration; Custodian; Accountants and Legal Counsel

	21.	Brokerage Allocation and Other Practices	Portfolio Transactions and Brokerage

	22.	Portfolio Managers	Management of the Fund; Board of Trustees, Officers and Portfolio Management; Portfolio Manager Compensation; Securities Ownership by Portfolio Manager

	23.	Tax Status	Tax Aspects; Additional Taxation Discussion

	24.	Financial Statements	Financial Statements

*	Certain disclosure information required by Part B: Statement of Additional Information has been included in Part A: Propsectus

The information in this prospectus is incomplete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

March 15, 2012

SALIENT ABSOLUTE RETURN FUND

SALIENT ABSOLUTE RETURN INSTITUTIONAL FUND

Shares of Beneficial Interest


	Each Fund’s Price to Public (1)	Proceeds to Each Fund (2)(3)
Per Share	At Current NAV	Amount Invested at Current NAV

Total	$500,000,000	$500,000,000

(1) Shares are continuously offered at current net asset value (“NAV”), which will vary. Generally, the minimum initial investment in Shares by an investor is $25,000 and subsequent investments must be at least $10,000. These minimums may be reduced for certain investors. Certain intermediaries, as described below, may impose higher minimums.

(2) Assumes sale at the NAV of all Shares currently registered.

(3) See “Plan of Distribution” regarding distribution-related compensation.

Salient Absolute Return Fund (the “SAR Fund”) and Salient Absolute Return Institutional Fund (the “Institutional Fund”) (each singly a “Fund” and together the “Funds”) are Delaware statutory trusts registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as non-diversified closed-end management investment companies. Each of the Funds is a feeder fund that invests substantially all of its investable assets in Salient Absolute Return Master Fund, a Delaware statutory trust (the “Master Fund”). As discussed below, each Fund’s objective is to produce positive returns regardless of overall market trends. The Master Fund allocates proceeds among a number of investment managers (“Investment Managers”), generally through investments in a number of private investment vehicles (“Investment Funds”) managed by the Investment Managers. Salient Advisors, L.P. (the “Adviser”) is the investment adviser to the Funds.

Salient Capital, L.P. (the “Distributor”) acts as the distributor of shares of beneficial interest (“Shares”) of each Fund on a reasonable best efforts basis, subject to various conditions. A Fund’s Shares may be purchased through the Distributor, broker-dealers that have entered into selling agreements with the Distributor (“Selling Agents”), or registered investment advisers (“RIAs”) that have entered into an arrangement with the Distributor. Neither the Distributor nor any Selling Agents or RIAs are obligated to buy from a Fund any of the Shares. There is no minimum aggregate amount of Shares of a Fund required to be purchased in the offering. In consideration for investor services and administrative assistance, the SAR Fund and the Institutional Fund pay the Adviser, as servicing agent, a quarterly fee based on the average month-end net assets of a Fund over the course of the applicable quarter in the amounts, respectively, of 1.00% and 0.25% (on an annualized basis) of each Fund’s average month-end net assets, payable quarterly in arrears. The Adviser or its affiliates may pay from their own resources compensation to the Selling Agents or RIAs in connection with placement of Shares or servicing of investors. These arrangements may result in receipt by the Selling Agents and their personnel (who themselves may receive all or a substantial part of the relevant payments) or RIAs (Selling Agents and RIAs together an “Intermediary”) of compensation in excess of that which otherwise would have been paid in connection with their placement of shares of a different investment fund. A prospective investor with questions regarding these arrangements may obtain additional detail by contacting his, her or its Intermediary directly. Prospective investors also should be aware that these payments could create incentives on the part of an Intermediary to view a Fund more favorably relative to investment funds not making payments of this nature or making smaller such payments.

This Prospectus provides the information that a prospective investor should know about a Fund before investing. You are advised to read this Prospectus carefully and retain it for future reference. Additional information about each Fund, including the statement of

additional information (“SAI”) dated March 15, 2012 has been filed with the U.S. Securities and Exchange Commission (the “SEC”). The SAI and the Funds’ annual and semiannual reports are available upon request and without charge by visiting the Funds’ website (http://www.sarfund.com), SEC’s website (http://www.sec.gov) or by writing to the appropriate Fund at 4265 San Felipe, Suite 800, Houston, TX 77027 or by calling the appropriate Fund toll-free at 1-800-725-9456. Investors may also make written or telephonic inquiries or request other information about the Funds at this address and telephone number. The SAI is incorporated by reference into this Prospectus in its entirety. The table of contents of the SAI appears on page 66 of this Prospectus. The address of the SEC’s Internet site is provided solely for the information of prospective investors and is not intended to be an active link.

An investment in a Fund involves a high degree of risk. It is possible that a Shareholder may lose some or all of his, her or its investment and that a Fund may not achieve its investment objective. In making an investment decision, a prospective shareholder must rely upon his, her or its own examination of a Fund and the terms of the offering, including the merits and risks involved in an investment in a Fund’s Shares described in this Prospectus.

Each Fund’s Shares are subject to substantial restrictions on transferability and resale, and may not be transferred or resold except as permitted under the Fund’s organizational instrument, the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws, pursuant to registration or exemption from these provisions. To provide a limited degree of liquidity to Shareholders, each Fund may from time to time offer to repurchase Shares pursuant to written tenders by Shareholders. Repurchases will be made at such times, in such amounts, and on such terms as may be determined by a Fund’s Board of Trustees (the “Board”), in its sole discretion. However, shareholders do not have the right to require a Fund to redeem any or all of their Shares in the Fund.

Neither Fund’s Shares have been approved or disapproved by the SEC or any other U.S. federal or state governmental agency or regulatory authority or any securities exchange. No agency, authority, or exchange has passed upon the accuracy or adequacy of this Prospectus or the merits of an investment in a Fund’s Shares. Any representation to the contrary is a criminal offense.

March 15, 2012

To All Prospective Investors

No person has been authorized to make any representations concerning a Fund that are inconsistent with those contained in this Prospectus. Prospective investors should not rely on any information not contained in this Prospectus, the SAI or the accompanying exhibits. This Prospectus is intended solely for the use of the person to whom it has been delivered for the purpose of evaluating a possible investment by the recipient in the Shares of a Fund and is not to be reproduced or distributed to any other persons (other than professional advisers of the prospective investors receiving this document). Prospective investors should not construe the contents of this Prospectus as legal, tax or financial advice. Each prospective investor should consult his, her or its own professional advisers as to the legal, tax, financial or other matters relevant to the suitability of an investment in a Fund.

An investment in a Fund involves a high degree of risk. It is possible that a Shareholder may lose some or all of his, her or its investment and that a Fund may not achieve its investment objective. Before making an investment decision, a prospective investor and/or a prospective investor’s adviser should: (i) consider the suitability of this investment with respect to the prospective investor’s investment objectives and personal situation; and (ii) consider factors such as the prospective investor’s personal net worth, income, age, risk tolerance and liquidity needs. Short-term prospective investors, prospective investors with immediate liquidity needs and prospective investors who cannot bear the loss of some or all of their investment or the risks associated with the limited liquidity of an investment in a Fund should not invest in the Funds.

Fund Shares are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

You should rely only on the information contained in this Prospectus. Neither Fund has authorized anyone to provide you with different information. Neither Fund is making an offer of its Shares in any state or other jurisdiction where the offer is not permitted. You should not assume that the information provided by this Prospectus is accurate as of any date other than the date on the front of this Prospectus. Each Fund is required to supplement this Prospectus to disclose any material changes in the information provided herein.

For a discussion of certain risk factors and special considerations with respect to owning Fund Shares, see the “General Risks,” “Special Risks of the Fund of Funds Structure,” and “Investment Related Risks” sections of this Prospectus.

Table of Contents


	Page
SUMMARY		1
SUMMARY OF FUND EXPENSES		18
FINANCIAL HIGHLIGHTS		20
INVESTMENT OBJECTIVE		23
INVESTMENT STRATEGIES		23
OVERVIEW OF INVESTMENT PROCESS, DUE DILIGENCE AND MANAGER SELECTION		27
BORROWING AND USE OF LEVERAGE BY THE FUNDS AND THE MASTER FUND		29
GENERAL RISKS		29
SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE		33
INVESTMENT RELATED RISKS		37
MANAGEMENT OF THE FUNDS		47
INVESTMENT MANAGEMENT FEE		48
ADMINISTRATION		49
FUND EXPENSES		49
THE FUNDS AND THE MASTER FUND		50
USE OF PROCEEDS		51
VOTING		51
CONFLICTS OF INTEREST		53
LIMITATIONS ON LIQUIDITY		53
REPURCHASES OF SHARES		56
TRANSFERS OF SHARES		56
CALCULATION OF NET ASSET VALUE; VALUATION		58
TAX ASPECTS		61
ERISA CONSIDERATIONS		62
DISTRIBUTION POLICY		62
ELIGIBLE INVESTORS		63
PURCHASING SHARES		64
PLAN OF DISTRIBUTION		64
REPORTS TO SHAREHOLDERS; FINANCIAL STATEMENTS		64
INQUIRIES		65
APPENDIX A – Past Performance

SUMMARY

This is only a summary and does not contain all of the information that you should consider before investing in a Fund. Before investing in a Fund, you should carefully read the more detailed information appearing elsewhere in this Prospectus and the SAI.


THE FUNDS AND THE MASTER FUND		Each Fund is a Delaware statutory trust, registered under the 1940 Act and classified as a non-diversified, closed-end management investment company. Each Fund invests substantially all of its investable assets in the Master Fund. The Master Fund also is a Delaware statutory trust registered under the 1940 Act and classified as a non-diversified, closed-end management investment company. The Master Fund has the same investment objective as the Funds, and allocates its assets among a number of Investment Funds and securities. The Funds and the Master Fund are each managed by Salient Advisors, L.P., a Texas limited partnership registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser is also registered with the Commodities Futures Trading Commission (“CFTC”) as a commodity pool operator and commodities trading advisor and is a member of the National Futures Association. The address of the Funds, the Master Fund and Adviser is 4265 San Felipe, Suite 800, Houston, Texas 77027, the Funds’ website is http://www.sarfund.com, and the telephone number is: 1-800-725-9456. For convenience, references to the Fund may include the Master Fund as the context requires. Also, the Master Fund’s investments may be referred to as investments with Investment Managers or Investment Funds.
INVESTMENT OBJECTIVE AND STRATEGY		Each Fund’s objective is to seek to generate returns that are marked by relatively low volatility as measured by annualized standard deviation and relatively low correlation to equity and other “risk” markets. The strategy used for each Fund is to invest it’s assets, through the Master Fund, across a variety of Investment Funds and individual securities, swaps and/or derivatives with the goal of generating returns that have lower volatility than equity markets and relatively low correlation to equity markets. Such a strategy contrasts with strategies that depend more heavily on market directionality to generate returns. See “INVESTMENT OBJECTIVE.”
INVESTMENT PROGRAM		To achieve its objective, each Fund, through the Master Fund, generally allocates assets to the Investment Funds, managed by a group of Investment

Managers identified by the Adviser, or to individual securities, swaps and/or derivatives. These Investment Funds and securities may be exposed to a variety of underlying markets including fixed income, equity, commodities and currencies, and they may not be freely tradable and/or may have substantial transfer restrictions and no active trading market, but have certain rights as to redemption.

Styles and Strategies Utilized by Portfolio Funds . The strategies employed by the Investment Funds (and, by extension, the Funds) fall into four primary categories (“Styles”) and several secondary categories (“Strategies”). Each Style may include Strategies that are not listed below. These Styles and Strategies are:

Top-Down Alpha Style . These Strategies are designed to extract “Top-Down” alpha or excess return from certain markets or sub-markets (as opposed to generating return through analysis at an individual security level) and include:

• Global Macro

• Global Tactical Asset Allocation (“GTAA”)

• Commodity Trading Advisors (“CTAs”) or Managed Futures

Bottom-Up Alpha Style . These Strategies are generally “relative value” in nature and are designed to profit from changes in the prices of two or more securities relative to one another. Strategies are categorized as follows:

• Equity Market Neutral or Statistical Arbitrage

• Capital Structure Arbitrage or Credit Relative Value

• Volatility Arbitrage or Convertible Arbitrage

• Commodity Relative Value

• Other Relative Value

Tactical Credit Style . These Strategies consist of long-only, lower cost exposure to certain credit markets and include:

• Emerging Market Debt

• U.S. Corporate Credit

• Other Credit

Event-Driven Style . Strategies within the Event-Driven Style are designed to profit from changes in the prices of securities of companies facing a major corporate event. These include:

• Merger or Risk Arbitrage

• Distressed or Special Situations

• Other Event-Driven

Overlays and Derivatives . The Master Fund will use swaps and/or similar derivative instruments to invest in Styles and Strategies that replicate the performance of a particular Investment Fund, may not be available through an Investment Fund, or to adjust or hedge market or risk exposure of the Master Fund.

Additional information regarding the strategies utilized by the Investment Funds is set forth under “INVESTMENT STRATEGIES.” There can be no assurance that either Fund’s investment objective will be achieved or that their portfolio design and risk monitoring strategies will be successful.

Investment Limits . At the time of investment, the Adviser will invest no more

than 20% of the Master Fund’s net assets in any one Investment Fund.

Each Fund’s investment objective is non-fundamental and may be changed by the Board without the approval of Shareholders. Except as otherwise stated in this Prospectus and as set forth in the SAI, the investment policies, ranges, strategies and restrictions of the Funds are not fundamental and may be changed by the Board without the approval of the Shareholders.

Tax Code Compliance . The Funds and the Master Fund are registered investment companies under the 1940 Act and each Fund and the Master Fund has elected, and intends to continue to qualify, to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a RIC under the Code, a Fund must, among other things: (i) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies, and net income from interests in “qualified publicly traded partnerships” (as defined in the Code); and (ii) diversify its holdings so that, at the end of each quarter of each taxable year: (A) at least 50% of the market value of its assets is represented by cash, cash items, U.S. government securities, securities of other RICs, and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund’s total assets and 10% of the outstanding voting securities of such issuer; and (B) not more than 25% of the market value of the Fund’s total assets is invested in the securities (other than U.S. government securities and the securities of other RICs) of: (1) any one issuer; (2) any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses; or (3) any one or more “qualified publicly traded partnerships.”

Investment Fund Selection and Due Diligence Process . It is the responsibility of the Adviser to research and identify Investment Managers, to satisfy itself as to the suitability of the terms and conditions of the Investment Funds and to allocate or reallocate each Fund’s assets among Investment Managers. The Adviser employs an approach to investing that seeks to combine in-depth research and recommendations with portfolio management, risk management, due diligence and management oversight. The Adviser allocates the Funds’ assets among Investment Managers using the diverse knowledge and experiences of the members of its Investment Committee (as defined below) to assess the capabilities of the Investment Managers and to determine an appropriate mix of Investment Funds. As discussed below, the Adviser relies upon its Investment Committee to identify potential Investment Fund investments, with one person being designated as having day-to-day investment oversight responsibility for the Funds.

The Adviser employs a multi-step process in which the Adviser develops a pool of Investment Funds to consider for investment. The Adviser sources potential Investment Funds on an ongoing basis and generates a list of Investment Funds that might qualify for investment by the Funds. The Investment Committee will identify potential Investment Funds based on quantitative, qualitative, or other due diligence criteria. The list of potential Investment Funds is reduced to a more manageable number of higher quality funds by running proprietary screens on the group of Investment Funds that rank such Funds on an overall Style and Strategy basis. Each of the top Investment Funds based on these screens (the “Qualified Pool”) is then subjected to qualitative due diligence, which typically begins with a review of marketing materials and a teleconference with one or more members of such Fund’s investment and/or investment relations teams. The Adviser then meets with representatives of such Investment Funds and weighs the quantitative and qualitative results of the due diligence process before deciding to invest,


		remove such Fund from the Qualified Pool, or leave such Fund in the Qualified Pool for future consideration. Once a pool of one or more potential Investment Funds has been identified and approved for investment by the Investment Committee, the Investment Committee then determines an allocation for the Funds’ assets across the pool. Ongoing due diligence includes review of monthly performance and monthly reports (if available) from each Investment Fund as well as conference calls and in-person meetings with Investment Fund personnel. See “INVESTMENT STRATEGIES,” “OVERVIEW OF INVESTMENT PROCESS, DUE DILIGENCE AND MANAGER SELECTION” and “TAX ASPECTS.”
POTENTIAL BENEFITS OF INVESTING IN THE FUNDS		Investors in the Funds gain access to a portfolio that has been designed to be a complement to the traditional fixed income that comprises the 40% in a traditional “60/40” equities / fixed income portfolio. The investment objective of the Funds is to seek to generate returns that are marked by relatively low volatility as measured by annualized standard deviation and relatively low correlation to equity and other “risk” markets. An investment in the Funds enables investors to invest with Investment Managers whose services generally are not available to the investing public or who otherwise may place stringent restrictions on the number and type of persons whose money they will manage. An investment in the Funds also enables investors to invest with a number of Investment Managers without incurring the high minimum investment requirements that Investment Managers typically impose on single investors. Investment Funds in which the Master Fund may invest also may close to new investors from time to time. If the Master Fund has previously invested in an Investment Fund that has closed, an investor would nevertheless be able to invest indirectly in such Investment Fund by investing in a Fund. Investors may also benefit from preferred terms such as lower fees or better liquidity from certain Investment Funds, as negotiated by the Adviser. In addition to potentially benefiting from the Investment Managers’ individual investment strategies, each Fund as a whole should achieve the benefits of exposure to a number of different investment strategies and Investment Managers. By investing through multiple Investment Managers, a Fund may reduce the volatility inherent in a direct investment with a single Investment Manager.
BORROWING AND USE OF LEVERAGE BY THE FUNDS AND THE MASTER FUND		Each Fund may borrow money to purchase portfolio securities and for portfolio management purposes. Each of the Funds and the Master Fund may also borrow money to pay operating expenses, including, without limitation, investment management fees or to fund repurchases of Shares or facilitate distributions. Under the 1940 Act, none of the Funds or the Master Fund is permitted to borrow for any purposes if, immediately after such borrowing, such Fund would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to indebtedness or less than 200% with respect to preferred stock. The 1940 Act also provides that none of the Funds or the Master Fund may declare distributions, or purchase its stock (including through repurchase offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% for indebtedness or 200% for preferred stock. Under the 1940 Act, certain short-term borrowings (such as for the purpose of meeting repurchases, for bridge financing of investments in Investment Funds or for cash management purposes) if: (i) repaid within 60 days; (ii) not extended or renewed; and (iii) which are not in excess of 5% of the total assets of the Fund, are not considered the use of investment leverage. In addition to borrowing money, the Fund may also incur economic leverage via the use of derivatives and short sales. Borrowing restrictions generally do not apply to Investment


		Funds that are not registered under the 1940 Act. See “BORROWING AND USE OF LEVERAGE BY THE FUNDS AND THE MASTER FUND.”
BOARD OF TRUSTEES		Each Fund has a Board of Trustees (each member thereof a “Trustee” and, collectively, the “Board”) that has overall responsibility for monitoring and overseeing the Fund’s investment program and its management and operations. A majority of the Trustees are not “interested persons” (as defined by the 1940 Act) of either Fund, the Master Fund or the Adviser (“Independent Trustees”). See “MANAGEMENT OF THE FUNDS.”
MANAGEMENT		The Board has the overall responsibility for the management and supervision of the business operations of the Funds. Under the supervision of the Board and pursuant to an investment management agreement (“Investment Management Agreement”), the Adviser, an investment adviser registered under the Advisers Act, serves as the Funds’ investment adviser. The Adviser also serves as investment adviser to the Master Fund pursuant to a separate investment management agreement. Subject to policies adopted by the Board and applicable law, the Adviser is responsible for the day-to-day management of each Fund and for the allocation of the Master Fund’s assets to various Investment Funds. The Adviser, which is a Texas limited partnership, is owned by Salient Partners, L.P. (“Salient”), a Houston-based investment firm that advises or consults on over $16 billion in assets as of December 31, 2011. The Investment Committee oversees the investments of the Funds. The Investment Committee meets monthly and acts by majority vote of those members attending a meeting at which a quorum is present, or by unanimous written consent. A quorum consists of a majority of the members of the Investment Committee. The Investment Committee is comprised of John A. Blaisdell, Andrew B. Linbeck, Lee G. Partridge and Jeremy L. Radcliffe. Mr. William K. Enszer will have day-to-day investment oversight responsibility for each Fund. The Adviser’s investment professionals will devote such time to the ongoing operations of each Fund and the Master Fund as they deem appropriate in order to implement and monitor their investment program. See “MANAGEMENT OF THE FUNDS.”
FEES AND EXPENSES		Each Fund bears its own operating expenses (including, without limitation, offering costs), and a pro rata portion of the operating expenses of the Master Fund and indirectly its proportionate share of expenses of Investment Funds. A more detailed discussion of each Fund’s expenses can be found under “FUND EXPENSES.” Investment Management Fee . The Master Fund will pay the Adviser a monthly investment management fee equal to 0.75% (on an annualized basis) of its average month-end net assets, accrued monthly and payable quarterly in arrears (the “Investment Management Fee”). So long as the Funds invest all of their investable assets in the Master Fund, the Funds will not directly pay the Adviser an investment management fee. See “INVESTMENT MANAGEMENT FEE.” Administration and Servicing Fees . Citi Fund Services Ohio, Inc., serves as the independent administrator of the Funds and the Master Fund (“Independent Administrator”). The Independent Administrator performs certain administration, accounting, recordkeeping, and investor services for the Funds. In consideration for these services, each Fund bears its share of the Independent Administrator’s monthly administration fee (the “Administration Fee”), which is based on the month-end net assets of the Master Fund. In

addition, the Independent Administrator charges fees for legal, transfer agency, compliance, and certain other services, and is entitled to reimbursement of certain expenses.

The Adviser also acts as servicing agent to the Funds (“Servicing Agent”), whereby it provides or procures certain Shareholder servicing and administrative assistance. Investor servicing entails the provision of personal, continuing services to investors in the Funds and administrative assistance. The Servicing Agent may, in turn, retain certain parties to act as sub-servicing and sub-administrative servicing agents to assist with investor servicing and administration. The Funds compensate the Servicing Agent for providing or procuring these services and, when the Servicing Agent employs sub-servicing and sub-administrative servicing agents, the Servicing Agent compensates such sub- agents out of its own resources.

In consideration for investor services and administrative assistance, each Fund pays the Adviser, as Servicing Agent, a quarterly servicing fee (SAR Fund “Servicing Fee,” and Institutional Fund “Administrative Servicing Fee”) based on the average month-end net assets of the Fund over the course of the applicable quarter. For the SAR Fund, the Servicing Fee equals 1.00% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. For the Institutional Fund, the Administrative Servicing Fee equals 0.25% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. The Administrative Servicing Agent may engage one or more sub-servicing agents (each, a “Sub-Servicing Agent”) or sub-administrative servicing agents (each, a “Sub-Administrative Servicing Agent”) to provide some or all of the services. Compensation to any Sub-Servicing or Sub-Administrative Servicing Agent is paid by the Adviser as Servicing Agent. The Adviser or its affiliates also may pay a fee out of their own resources to Sub-Servicing or Sub-Administrative Servicing Agents.

Although the Servicing Fee and the Administrative Servicing Fee are paid for the provision of ongoing investor services, and administrative services, and are intended primarily for such services, to any extent that such fees could be considered to support the distribution of the Funds, investors would be paying for distribution of Fund interests out of a Fund’s assets. To any extent that the Servicing Fee and Administrative Servicing Fee could be considered to support distribution of the Funds, the Adviser would not have to pay such expenses from its own resources, which is an incentive to maintain such fees and considered a conflict of interest. See “CONFLICTS OF INTEREST.”

See “ADMINISTRATION.”

Custodian . JPMorgan Chase Bank, National Association. (the “Custodian”) serves as custodian for the Master Fund. Pursuant to a custodian agreement (“Custodian Agreement”), the Custodian maintains custody of the Master Fund’s assets and is paid a fee for such services. The Custodian also charges for transaction related costs and is entitled to reimbursement of certain expenses.

Expense Limitation Agreement . The Adviser has contractually agreed to limit the total annualized operating expenses of the SAR Fund (exclusive of borrowing and investment-related costs), including a portion of the indirect expenses of the Master Fund, to 2.5% (the “Expense Limitation Agreement”), through April 30, 2013.

See “FUND EXPENSES.”

THE OFFERINGS

Each Fund is offering Shares through the Distributor and through broker-dealer Selling Agents that have entered into selling agreements with the Distributor, as well as through RIAs that have entered into an arrangement with the Distributor to offer Shares. Shares are offered and may be purchased on a


		monthly basis or at such other times as may be determined by the Board. The Board may discontinue a Fund’s accepting purchase orders at any time. As discussed below, Shares will be sold at the then-current net asset value per Share as of the date on which the purchase order is accepted. Neither the Distributor nor any Selling Agent is obligated to buy from a Fund any of the Shares. There is no minimum aggregate amount of Shares of a Fund required to be purchased in the offering. To the extent that substantial numbers of investors have a relationship with a particular Intermediary, such entity may have the ability to influence investor behavior, which could positively or negatively affect the Fund. The Adviser or its affiliates also may pay from their own resources additional compensation to Intermediaries in connection with placement of Shares or servicing of Shareholders. These arrangements may result in receipt by the Intermediaries and their personnel (who themselves may receive all or a substantial part of the relevant payments) of compensation in excess of that which otherwise would have been paid in connection with their placement of shares of a different investment fund. A prospective investor with questions regarding these arrangements may obtain additional detail by contacting his, her or its Intermediary directly. Prospective investors also should be aware that these payments could create incentives on the part of an Intermediary to view a Fund more favorably relative to investment funds not making payments of this nature or making smaller such payments. Such payments may be different for different Intermediaries. Intermediaries may in addition charge a fee for their services in conjunction with an investment in a Fund and/or maintenance of investor accounts. Such a fee will be in addition to any fees charged or paid by a Fund and will reduce the amount of an investor’s investment in the Fund. The payment of any such fees, and their impact on a particular investor’s investment returns, would not be reflected in the returns of the Fund. Investors should direct any questions regarding such fees to the relevant Intermediary. See “PLAN OF DISTRIBUTION” and “PURCHASING SHARES.”
INVESTOR SUITABILITY		An investment in a Fund involves substantial risks. It is possible that a Shareholder may lose some of the Shareholder’s investment and that a Fund may not achieve its investment objective. In addition, an investment in a Fund is not liquid and investors should provide for adequate liquidity outside of their investment in the Funds to meet their foreseeable liquidity needs. Before making an investment decision, a prospective investor and/or a prospective investor’s adviser should: (i) consider the suitability of this investment with respect to the prospective investor’s personal investment objectives and individual situation; and (ii) consider factors such as the prospective investor’s personal net worth, income, age, risk tolerance and liquidity needs. See “RISK FACTORS.” Short-term investors, prospective investors with immediate liquidity needs and investors who cannot bear the loss of some or all of their investment and/or the risks associated with a lack of liquidity should not invest in a Fund.
ELIGIBLE INVESTORS		Investors who meet the qualifications set forth in this Prospectus are referred to as “Eligible Investors.” In addition, Shares are being offered only to investors that are U.S. persons for U.S. federal income tax purposes. Only certain categories of Eligible Investors may be able to invest in the Institutional Fund. In addition to the above, prospective investors in the Institutional Fund also must certify that they: (i) compensate their financial intermediaries directly for their services (for example, investors participating in a “wrap fee” or similar account with their intermediary); or (ii) in the case of certain institutional investors, invest directly through their financial


		intermediary (for example, a pension or similar institutional investor advised by a separately retained consultant or other intermediary). See “ELIGIBLE INVESTORS.”
PURCHASING SHARES		Shares are generally available for purchase as of the first business day of each calendar month, except that Shares may be made available for purchase more or less frequently, as determined by the Board in its sole discretion. The minimum initial investment in the Funds by any investor is $25,000, and the minimum additional investment in a Fund by any investor is $10,000. However, a Fund, in its sole discretion, may accept additional investments below the stated minimum additional investment. Certain Intermediaries may impose higher minimums. A prospective investor is required to complete and submit the correct investor application signature pages (“Application Agreement Signature Pages”), satisfy the investor eligibility standards set forth therein and to transfer funds on or prior to the acceptance date set by the Fund and communicated to prospective investors in order to be permitted to invest in a Fund. Each Fund reserves the right to reject in whole or in part, in its sole discretion, any request to purchase Shares at any time. Each Fund also reserves the right to suspend or terminate the availability for purchase of Shares at any time. Existing Shareholders who seek to purchase additional Shares are required to qualify as Eligible Investors and to complete additional application Signature Pages prior to the additional purchase. Additional information regarding the investment process is set forth under “PURCHASING SHARES.” Investments in the Funds are not subject to a sales load. The Adviser or its affiliates may pay a fee out of their own resources to Intermediaries. Intermediaries may charge a fee for their services in conjunction with an investment in a Fund and/or maintenance of investor accounts. Such a fee will be in addition to any fees charged or paid by a Fund and will reduce the amount of an investor’s initial or subsequent investment in the Fund. The payment of any such fees, and their impact on a particular investor’s investment returns, would not be reflected in the returns of a Fund. Investors should direct any questions regarding such fees to the relevant Selling Agent. See “PURCHASING SHARES,” “PLAN OF DISTRIBUTION” and “ADMINISTRATION.”
CLOSED-END FUNDS; LIMITATIONS ON LIQUIDITY		The Funds and the Master Fund have been organized as closed-end management investment companies. Closed-end funds differ from open-end management investment companies, commonly known as mutual funds, in that closed-end fund shareholders do not have the right to redeem their shares on a daily basis. In order to meet daily redemption requests, mutual funds are subject to more stringent regulatory limitations than closed-end funds. In particular, a mutual fund generally may not invest more than 15% of its assets in illiquid securities. However, private investment funds or hedge funds (actively managed portfolios of investments that use advanced investment strategies such as leveraged, long, short and derivative positions with the goal of generating high returns either in an absolute sense or relative to a market benchmark), such as the Investment Funds, are often illiquid. For this reason, the Funds and the Master Funds are organized as closed-end funds. See “RISK FACTORS.” The Investment Funds in which the Master Fund invests may have limitations on withdrawals, such as quarterly withdrawals with notice provisions or even more limited withdrawal rights. The Funds’ and Master Fund’s portfolios are not subject to any minimum liquidity requirement imposed by the 1940 Act. However, to manage the Master Fund’s liquidity and comply with the Code, the Adviser will cause the Master Fund to structure its portfolio such that the Master Fund meets the tests under the Code discussed above.

THE ADVISER WILL STRUCTURE THE MASTER FUND’S PORTFOLIO IN A MANNER THAT THE ADVISER REASONABLY BELIEVES WILL ENABLE IT TO MAKE PERIODIC REPURCHASE OFFERS FOR SHARES. HOWEVER, THIS SHOULD NOT BE CONSTRUED BY SHAREHOLDERS OR PROSPECTIVE INVESTORS TO MEAN THAT A FUND PROVIDES INVESTORS WITH LIQUIDITY. THE SHARES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE AND IT IS NOT ANTICIPATED THAT A SECONDARY MARKET FOR SHARES WILL DEVELOP. THE SHARES ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE DECLARATION OF TRUST OF EACH FUND. ALTHOUGH A FUND EXPECTS TO OFFER TO REPURCHASE SHARES FROM TIME TO TIME, AT THE DISCRETION OF THE BOARD, SHARES WILL NOT BE REDEEMABLE AT A SHAREHOLDER’S OPTION, NOR WILL THEY BE EXCHANGEABLE FOR SHARES OR INTERESTS OF ANY OTHER FUND. AS A RESULT, AN INVESTOR MAY NOT BE ABLE TO SELL OR OTHERWISE LIQUIDATE HIS, HER OR ITS SHARES. THE SHARES ARE APPROPRIATE ONLY FOR THOSE INVESTORS WHO DO NOT REQUIRE A LIQUID INVESTMENT AND WHO ARE AWARE OF THE RISKS INVOLVED IN INVESTING IN THE FUNDS. TO THE EXTENT THAT AN INVESTOR REQUIRES THAT A PORTION OF ITS INVESTMENT PORTFOLIO PROVIDE LIQUIDITY, SUCH PORTION SHOULD NOT BE INVESTED IN EITHER FUND. SEE “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE – INVESTMENT FUNDS’ SECURITIES ARE GENERALLY ILLIQUID.”

See “LIMITATIONS ON LIQUIDITY,” “REPURCHASES OF SHARES” and “TRANSFERS OF SHARES.”

REPURCHASES OF SHARES

No Shareholder will have the right to require a Fund to redeem his, her or its Shares (or any portion thereof). A Fund from time to time may offer to repurchase Shares pursuant to written tenders by the Shareholders. These repurchases are made at such times and on such terms as may be determined by the Board from time to time in its sole discretion. A Fund may elect to repurchase less than the full amount that a Shareholder requests to be repurchased. If a repurchase offer is oversubscribed by Shareholders who tender Shares, a Fund may repurchase a pro rata portion of the Shares tendered by each Shareholder, extend the repurchase offer, or take any other action with respect to the repurchase offer permitted by applicable law. In addition, each Fund has the right to repurchase Shares of Shareholders if the Fund determines that the repurchase is in the best interest of the Fund or upon the occurrence of certain events specified in the Fund’s Declaration of Trust.

In determining whether a Fund should offer to repurchase Shares pursuant to repurchase requests, the Board may consider, among other things, the recommendation of the Adviser as well as a variety of other operational, business, legal and economic factors. The Adviser expects that it will recommend to the Board that each Fund offer to repurchase Shares with a Valuation Date (as defined below in “REPURCHASES OF SHARES”) quarterly on or about March 31, June 30, September 30 and December 31 of each year. The Board may, under certain circumstances, elect to postpone, suspend or terminate an offer to repurchase Shares.

A Shareholder who tenders some but not all of his, her or its Shares of a Fund for repurchase will be required to maintain a minimum account balance of $25,000 in the Fund. Such minimum account balance requirement may be waived by the Adviser, in its sole discretion. The Fund reserves the right to reduce the amount to be repurchased from a Shareholder so that the required account balance is maintained.


		See “REPURCHASES OF SHARES.”
TRANSFER RESTRICTIONS		A Shareholder may assign, transfer, sell, encumber, pledge or otherwise dispose of (each, a “transfer”) its Shares (or a portion thereof) only (1) by operation of law pursuant to the death, divorce, insolvency, bankruptcy, or adjudicated incompetence of the Shareholder; or (2) under other circumstances, with the consent of the Board. Shares thus should be viewed as a long-term investment. In connection with any request to transfer any Shares (or a portion thereof), a Fund may require the Shareholder requesting the transfer to obtain, at the Shareholder’s expense, an opinion of counsel selected by the Fund as to such matters as the Fund may reasonably request. Notice to the Fund of any proposed transfer must include evidence satisfactory to the Board or its delegate that the proposed transferee, at the time of transfer, meets any requirements imposed by the Fund with respect to investor eligibility and suitability. Each transferring Shareholder and transferee may be charged reasonable expenses, including attorneys’ and accountants’ fees, incurred by the relevant Fund in connection with the transfer. See “TRANSFERS OF SHARES.”
CONFLICTS OF INTEREST		The investment activities of the Adviser (including the Investment Committee), the Investment Managers, their respective affiliates, and their directors, trustees, managers, members, partners, officers, and employees (collectively, the “Related Parties”), for their own accounts and other accounts they manage, may give rise to conflicts of interest that potentially could disadvantage the Funds and their Shareholders. The Adviser and other Related Parties provide other investment management services to other funds and discretionary managed accounts that follow an investment program certain aspects of which are similar to certain aspects of the Funds’ investment program. The Adviser and other Related Parties are involved with a broad spectrum of financial services and asset management activities, and may, for example, engage, in the ordinary course of business, in activities in which their interests or the interests of their clients may conflict with those of the Funds or their Shareholders. The trading activities of the Adviser’s affiliates are carried out without reference to positions held directly or indirectly by the Funds. In addition and more significantly, the Related Parties may be involved with other investment companies, investment programs, investment partnerships or separate accounts that use Investment Managers or Investment Funds that are either already a part of the Master Fund’s portfolio or that may be appropriate for investment by the Master Fund. In some cases, these Investment Funds may be capacity-constrained. The Related Parties are under no obligation to provide the Master Fund with capacity with respect to these Investment Funds and, accordingly, the Master Fund may not have exposure or may have reduced exposure with respect to these Investment Funds that may be used in other portfolios managed by Related Parties. The Master Fund’s and the Funds’ operations may give rise to other conflicts of interest that could disadvantage the Funds and their Shareholders. See “CONFLICTS OF INTEREST.” In addition, the Adviser may recommend an investment by the Master Fund in an Investment Fund managed or co-managed by a Related Party. Such an investment would only be made subject to rules or SEC or SEC staff positions under the 1940 Act, or exemptive relief from the SEC and, among other things, will be made only if approved by a majority of the Independent Trustees, who will review the conflicts of interest that may arise from such investment. Finally, the Adviser may manage a portion of the Master Fund’s assets directly in cases where it has the competency to do so (e.g., certain derivative investments and hedging transactions, etc.) and such management, since it is direct, shall not require any consent. However, no additional fees will be charged by the Adviser for such management.


		See “RISK FACTORS.”
SUMMARY OF TAXATION		The Funds and the Master Fund qualify, and expect to continue to qualify, as RICs under Subchapter M of the Code. For each taxable year that a Fund so qualifies, the Fund is not subject to federal income tax on that part of its taxable income that it distributes to Shareholders. Taxable income consists generally of net investment income and any capital gains. The Master Fund will distribute substantially all of its net investment income and gains to the Funds, and the Funds in turn will distribute substantially all of their net investment income and gains to Shareholders. These distributions generally will be taxable as ordinary income to the Shareholders. Shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them. The Funds will inform Shareholders of the amount and character of the distributions to Shareholders. See “DISTRIBUTION POLICY.” Subchapter M imposes strict requirements for the diversification of a RIC’s investments, the nature of a RIC’s income and a RIC’s distribution and timely reporting of income and gains. In order to satisfy these requirements, the Master Fund generally will invest its assets in Investment Funds organized outside the United States that are treated as corporations for U.S. tax purposes and are expected to be classified as passive foreign investment companies (“PFICs”). See “TAX ASPECTS.”
DISTRIBUTIONS		Distributions will be paid at least annually on the Shares in amounts representing substantially all of the net investment income and net capital gains, if any, earned each year. The Funds are not a suitable investment for any investor requiring dividend income. Each Shareholder will automatically be a participant under the Funds’ Dividend Reinvestment Plan (“DRP”) and have all income dividends and/or capital gains distributions automatically reinvested in Shares. Election not to participate in the DRP and to receive all income dividends and/or capital gain distributions, if any, in cash may be made by notice to a Shareholder’s Intermediary (who should be directed to inform the relevant Fund). See “DISTRIBUTIONS.”
ERISA PLANS AND OTHER TAX- EXEMPT ENTITIES		Investors subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and other tax-exempt entities, including employee benefit plans, individual retirement accounts (each, an “IRA”), and 401(k) and Keogh Plans (collectively, “ERISA Plans”) may purchase Shares. Because each Fund is an investment company registered under the 1940 Act, the underlying assets of the Funds will not be considered to be “plan assets” of an ERISA Plan investing in the Fund for purposes of ERISA’s fiduciary responsibility and prohibited transaction rules. Thus, the Adviser will not be a fiduciary within the meaning of ERISA with respect to the assets of any ERISA Plan that becomes a Shareholder, solely as a result of the ERISA Plan’s investment in a Fund. See “ERISA CONSIDERATIONS.”
TERM		The term of each Fund is perpetual unless a Fund is otherwise terminated under the terms of the Fund’s Declaration of Trust.
REPORTS TO SHAREHOLDERS		Each Fund furnishes to Shareholders as soon as practicable after the end of each taxable year information on Form 1099 as is required by law to assist the Shareholders in preparing their tax returns. The Funds prepare, and transmit to Shareholders, an unaudited semi-annual and an audited annual report within 60 days after the close of the period for which the report is being made, or as otherwise required by the 1940 Act. Shareholders may also be sent additional


		reports regarding the Fund’s operations each quarter, at the discretion of the Adviser. See “REPORTS TO SHAREHOLDERS.”
FISCAL YEAR		For accounting purposes each Fund’s fiscal year is the period ending on December 31. For tax purposes each Fund’s fiscal year is the period ending on October 31.
RISK FACTORS		An investment in a Fund involves certain risks and special considerations. Listed below are summaries of several of such risks and considerations. • Investment Funds may be illiquid. The Master Fund may not be able to redeem when desired or at the most opportune time as determined by the Adviser. The Master Fund may make withdrawals from most Investment Funds only at certain specified times, which may affect the ability of a Shareholder to make withdrawals from a Fund. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Investment Funds’ Securities Are Generally Illiquid.” • Shares will not be listed for trading on any national securities exchange, are subject to substantial restrictions on transfer, and have limited liquidity. Although the Adviser anticipates recommending to the Board that each Fund offer to repurchase Shares on a quarterly basis, the Board retains the discretion to approve such requests and, therefore, there is no requirement that a Fund repurchase Shares. Accordingly, there can be no assurance that a Shareholder who requests the repurchase of its Shares (or a portion thereof) will have such Shares repurchased. See “REPURCHASES OF SHARES” and “GENERAL RISKS—Shares Not Listed; Repurchases of Shares.” • The performance of the Funds depends upon the ability of the Adviser to select Investment Managers and Investment Funds in which the Master Fund invests, and on the success of the Investment Managers in managing the assets of the Investment Funds. See “GENERAL RISKS—Dependence on the Adviser and the Investment Managers.” • The Master Fund has prescribed portfolio construction and investment limits under which the Adviser allocates the assets of the Master Fund. However, within these limits, the Adviser has the discretion to underweight or overweight overall allocations to Investment Funds from a risk/reward perspective. There is no assurance that its decisions in this regard will be successful, or that the Master Fund will have the ability to change these allocations when the Adviser determines it is advisable to do so. This could have a material adverse effect on the ability of the Adviser to implement the Master Fund’s and the Funds’ investment objective. • Federal, state and other governments, and their regulatory agencies or self-regulatory organizations, may take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude a Fund’s

ability to achieve its investment objective. See “GENERAL RISKS — Governmental, Legal, Tax and Regulatory Risks.”

• Certain Investment Funds may use investment strategies and techniques that involve greater risks than the strategies typically used by open-end registered investment companies (i.e., mutual funds). Although Investment Funds invest in equity and debt securities, certain of them may also invest in and trade equity-related instruments, debt-related instruments, currencies, financial futures, swap agreements, and other types of instruments. In addition, the Investment Funds may sell securities short and use a wide range of other investment techniques, including leverage and derivative instruments used for both hedging and non-hedging purposes. The use of such instruments and techniques may be an integral part of an Investment Fund’s investment strategy, and may increase the risk to which the Funds’ portfolio is subject. See “INVESTMENT RELATED RISKS.”

• The Adviser, on behalf of the Master Fund, and Investment Managers on behalf of Investment Funds, may consider it appropriate, subject to applicable regulations, to utilize forward and futures contracts, options, swaps, other derivative instruments, short sales, margin and other forms of economic leverage in their investment programs. Such investment techniques can substantially increase the adverse impact of investment risks to which the Funds’ investment portfolio may be subject. See “INVESTMENT RELATED RISKS—Leverage.”

• Certain of the Investment Funds may invest in private securities for which there is no readily available market and that are generally illiquid. In addition, certain of these investments carry a high degree of risk.

• The Investment Funds may invest a substantial portion of their assets in securities of foreign issuers and the governments of foreign countries. These investments involve special risks not usually associated with investing in securities of U.S. companies or the U.S. government, including, but not limited to, political and economic considerations, such as greater risks of expropriation and nationalization, confiscatory taxation, the potential difficulty of repatriating funds, general social, political and economic instability and adverse diplomatic developments, as well as potentially great volatility levels. See “INVESTMENT RELATED RISKS — Foreign Investments” and “Investment in Emerging Markets.”

• From time to time an Investment Fund in which the Master Fund invests may have a limited (or no) operating history.

• Legal, tax and regulatory changes may occur which may materially adversely affect the Fund. See “GENERAL RISKS—Governmental, Legal, Tax and Regulatory Risks” and “TAX ASPECTS.” Additionally, there are certain tax risks associated with an investment in a Fund, including without limitation the potential for legislative or regulatory change that could impact the Fund. See “TAX ASPECTS.”

• Each Fund intends to accept additional investments in Shares, and such purchase orders will dilute the indirect interest of existing Shareholders in the Fund’s investment portfolio, which could have an adverse impact on the value of the existing Shareholders’ Shares. See “GENERAL RISKS—Special Considerations Applicable to Purchases of Shares.”

• The Master Fund may not be able to identify appropriate Investment Funds with whom to deploy capital for certain periods of time, which could have an adverse impact.

• Investment Managers charge the Master Fund asset-based fees, and certain Investment Managers are also entitled to receive performance-based fees or allocations. Such fees and performance-based compensation are in addition to the fees charged to the Master Fund and the Funds by the Adviser. Moreover, an investor in a Fund bears a proportionate share of the expenses of the Master Fund, the Fund, and, indirectly, expenses of the Investment Funds. Investors could avoid the additional level of fees and expenses at the Master Fund and Fund level by investing directly with the Investment Funds, although access to many Investment Funds may be limited or unavailable. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Multiple Levels of Fees and Expenses.”

• Performance-based allocations may create incentives for Investment Managers to make risky investments, and may be payable by the Master Fund to an Investment Manager based on an Investment Fund’s positive returns even if the Master Fund’s overall returns are negative. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Multiple Levels of Fees and Expenses.”

• Investment Funds generally are not registered as investment companies under the 1940 Act and, therefore, the Master Fund as an investor in Investment Funds does not have the benefit of the protections afforded by the 1940 Act. Investment Managers potentially may not be registered as investment advisers under the Advisers Act, in which case the Master Fund as an investor in Investment Funds managed by such Investment Managers will not have the benefit of certain of the protections afforded by the Advisers Act. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Investment Funds Generally Not Registered.”

• The Board has delegated to the Adviser discretion to determine whether to invest in voting or non-voting interests in underlying Investment Funds. To the extent the Master Fund purchases non-voting interests of, or contractually foregoes the right to vote its interests in, an Investment Fund, it will not be able to vote on matters that require the approval of the investors of the Investment Fund, including matters that could adversely affect the Master Fund’s investment in such Investment Fund. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Inability to Vote.”

• The valuation of the Master Fund’s investments in Investment Funds is ordinarily calculated by the Independent Administrator in consultation with the Adviser. The valuation procedures of the Investment Funds in which the Master Fund invests are reviewed by a committee established by the Adviser to oversee the valuation of the Funds’ investments (the “Adviser’s Valuation Committee”), in consultation with the Adviser and the Independent Administrator. The Master Fund’s investments are ordinarily based upon valuations provided to it by the Investment Managers of such Investment Funds or, in many cases, the administrators of those Investment Funds. Certain securities in which the Investment Funds invest may not have a readily ascertainable market price and are fair valued by the Investment Managers and/or their administrators. An Investment Manager may face a conflict of interest in valuing such securities since their values affect the Investment Manager’s compensation. The Adviser’s Valuation Committee reviews the valuation procedures used by each Investment Manager and the committee will monitor the returns provided by the Investment Funds, including performing ongoing due diligence. The Master Fund and the Funds have established a Valuation Committee of their Boards, which oversees the actions of the Adviser’s Valuation Committee. However, none of the Adviser’s Valuation Committee, the Independent Administrator or the Board is able to confirm or review the accuracy of valuations provided by Investment Managers or their administrators. Inaccurate valuations provided by Investment Funds could materially adversely affect the value of Shares, which determine the value at which new Shareholders invest and the amounts Shareholders receive upon any repurchases of Shares by the Funds. Illiquid investments may be harder to value, potentially increasing risks regarding valuation. “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Valuation of Investments in Investment Funds,” and “CALCULATION OF NET ASSET VALUE; VALUATION.”

• Certain Investment Funds that the Adviser has selected may provide infrequent opportunities to purchase their securities. In addition, the Funds must make annual distributions of income and gain, if any. The Master Fund therefore may from time to time need to hold significant amounts of cash, short-term debt securities or money market securities, pending investment in such Investment Funds or payment of any dividends not reinvested in the Funds, which could materially adversely affect the Fund’s investment returns. See “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE—Limitations on Ability to Invest in Investment Funds” and “—Potential Limitations Arising From Distributions.”

• The Investment Funds and Master Fund may invest in, or enter into transactions involving, derivative instruments. The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in securities or more traditional investments, depending upon the characteristics of the particular

derivative and the Investment Fund’s portfolio as a whole. If the counterparty to a derivative defaults, an Investment Fund may lose the net amount of payments that the Investment Fund is entitled to receive. See “INVESTMENT RELATED RISKS.”

• The Investment Funds and the Master Fund may use borrowing for operational and investment purposes. Any utilization of investment leverage may increase the volatility of the Master Fund’s investments and can increase the adverse impact of risks to which an investment in the Funds may be subject. See “INVESTMENT RELATED RISKS.”

• The markets in which Investment Fund or Master Fund investments are made can be highly volatile. See “INVESTMENT RELATED RISKS.”

• Insolvency laws can have an adverse impact on the Funds if an Investment Fund has invested in a debt instrument issued by an issuer that becomes insolvent. See “INVESTMENT RELATED RISKS.”

• Investment Funds and the Master Fund may invest in securities of companies in emerging markets or in debt issued by foreign governments, which are subject to risks based on the underdeveloped nature of, among other things, emerging market country economies, political infrastructure and technology. See “INVESTMENT RELATED RISKS.”

• Investment Funds and the Master Fund may invest in a company with the expectation that a particular corporate event (i.e., a merger, bankruptcy) will or will not occur, but there can be no assurance that such expectations will be met, which may have an adverse impact on the value of an investment in such a company. See “INVESTMENT RELATED RISKS.”

• Investment Funds and the Master Fund may invest in securities of small and mid-capitalization companies, the prices of which can be more volatile than securities of larger capitalization companies. See “INVESTMENT RELATED RISKS.”

• Investment Funds and the Master Fund may invest in exchange traded funds (“ETFs”) which have management fees and may have higher volatility, both of which could have an adverse impact on Fund performance. See “INVESTMENT RELATED RISKS.”

• The Master Fund, and thus the Funds, are dependent on the ability of the Investment Fund Managers to effectively implement their respective strategies. See “INVESTMENT RELATED RISKS.”

• Investment Funds may purchase securities of companies through, or shortly after, initial public offerings of such securities, the price of which can be volatile due to, among other things, the market’s unfamiliarity with the issuer and/or the industry in which the issuer operates. See “INVESTMENT RELATED RISKS.”

• Investing in convertible securities or using arbitrage and/or

global macro investing strategies may subject an Investment Fund and the Master Fund to risks in addition to those described above. See “INVESTMENT RELATED RISKS.”

In view of the risks noted above, an investment in a Fund is suitable only for investors who can bear the risks associated with limited liquidity of the Shares and should be viewed as a long-term investment.

No guarantee or representation is made that the investment program of the Funds, the Master Fund or any Investment Fund will be successful, that the various Investment Funds selected will produce positive returns or that either Fund will achieve its investment objective.

A more detailed discussion of the risks associated with an investment in a Fund can be found under “GENERAL RISKS,” “SPECIAL RISKS OF THE FUND OF FUNDS STRUCTURE,” and “INVESTMENT RELATED RISKS.”

SUMMARY OF FUND EXPENSES

The following table illustrates the aggregate expenses and fees that Shareholders in the Funds can expect to bear directly or indirectly through the Funds’ investments in the Master Fund. The information below, and specifically the Acquired Fund Fees and Expenses (as described below in footnote 4), is required disclosure for investment companies that are registered under the 1940 Act. Because the Master Fund and the Funds are registered under such Act, they are required to include these disclosures. Unregistered Investment Funds that may resemble the Master Fund in that they invest in underlying funds will also incur expenses from the underlying funds in which they invest. However, unlike the Master Fund, these unregistered funds of funds are not required to disclose Acquired Fund Fees and Expense information to investors because they are not registered under the 1940 Act.


	SAR Fund	Institutional Fund
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of purchase amount) (1)	None	None

ANNUAL EXPENSES (as a percentage of average net assets)
Management Fees	0.75%	0.75%
Servicing Fees	1.00%	0.25%
Interest Payments on Borrowed Funds (2)	0.31%	0.31%
Other Expenses (3)	1.62%	0.89%
Acquired Fund (Investment Fund) Fees and Expenses (4)	TBD%	TBD%

TOTAL ANNUAL FUND OPERATING EXPENSES	[ ]%	[ ]%
Fee Waiver and/or Expense Reimbursement (5)	(0.82)%	-

TOTAL ANNUAL FUND OPERATING EXPENSES AFTER FEE WAIVER AND/OR EXPENSE REIMBURSEMENT	[ ]%	[ ]%

TOTAL ANNUAL EXPENSES (6)	[ ]%	[ ]%

(1) The Funds have engaged the Distributor to assist them in placing Shares in the Funds. The Distributor may engage one or more Selling Agents. The Adviser or its affiliates may pay a fee out of their own resources to Selling Agents. Selling Agents also may charge an investor a fee for their services in conjunction with an investment in the Funds and/or maintenance of investor accounts. Such a fee will be in addition to any fees charged or paid by the Funds and is not a Fund expense, and thus not reflected above. Investors should direct any questions regarding any such fees to the relevant Selling Agent.

(2) The Master Fund and the Funds may borrow money to purchase portfolio securities and for portfolio management purposes. For additional information on the Funds’ borrowing policy, see “BORROWING AND USE OF LEVERAGE BY THE FUNDS AND THE MASTER FUND.”

(3) Other Expenses include operating expenses of approximately 1.26% and 0.53% for the SAR Fund and Institutional Fund, respectively, (including professional fees, transfer agency fees, offering costs and other operating expenses) and each Fund’s pro rata share (for calculation purposes in the above table) of the operating expenses borne directly at the Master Fund level of approximately 0.36%. Other costs may be borne by the Master Fund and/or the Funds, as appropriate. As a contractual matter, so long as each Fund invests all of its investable assets in the Master Fund, such Fund will not directly pay the Adviser an investment management fee; however, as reflected in the preceding line item in the Fee Table, each Fund’s Shareholders bear an indirect share of the Master Fund’s annualized investment management fee of 0.75%, through the Fund’s investment in the Master Fund. If the Funds invested directly, they would pay the Adviser the investment management fee of 0.75%. As discussed above, the SAR Fund pays a Servicing Fee of 1.00%, and the Institutional Fund an Administrative Servicing Fee of 0.25%, on an annualized basis, calculated monthly, out of the respective Funds’ assets. For the Institutional Fund during the year ended December 31, 2011, the Adviser recouped $143,977 for expenses reimbursed in 2010, resulting in 0.25% of increased expenses during the year ended December 31, 2011. As of December 31, 2011, there were no remaining reimbursed expenses subject to recoupment.

(4) The Acquired Fund Fees and Expenses include each Fund’s share of the operating expenses and performance-based incentive fees of the underlying private Investment Funds in which the Master Fund invests. The costs incurred at the Investment Fund level include management fees, administration fees, professional fees, incentive fees and other operating expenses. In addition, the underlying Investment Funds also incur trading expenses, which may include

interest and dividend expenses, which are the byproduct of leveraging or hedging activities employed by the Investment Managers in order to seek to enhance or preserve the Investment Funds’ returns. Of the approximately TBD % representing costs incurred at the underlying Investment Fund level, such costs consist of approximately TBD % in management fees, approximately TBD % in other expenses (interest, trading, etc.) and approximately TBD % in incentive fee allocations.

The Acquired Fund Fees and Expenses were calculated in good faith by the Adviser. There are several components that go into the calculation and, for some Investment Funds, complete, current information was not available. Generally the calculation is based on the most recent audited shareholder reports, the most recent investor communication (which, in some cases, may be the Investment Funds’ offering documents) or other materials/communications from/with the Investment Funds. The fees and expenses disclosed above are based on historic earnings of the Investment Funds, which may (and which should be expected to) change substantially over time and, therefore, significantly affect Acquired Fund Fees and Expenses. In addition, the Investment Funds held by the Master Fund will change, which further impacts the calculation of the Acquired Fund Fees and Expenses. Generally, management fees payable to Investment Managers of the Investment Funds range from 0.50% to 3% (annualized) of the average NAV of the Master Fund’s investment in such Investment Funds. In addition, certain Investment Managers charge an incentive allocation or fee generally ranging from 15% to 30% of an Investment Fund’s net profits, although it is possible that such ranges may be exceeded for certain Investment Managers. The expenses charged by the underlying Investment Funds are not paid to the Funds or the Adviser and represent the costs incurred to invest in the Investment Funds.

(5) Under the Expense Limitation Agreement, the Adviser has contractually agreed to limit total annualized expenses of the SAR Fund, including the SAR Fund’s proportionate share of Master Fund expenses (for Expense Limitation Agreement calculation purposes only) (excluding fees and expenses of underlying funds, the SAR Fund’s pro rata share of borrowing and other investment-related costs and fees, taxes, litigation and indemnification expenses, judgments and other extraordinary expenses not incurred in the ordinary course of the SAR Fund’s business), to 2.5%, through April 30, 2013. The expenses of the SAR Fund, after any application of the Expense Limitation Agreement, will not reflect the Acquired Fund (Investment Fund) Fees and Expenses shown above, and will exclude the Master Fund’s borrowing, investment-related and certain other costs (if any). Actual SAR Fund expenses could be higher in the absence of the Adviser’s contractual limitation. The Adviser is permitted to recover from the SAR Fund expenses it has borne (whether through reduction of its management fee or otherwise) in later periods to the extent that the SAR Fund’s expenses fall below the annual rate set forth in the Expense Limitation Agreement. Under the Expense Limitation Agreement, for expenses reimbursed since the beginning of the SAR Fund’s 2011 fiscal year, the SAR Fund is not obligated to reimburse such expenses beyond three years from the end of the fiscal year in which the Adviser deferred a fee or reimbursed an expense. Any such recovery by the Adviser will not cause the SAR Fund to exceed the annual limitation rate that was in affect at the time of such waiver or reimbursement. Under a prior expense limitation agreement for the Institutional Fund, effective through April 30, 2012, the Adviser is permitted to recover expenses it has borne (in the same manner described above), but the Institutional Fund is not obligated to reimburse such expenses beyond three years from the end of such fiscal year in which the Adviser deferred a fee or reimbursed an expense and in any event not if such expense caused the Institutional Fund to exceed its prior expense limit.

(6) The “Total Annual Expenses” of the Funds disclosed above differs from the ratio of expenses to average net assets (Fund expense ratio) that is included in the Financial Highlights section of the financial statements in each Fund’s annual report. The financial statements that appear in each Fund’s Shareholder reports depict the Fund’s direct expenses and do not include in expenses the direct expenses of the Master Fund or the portion of Acquired Fund Fees and Expenses that represent costs incurred at the Investment Fund level, as required to be disclosed in the above table.

The following example is intended to help you compare the cost of investing in each Fund with the cost of investing in other funds. The assumed 5% annual return, which is required by the SEC, is not a prediction of, and does not represent, the projected or actual performance of the Fund.

Example

You would pay the following fees and expenses on a $1,000 investment in the SAR Fund, assuming a 5% annual return:


1 YEAR	3 YEARS	5 YEARS	10 YEARS
$[ ]	$[ ]	$[ ]	$[ ]

You would pay the following fees and expenses on a $1,000 investment in the Institutional Fund, assuming a 5% annual return:


1 YEAR	3 YEARS	5 YEARS	10 YEARS
$[ ]	$[ ]	$[ ]	$[ ]

The example is based on the anticipated fees and expenses incurred by the Fund, including the Acquired Fund Fees and Expenses, as set out in the table above and should not be considered a representation of future expenses. Actual expenses may be greater or less than those shown. The rate of return of the Fund may be greater or less than the hypothetical 5% return used in the example. A greater rate of return than that used in the example would increase the dollar amount of the investment management and (in the case of Investment Funds) incentive fees borne directly (and indirectly) by the Fund.

The purpose of the table above is to assist prospective investors in understanding the various fees and expenses that Shareholders will bear directly or indirectly. For a more complete description of the various fees and expenses of the Funds, see “INVESTMENT MANAGEMENT FEE,” “ADMINISTRATION,” “FUND EXPENSES,” “REPURCHASES OF SHARES,” and “PURCHASING SHARES.”

FINANCIAL HIGHLIGHTS

The information contained in the table below sets forth selected information of the Funds. The financial information for each period is derived from the financial statements contained in each of the Fund’s annual reports for such period (the “Annual Report”) which has been audited by KPMG LLP (“KPMG”). KPMG’s report, along with the Funds’ and the Master Fund’s financial statements, are included in the Annual Report. Each of the Fund’s Annual Reports have been filed with the Securities and Exchange Commission (the “SEC”) and are available on the SEC’s website at www.sec.gov, and are also available upon request by calling 1-800-725-9456. The Funds’ financial statements for each period are included in the Funds’ Statement of Additional Information (the “SAI”), which is available upon request from the Funds. The SAI also contains the financial statements of the Master Fund for each period, which have been audited by KPMG.

SAR FUND


	For the year ended December 31, 2011	For the period from April 1, 2010 through December 31, 2010 ¹
Per share operating performance:
Net asset value, beginning of period	$14.74	$15.00
Loss from operations:
Net investment income ²	0.11	0.13
Net realized and unrealized loss from investments	(0.62 )	(0.25)
Net decrease resulting from operations	(0.51)	(0.12)
Distributions to Shareholders from:
Net investment income	(0.08)	(0.14)
Net realized gains on investments	- ³	-

Total distributions	(0.08)	(0.14)
Total	(0.59)	(0.26)

Net asset value, end of period	$14.15	$14.74

Net investment income to average net assets ⁴	0.77%	1.84%

Total gross operating expenses to average net assets ⁴	2.26%	12.15%

Total net operating expenses to average net assets ^4,5	1.44%	1.21%

Portfolio turnover ⁶	54.92%	57.50%


Total return ⁷	(3.45)%	(0.78)%

Net assets, end of period (000’s)	$13,768	$4,010

1	The SAR Fund commenced operations on April 1, 2010.

2	Calculated using the average shares.

3	Amount is less than $0.005.

Ratios are calculated by dividing the indicated amount by average net assets measured at the end of each month during the period. Ratios have been annualized for periods less than twelve months. The gross operating expenses are the expenses before reimbursement to the SAR Fund or recoupment by the Adviser.

In accordance with the Expense Limitation Agreement, reimbursed expenses include expenses of the Master Fund, accounting for 1.06% for the year ending December 31, 2011 and 1.29% for the period from April 1, 2010 through December 31, 2010. The net expense ratio of the SAR Fund, including the applicable Master Fund expenses, is 2.50%.

6	The SAR Fund is invested substantially in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund.

7	The total return is calculated for the shareholders taken as a whole. Total return is not annualized for periods less than twelve months.

INSTITUTIONAL FUND


	For the year ended December 31, 2011	For the period from April 1, 2010 through December 31, 2010 ¹
Per share operating performance:
Net asset value, beginning of period	$14.77	$15.00
Loss from operations:
Net investment income ²	0.15	0.15
Net realized and unrealized loss from investments	(0.57)	(0.23)
Net decrease resulting from operations	(0.42)	(0.08)
Distributions to Shareholders from:
Net investment income	(0.14)	(0.15)
Net realized gains on investments	- ³	-

Total distributions	(0.14)	(0.15)

Total	(0.56)	(0.23)

Net asset value, end of period	$14.21	$14.77

Net investment income to average net assets ⁴	1.04%	1.84%

Total operating expenses to average net assets ⁴	0.53%	1.49%

Total operating expenses to average net assets net of recoupments ⁴	0.78%	0.71%

Portfolio turnover ⁵	54.92%	57.50%

Total return ⁶	(2.87)%	(0.51)%

Net assets, end of period (000’s)	$59,390	$33,124

1	The Institutional Fund commenced operations on April 1, 2010.

2	Calculated using the average shares.

3	Amount is less than $0.005.

5	The Institutional Fund is invested substantially in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund.

6	The total return is calculated for the shareholders taken as a whole. Total return is not annualized for periods less than twelve months.

INVESTMENT OBJECTIVE

Each Fund’s objective is to seek to generate returns that are marked by relatively low volatility as measured by annualized standard deviation and relatively low correlation to equity and other “risk” markets. When implemented within a broader portfolio that contains exposure to equities and other relatively high-volatility asset classes, the Fund seeks to dampen overall volatility by decreasing directionality and correlation with equity or “risk” markets, and it is designed to achieve a volatility level closer to that of fixed income instruments such as U.S. government bonds (Treasuries) or investment grade corporate bonds as opposed to the volatility of equity or “risk” markets (although in certain periods, volatility may be higher, sometimes materially). Many of the strategies utilized within the Fund generally provide better returns in a higher (but not extreme) volatility environment, with rising short-term interest rates, and therefore, these types of strategies can provide a reasonable hedge against inflation, while providing portfolio stability akin to fixed income.

Each Fund invests substantially all of its investable assets in the securities of the Master Fund, through which the Fund pursues its investment objective. Although substantially all of each Funds’ investments are made through the Master Fund, this Prospectus generally refers to each Funds’ investments as if they were made directly by the Fund, in order to make the Fund’s and Master Fund’s investment programs easier to understand. Accordingly, references in this Prospectus to a Fund’s investment activities actually describe the Master Fund’s investment activities, unless the context requires otherwise.

Each Fund’s investment objective is non-fundamental and may be changed by the Board without the approval of the Shareholders. Except as otherwise stated in this Prospectus or the SAI, the investment policies, strategies and restrictions of a Fund are not fundamental and may be changed by the Board without the approval of the Shareholders. Each Fund’s principal investment policies and strategies are discussed below.

IN VESTMENT STRATEGIES

The Funds’ strategy is to seek to generate returns that are marked by relatively low volatility as measured by annualized standard deviation and relatively low correlation to equity and other “risk” markets by investing its assets, through the Master Fund, across a variety of Investment Funds and securities. , although there can be no assurance that a Fund will achieve its investment objective.

Styles and Strategies Utilized by Investment Funds . The strategies employed by the Adviser and the Investment Funds (and, by extension, the Funds) fall into four primary categories (“Styles”) and several secondary categories (“Strategies”). In addition to benefiting from the Investment Managers’ individual investment strategies, the Master Fund, as a whole, expects to achieve the benefits of making a broad allocation of its assets among a carefully selected group of Investment Managers and securities that fit within the various Styles and Strategies. The Adviser expects that by investing through multiple Investment Managers employing various Styles and Strategies, the Master Fund may reduce the volatility inherent in a more concentrated portfolio that is invested in fewer Investment Managers, Styles and/or Strategies. The Adviser and the Investment Managers may invest in a wide range of instruments and markets, including, but not limited to, U.S. and foreign equities and equity-related instruments, U.S. and foreign fixed income securities, issued by both governments and corporations, currencies, commodities, and financial futures, swaps and other derivatives.

The Styles and Strategies employed by the Adviser and the Investment Managers are:

Top-Down Alpha Style . Strategies within the Top-Down Alpha Style include Global Macro, Global Tactical Asset Allocation (“GTAA”) and Commodity Trading Advisors (“CTAs,” also commonly referred to as “Managed Futures”). All of these Strategies are designed to extract “Top-Down” alpha or excess return from certain markets or sub-markets (as opposed to generating return through analysis at an individual security level). Managers across the Strategies within this category trade across all types of markets, typically utilizing futures contracts to gain exposure to these markets. Investment Funds within this category typically offer relatively high levels of liquidity (monthly redemption rights in most cases) because the underlying portfolios are highly liquid. These Strategies will tend to have some directionality across the various markets traded, and the volatility of these Strategies is higher than that of the other Styles used by the Fund. However, these Strategies tend to be “divergent” in nature, essentially positioned to profit from dislocations or extended market trends, which helps explain the relatively low correlations between these strategies and most equity-related strategies. The Top-Down Alpha Strategies are:

Global Macro . Global Macro managers analyze a variety of macroeconomic data including but not limited to forecasts for inflation and growth in various economies, forecasts for returns across various asset classes, valuations of various asset classes, historical price and volume data across various global markets and gauges of investor sentiment to determine whether to be long or short across global equity, fixed income, currency and commodity markets. These Investment Managers synthesize the inputs that they believe are predictive of future returns and then

establish positions utilizing, for the most part, futures contracts that in most cases are very liquid. In this Global Macro category, Investment Managers ultimately make the final decisions themselves as to these positions without relying exclusively on computer-driven models or systems to create their portfolios.

Global Tactical Asset Allocation (“GTAA”) . GTAA managers are similar to the Global Macro managers described above, with one significant difference – instead of constructing portfolios at the discretion of the portfolio managers or investment committees, they construct and trade portfolios systematically, using computer-driven models or systems.

CTAs or Managed Futures . Investment Managers who are CTAs generally use historical price and volume data exclusively (as opposed to the broader range of inputs that include macroeconomic data used by Global Macro and GTAA managers) to forecast future prices and build appropriate portfolios. These Investment Funds typically trade in the futures markets exclusively and most offer monthly liquidity to their investors. They may be categorized as trend-following or counter-trend, and their models may be focused on short-term movements in markets or on longer-term patterns. Almost all CTAs are managed on a systematic, model-driven basis.

Bottom-Up Alpha Style . Strategies within the Bottom-Up Alpha Style are generally characterized as “relative value” in nature. For the most part, these relative value Strategies involve an Investment Manager identifying a security or group of securities that are undervalued or overvalued relative to another security or group of securities and then buying or going “long” the undervalued security or group of securities while selling or going “short” the overvalued security or securities. In so doing, these Managers strip out market exposure and attempt to create mostly non-directional portfolios, with the resultant return therefore comprised mainly by alpha as opposed to beta . This approach also produces the lowest volatility among the Styles used in the Fund. Liquidity offered by these Investment Funds is typical of many hedge funds with quarterly liquidity being typical although not universal. Most relative value strategies tend to be “convergent” in nature, with Investment Managers taking positions in stretched or dislocated markets which appreciate if relationships revert to the mean or their historical norms. These Strategies may be categorized as follows:

Equity Market Neutral or Statistical Arbitrage . Investment Funds that employ Equity Market Neutral or Statistical Arbitrage Strategies purchase certain equity securities and simultaneously sell short other equity securities in an attempt to isolate risk to the relative value of one security or basket of securities as compared to another security or basket of securities and eliminate general market risk. Generally, Investment Managers who use fundamental analysis to establish the relative values of the securities in their portfolios are categorized as Equity Market Neutral, while those who use quantitative models to establish the relative values are categorized as Statistical Arbitrage.

Capital Structure Arbitrage or Credit Relative Value . Capital Structure Arbitrage or Credit Relative Value are strategies predicated on realization of a spread between related instruments in which all or some of the components are corporate fixed income instruments. Capital Structure Arbitrage is utilized by Investment Managers to exploit perceived pricing inefficiencies within a company’s capital structure. An Investment Manager employing Capital Structure Arbitrage analyzes the various securities issued by a company, including common and preferred equity, convertible securities, various forms of senior and junior (typically unsecured) debt, and then establishes a long position in a security that is more attractive on a relative basis to another security in which a short position is established. In a successful trade, the long security appreciates in price relative to the shorted security and the Investment Manager then closes the trade at a profit. This strategy is market neutral because it can be profitable even if both securities decline in value (as long as the shorted security declines more than the purchased security). Companies that are distressed are often targets in this Strategy because of the potential for significantly different recover values for different types of securities in the event of a bankruptcy, but healthy companies with complex balance sheets are also fertile ground for Capital Structure Arbitrage trades. Credit relative value is a very similar strategy to the equity market neutral strategy described above, except that the securities in play are fixed income securities. Investment Managers attempt to identify and exploit anomalous (typically based on historical trading ranges) spreads in the prices of functionally equivalent or substitutable securities. There can be no assurance that any such hedging techniques will be successful or that the hedging employed by an Investment Manager will not have the negative effect of lowering overall returns, or creating losses, in the portfolio or with respect to the applicable position.

Volatility Arbitrage or Convertible Arbitrage . Volatility Arbitrage or Convertible Arbitrage strategies trade volatility as an asset class, utilizing arbitrage, directional, market neutral or a mix of types of strategies, and include exposures which can be directional or market neutral to implied volatility. Volatility Arbitrage entails the use of derivative investments and can be used on both a stand-alone basis and as a hedging strategy in conjunction with other investment strategies. As a stand-alone Strategy, exchange traded domestic or global index options and/or options on futures contracts are used to exploit anomalies in the pricing of volatilities in related assets. There are several well-defined related securities and/or asset classes that Volatility Arbitrage Investment Managers typically

follow to determine when they are out of their historical trading ranges. By continually monitoring these relationships, the Investment Manager can identify when the securities or asset classes trade out of their normal trading range and can put a trade on when there has not been a fundamental, or exogenous, change in the relationship. As an adjunct Strategy, these same derivative instruments can be used to manage risk and enhance returns on investments made utilizing other strategies. Use of derivatives often relies on extensive quantitative modeling, volatility estimation and proprietary in-house trading models. Convertible Arbitrage, a subset of Volatility Arbitrage, involves the purchase of a convertible debt or preferred equity instrument (an instrument that is effectively a bond or has a fixed obligation of repayment with an embedded equity option, non-detachable warrants or an equity-linked or equity-indexed note) concurrent with the short sale of, or a short over-the-counter (“OTC”) derivative position in, the common stock of the issuer of such debt instrument. Investment returns are driven by a combination of an attractive coupon or dividend yield, interest on the short position and the level of the underlying stock’s volatility (which directly affects the option value of the security’s conversion feature). The Fund may invest in one or more Investment Funds with exposure in the convertible arbitrage strategy to provide greater diversification across markets (U.S. and foreign issues), sectors, credit ratings, and market capitalizations. This Strategy is cyclical because the opportunity set is dependent on sufficient issuance of convertible securities.

Commodity Relative Value . Commodity relative value strategies are reliant on the fundamental evaluation of market data, relationships and influences across commodity markets including positions in energy, agricultural, resources or metal assets. Investment Managers pursuing a relative value approach in these markets analyze a wide variety of commodities markets and look for opportunities to put on trades that may take advantage of substitution, the curve structure and the effects of “roll” on commodity contracts.

Other Relative Value . Bottom-Up Alpha Strategies that do not fit in the two categories defined above are included in the Other Relative Value category.

Tactical Credit Style . In this area, the Adviser may utilize Investment Funds, individual securities or derivatives to gain access to certain credit markets, with the goal of harvesting he yield or “carry” from those credit markets that the Adviser deems attractive. The Adviser believes that obtaining mostly passive, liquid and low-cost exposure within this Style is preferable to utilizing less liquid and higher-cost Investment Funds to access these markets. Types of exposures in this Style include:

Emerging Market Debt (Local Currency Denominated) . The core strategy within the Tactical Credit Style is emerging market debt, with two important distinctions: that the debt is issued by governments as opposed to corporations, and that the debt is denominated in local currency instead of dollars or euros. The Adviser believes that this Strategy is likely to benefit from a number of trends within and characteristics of emerging markets for the next several years, including lower fiscal deficits, more supportive demographic trends, more significant sovereign natural resources, more credible monetary regimes, credit cycles in earlier stages (all when compared to developed markets), and the availability of bonds issued by supranational entities with strong credit such as the World Bank. Because of these supportive conditions, the Adviser believes that this Strategy is particularly suited to long-only, passive or low-cost active implementation. Taking these supportive conditions into account, the Adviser believes that relatively high interest rates and generally attractive currencies combine to make this an attractive asset class.

U.S. Corporate Credit . Fixed income securities issued by U.S. and foreign corporations constitute this Strategy. These securities may be “high yield,” investment grade, or a combination of both depending on their relative attractiveness as determined by the Advisor. In general, exposure to this Strategy will be gained through long-only, active Investment Funds managed by Investment Managers with strong abilities and track records in credit analysis and selection. Floating rate bank loans that are typically secured and senior in the capital structure comprise a different sort of corporate credit universe. The Adviser believes that these types of securities add a different type of yield or “carry” to the portfolio because as floating rate securities, they typically offer some protection in an inflationary environment, as opposed to fixed-rate debt whose market value and purchasing power decline in a rising rate or inflationary environment. As with the other Strategies in the Tactical Credit Style, the Adviser will utilize long-only Investment Funds with high levels of liquidity and relatively low costs and fees.

Other Credit . Credit Strategies that do not fit in the two categories defined above are included in the Other Credit category.

Event-Driven Style . Strategies within the Event-Driven Style are designed to profit from changes in the prices of securities of companies facing a major corporate event. The goal of an Event-Driven Strategy is to identify securities, which may include common or preferred stock as well as many types of debt, with a favorable risk-reward ratio based on the probability that a particular event will occur. Such events include mergers and acquisitions as well as restructurings, spin-offs and significant litigation (e.g., tobacco or patent litigation). These Investment Funds tend to exhibit higher levels of

correlation to equity markets than those in other Styles, although the Advisor attempts to allocate to Investment Funds with unique portfolios that generate more alpha than beta. As a result, volatility of these portfolios on average are in between those of the Investment Funds in either the Top-Down or Bottom-Up Alpha Styles. Liquidity offered by these Investment Funds is typical of many hedge funds with quarterly liquidity typical although not universal. Most event-driven strategies tend to be “convergent” in nature. Event-Driven Strategies employed by Investment Funds are categorized as follows:

Merger or Risk Arbitrage . The Merger or Risk Arbitrage strategy involves taking short and long investment positions, respectively, in the stock of acquiring and target companies upon the announcement of an acquisition offer. Acquisitions are typically paid for in stock, cash or a combination thereof. Thus, when an acquisition is announced, the acquiring company (“Acquiror”) will establish a price per share of the company being acquired (“Target”) in cash (per share cash price), stock (a share ratio is established) or a combination thereof. Typically, the Target traded for less than the price being paid (in either cash or stock) prior to the announcement. When the announcement is made, the Target’s stock price will typically increase, but still trade at a discount to the price being offering by the Acquiror. This discount – and the size of the discount – is principally a function of three factors: (a) the risk that the acquisition will close; (b) the time frame for closing (i.e., the time value of money); and (c) the amount of liquidity or capital being deployed by merger arbitrageurs and other investors. Accordingly, if a merger arbitrageur or investor believes that the risk of the acquisition not closing is not significant relative to the returns that can be generated by the “spread” between the current stock price of the Target and the price being offered by the Acquiror, the merger arbitrageur or investor will generally buy shares of the Target and short shares of the Acquiror in a stock for stock transaction. When the deal closes, the risk premium vanishes and the Investment Fund’s profit is the spread. This strategy is somewhat cyclical, since it requires a supply of corporate mergers and acquisitions to deploy capital.

Distressed Investments or Special Situations . Distressed investments include investments in securities issued by companies that are experiencing difficult business conditions, including bankruptcy. In many cases, securities issued by such companies over-correct and trade at levels below their value in a liquidation or acquisition scenario. Special situations investments are similar to distressed investments in that they are typically made in securities that the buyer perceives to be undervalued for one reason or another; however, these companies are not in, and do not appear to be on the brink of, bankruptcy. An example of a Special Situations trade is the purchase of a security issued by a company that the Investment Manager believes is a likely acquisition target.

Other Event-Driven . Event-Driven Strategies that do not fit in the two categories defined above are included in the Other Event-Driven category.

Investment Limits . At the time of investment, the Adviser will invest no more than 20% of the Master Fund’s net assets in any one Investment Fund.

Tax Code Compliance . The Funds and the Master Fund are registered investment companies under the 1940 Act and each Fund and the Master Fund has elected, and intends to qualify, to be treated as a RIC under the Code. To qualify as a RIC under the Code, a Fund must, among other things: (i) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies, and net income from interests in “qualified publicly traded partnerships” (as defined in the Code); and (ii) diversify its holdings so that, at the end of each quarter of each taxable year: (A) at least 50% of the market value of the Fund’s assets is represented by cash, cash items, U.S. government securities, securities of other RICs and other securities, with such other securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund’s total assets and 10% of the outstanding voting securities of such issuer; and (B) not more than 25% of the market value of the Fund’s total assets is invested in the securities (other than U.S. government securities and the securities of other RICs) of: (1) any one issuer; (2) any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses; or (3) any one or more “qualified publicly traded partnerships.”

Acces s. Many high quality Investment Funds are not required to register under the 1940 Act because they do not publicly offer their securities and are restricted as to either the number of investors permitted to invest in such Investment Funds or as to the qualifications of persons eligible to invest (determined with respect to the value of investment assets held by the managers of such investor) in such Investment Funds. Many of these Investment Funds will have greater investment flexibility than traditional investment funds (such as mutual funds and most other registered investment companies) as to the types of securities owned, the nature of performance-based compensation paid to Investment Managers, the types of trading strategies employed, and in many cases, the amount of leverage they may use.

An investment in a Fund enables investors to invest, through the Fund’s investment in the Master Fund, with Investment Managers whose services generally are not available to the investing public, whose Investment Funds may be closed from time to time

to new investors, or who otherwise may place stringent restrictions on the number and type of persons whose money they will manage. An investment in a Fund also enables investors to invest with a cross-section of investment strategies without incurring the high minimum investment requirements that Investment Managers typically would impose on investors.

Overlays and Derivatives . From time to time, the Adviser may decide to use options, swaps, futures, or other derivatives (potentially in a subsidiary of the Master Fund or an account managed by the Adviser) to invest in Styles and Strategies that replicate the performance of a particular Investment Fund, may not be available through an Investment Fund, or to adjust or hedge market or risk exposure of the Master Fund. To achieve investment returns equivalent to those achieved by an Investment Manager in whose Investment Fund (or other account managed by the Investment Manager) the Fund otherwise could not invest directly, either because of incompatible terms, tax or reporting issues, or general lack of availability for direct investment, the Fund may enter into total return swaps and/or other similar derivatives in order to receive the total return of the reference Investment Fund (or other account managed by the Investment Manager) over a stated time period. The Fund may enter into total return swap and/or other similar derivatives in order to receive the total return of a reference index that may not be available through an Investment Fund and/or has lower fees and expenses than an Investment Fund using a similar Style or Strategy. In such situations, the performance of a reference index will be tied to a Style or Strategy or may be “rules-based” and/or systematic in nature. The Fund may enter into total return swaps and/or other similar derivatives in order to adjust the market of risk or exposure of the Master Fund. The Adviser may increase or decrease the level of risk, hedge or change the character of risk to which the Fund is exposed, by utilizing swaps, futures and/or other similar derivatives. There can be no assurance that any such hedging techniques will be successful or that the hedging employed by the Adviser will not have the negative effect of lowering overall returns, or creating losses, in the portfolio or with respect to the applicable position.

OVERVIEW OF INVESTMENT PROCESS, DUE DILIGENCE AND MANAGER SELECTION

Capital Allocation Decision s and Portfolio Construction. The Master Fund expects its assets to be allocated broadly among Styles and Strategies for the allocation of capital at the time of investment. The Adviser has latitude to allocate more or less capital to a particular Style, Strategy or Investment Fund, depending on the Adviser’s belief about the opportunities afforded over a given investment time horizon. In making such asset allocation decisions, the Adviser will consider national and international economic and geopolitical conditions, the risks incident to the Styles, Strategies and Investment Funds, and the relative return opportunities presented by each (among other considerations), and gauge these factors against other opportunities and the need for a broad portfolio to reduce risk (as measured by volatility).

Each Fund shall strive to maintain a broad allocation of its assets, both with regard to allocation of assets among Investment Managers, and also allocation of assets among various Styles and Strategies, as set forth above. In general, studies indicate that a broadly allocated portfolio enables an investor to generate more consistent returns than one that is more concentrated. Accordingly, a broad allocation of assets is generally noted as a means to reduce investment risk as measured by volatility. Correspondingly, while a broad allocation of assets lowers volatility and helps to mitigate the risk of investment losses, an un-concentrated portfolio is subject to limitations on its ability to generate relatively high investment returns than a more concentrated portfolio can sometimes generate. Accordingly, an un-concentrated portfolio may be appropriate for investors that want less volatility in their portfolios and are willing to accept relatively lower, but generally more consistent, returns than portfolios concentrated in a very few Styles, Strategies or Investment Managers/Investment Funds.

Manager Diversificatio n. The Adviser defines “manager risk” as the risk that an Investment Manager will not generate the returns commensurate with the mean of the Investment Manager’s peer group (i.e., same Style and Strategy) because of: (a) poor fundamental analysis and/or security selection; (b) market timing; (c) management turnover within the Investment Manager; or (d) other factors or circumstances that affected that Investment Manager’s performance specifically that were not caused by market conditions within the Investment Manager’s Style and Strategy generally. Manager risk can be reduced by, among other things, due diligence conducted on the Investment Managers and diversifying across multiple Investment Managers within the same or similar Style and Strategy.

The Adviser, on behalf of the Funds, will generally attempt to allocate assets among multiple Investment Managers to achieve an appropriately broad allocation among Styles and Strategies and also among Investment Managers. The Master Fund will limit the percentage of assets that are invested in any one Investment Fund, at the time of investment, to an amount that complies with the limits set forth above and in accordance with any regulatory restrictions applicable to the Funds.

Many Investment Funds will have exposure to more than one Strategy or Style or may have characteristics of more than one Strategy or Style. Accordingly, there is a wide degree of discretion in how a particular Investment Fund is categorized or in how its capital is allocated among Styles and Strategies in reports compiled by the Adviser. Decisions on how to most appropriately characterize an Investment Fund shall be made by the Adviser, and such decisions shall be final. See “GENERAL RISKS – Risks of Mis-Categorizing Investment Funds within Styles or Strategies.”

The Adviser may, in its discretion and upon approval of the Board, change or modify the Styles and Strategies from time to time.

Due Diligence and Manager Selection. It is the responsibility of the Adviser to research and identify Investment Managers, to satisfy itself as to the suitability of the terms and conditions of the Investment Funds and to allocate or reallocate each Fund’s assets among Investment Managers. The Adviser employs an approach to investing that seeks to combine in-depth research and recommendations with portfolio management, risk management, due diligence and management oversight. The Adviser allocates each Fund’s assets among Investment Managers using the diverse knowledge and experience of the members of its Investment Committee to assess the capabilities of the Investment Managers and to determine an appropriate mix of Investment Funds. As discussed further below, the Adviser relies upon its Investment Committee to identify potential Investment Fund investments, with one person being designated as having day-to-day investment oversight responsibility for the Funds. See “GENERAL RISKS” and “INVESTMENT RELATED RISKS.”

In the event that a Fund in the future engages one or more sub-advisers, following Shareholder approval, it would also be the responsibility of the Adviser to oversee any such sub-adviser. The Adviser would negotiate the investment sub-advisory agreements, subject to Shareholder approval requirements or SEC exemptive relief from such requirements. There can be no assurance that a Fund will seek, or that the SEC will grant, such exemptive relief allowing for the engagement of one or more sub-advisers without Shareholder approval.

Process of Portfolio Constructio n. On a regular basis, existing and prospective Investment Managers are reviewed by the Adviser. The review, and potential inclusion of new Investment Managers, will be predicated on the Adviser’s assessment of the current economic climate, capacity issues with respect to existing Investment Funds, performance issues with respect to existing Investment Funds, due diligence and/or other criteria on which Investment Funds and Investment Managers are assessed.

The Adviser employs a multi-step process in which the Adviser develops a pool of Investment Funds to consider for investment. The Adviser sources potential Investment Funds on an ongoing basis and generates a list of Investment Funds that might qualify for investment by the Funds. The Investment Committee will identify potential Investment Funds based on quantitative, qualitative, or other due diligence criteria. The list of potential Investment Funds is reduced to a more manageable number of higher quality funds by running proprietary screens on the group of Investment Funds that rank funds on an overall Style and Strategy basis. The top Investment Funds based on these screens (the “Qualified Pool”) are then subjected to qualitative due diligence, which typically begins with a review of marketing materials and a teleconference with one or more members of the investment and/or investment relations teams at each fund. The Adviser then meets with representatives of each Investment Fund and weighs the quantitative and qualitative results of the due diligence process before deciding to invest, remove the Investment Fund from the Qualified Pool, or leave the Investment Fund on the Qualified Pool list for future consideration. Once a pool of one or more potential Investment Funds has been identified and approved for investment by the Investment Committee, the Investment Committee then determines an allocation for the Funds’ assets across the pool.

The Adviser generally intends to employ the above through a multi-step process in structuring and monitoring each Fund’s portfolio. The Adviser generally employs the following steps, although the steps may not be conducted in the following order:

First, the Adviser will attempt to develop the Qualified Pool to consider for investment.

Second, the Investment Committee will identify one or more potential Investment Funds based on quantitative, qualitative, or other due diligence criteria.

Third, once a pool of one or more potential Investment Funds has been identified from the Qualified Pool and approved for investment by the Investment Committee, the Committee then determines an allocation for the Funds’ assets across the pool, consistent with the limitations then in effect.

Finally, the Adviser intends to monitor, among other things, the overall level of assets managed, the estimated capacity of each Investment Fund and the adherence to the pre-defined strategy and risk/return targets set forth when the investment was made.

The Adviser may invest a portion of the Funds’ assets with Investment Managers who may have limited track records and Investment Funds with limited or no operating histories.

Ongoing due diligence includes review of monthly performance and monthly reports (as available) from each Investment Fund as well as conference calls and in-person meetings with Investment Fund personnel.

BO RROWING AND USE OF LEVERAGE BY THE FUNDS AND THE MASTER FUND

The Master Fund and the Funds may borrow money to purchase portfolio securities and for portfolio management purposes. Each Fund and the Master Fund may also borrow money to pay operating expenses, including, without limitation, investment management fees, or to fund repurchases of Shares or facilitate distributions. Under the 1940 Act, no Fund or the Master Fund is permitted to borrow for any purposes if, immediately after such borrowing, such Fund would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to indebtedness or less than 200% with respect to preferred stock. The 1940 Act also provides that no Fund or the Master Fund may declare distributions, or purchase its stock (including through repurchase offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as applicable. Under the 1940 Act, certain short-term borrowings (such as for the purpose of meeting repurchases, for bridge financing of investments in Investment Funds or for cash management purposes): (i) if repaid within 60 days; (ii) if not extended or renewed; and (iii) that are not in excess of 5% of the total assets of a Fund, are not considered the use of investment leverage. In addition to borrowing money, the Fund may also incur economic leverage via the use of derivatives. Borrowing restrictions generally do not apply to Investment Funds that are not registered under the 1940 Act. The use of borrowings for investment purposes involves a high degree of risk.

The Master Fund and/or the Funds may be required to pledge assets when borrowing, which in the event of an uncured default, could affect the Master Fund’s and/or Funds’ operations, including preventing the Master Fund or Funds from conducting a repurchase of their shares. In addition, the terms of any borrowing may impose certain investment restrictions on the Master Fund or Funds. The following table is designed to illustrate the effect on the return to a Shareholder of leverage in the amount of 10% of a Fund’s gross assets. The table assumes hypothetical annual returns of the Funds’ portfolios of minus 10% to plus 10%, and an assumed utilization of leverage in the amount of 10% of a Fund’s gross assets with a cost of borrowing of approximately 1.98% payable for such leverage based on market rates as of the date of this Prospectus. A Fund’s actual cost of leverage would be based on market rates at the time it borrows money for investment leverage as well as any subsequent rate changes while such borrowings are outstanding, and such actual cost of leverage may be higher or lower than that assumed in the previous example. As the table shows, leverage generally increases the return to Shareholders when portfolio return is positive and greater than the cost of leverage and decreases the return when the portfolio return is negative or less than the cost of leverage. The figures appearing in the table are hypothetical and actual returns may be greater or less than those appearing in the table.


Assumed Portfolio Return (net of expenses)	(10.00	)%	(5.00	)%	0.00	%	5.00	%	10.00	%
Corresponding Share Return Assuming 10% Leverage	(11.20	)%	(5.70	)%	(0.20	)%	5.30	%	10.80	%

To the extent permitted by each Fund’s and the Master Fund’s fundamental policy on borrowing (described in the SAI) and the 1940 Act, the Board may modify a Fund’s borrowing policies, and the Board of the Master Fund may modify the Master Fund’s borrowing policies, including the purposes of borrowings. The rights of any lenders to a Fund or the Master Fund to receive payments of interest or repayments of principal will likely be senior to those of Shareholders, and the terms of any borrowings may contain provisions that limit certain investments or activities of the Fund or the Master Fund.

GENERAL RISKS

Although the Master Fund’s investment program is designed to produce positive returns regardless of overall market trends with lower volatility over a meaningful investment period of at least two to three years while attempting to minimize risk, the Master Fund’s investment program entails certain significant risks to which the Funds are subject through their investment in the Master Fund. There can be no assurance that the investment objective of the Funds or the Master Fund or those of the Investments Funds in which the Funds invest will be achieved or that their investment programs will be successful. Because each Fund invests substantially all of its investable assets in the Master Fund, the risks associated with an investment in the Fund are substantially the same as the risks associated with an investment in the Master Fund. Certain risks associated with an investment in the Funds are set forth below.

Risk Allocations

The Adviser will have the discretion to underweight or overweight allocations of assets among various Styles and Strategies from a risk/reward perspective, although such allocations must generally remain within the above limits. There is no assurance that the Adviser’s decisions in this regard will be successful. In addition, the Master Fund may be limited in its ability to make changes to allocations due to the subscription and redemption provisions of the Investment Funds, including notice periods and limited subscription and redemption dates, the ability of the Investment Funds to suspend and postpone redemptions, and lockups on redemptions imposed by certain Investment Funds. In addition, any such allocations will be made by the Adviser based on information previously provided by the Investment Funds. If such information is inaccurate or incomplete, it is possible that the Master Fund’s allocations from a risk/reward perspective may not reflect the Adviser’s intended allocations nor comply with the portfolio construction limitations. This could have a material adverse effect on the ability of the Adviser to implement the investment objective of the Funds and the Master Fund.

Risks of Mis-Categorizing Investment Funds within Styles and Strategies

While the Adviser will attempt to categorize all Investment Funds consistent with the foregoing discussions, certain Investment Funds may fit into more than one category or may not closely resemble any of the foregoing categories. Accordingly, the Adviser has a wide degree of discretion in categorizing Investment Funds within Styles and Strategies or allocating capital among Styles and Strategies in its reports. If the Adviser makes the wrong decision, certain Styles or Strategies may be under- or over-weighted relative to what may have been intended or reported. Accordingly, the Master Fund’s investment portfolio may be over-allocated or under-allocated to certain Styles or Strategies and incur concentration risks or result in insufficient exposure within the portfolio as a result.

Dependence on the Adviser and the Investment Managers

The Adviser will invest the assets of the Master Fund through the Investment Managers, and the Adviser has the sole authority and responsibility for the selection of the Investment Managers. The success of the Master Fund depends upon the ability of the Adviser to develop and implement investment strategies that achieve the investment objective of the Funds and the Master Fund. In addition, the Adviser may be dependent on key personnel. To the extent that any such key personnel were to depart, the Adviser’s ability to successfully develop and implement investment strategies may be negatively impacted.

The Master Fund also is dependent upon the ability of the Investment Managers to develop and implement strategies that achieve their investment objectives. Shareholders will have no right or power to participate in the management or control of the Funds, the Master Fund or the Investment Funds, and will not have an opportunity to evaluate the specific investments made by the Investment Funds or the Investment Managers, or the terms of any such investments.

Closed-End Fund; Limited Liquidity

Each Fund is a non-diversified, closed-end management investment company designed primarily for long-term investors, and is not intended to be a trading vehicle. You should not invest in a Fund if you need a liquid investment. Each Fund invests substantially all of its assets in illiquid investments. Closed-end funds differ from open-end management investment companies (commonly known as mutual funds) in that investors in a closed-end fund do not have the right to redeem their shares on a daily basis at a price based on NAV. In order to be able to meet daily redemption requests, mutual funds are subject to more stringent liquidity requirements than closed-end funds. In particular, a mutual fund generally may not invest more than 15% of its net assets in illiquid securities, while a closed-end fund, such as a Fund, may invest all or substantially all of its assets in illiquid investments (as is the Fund’s investment practice). The Adviser believes that unique investment opportunities exist in the market for Investment Funds, which generally are illiquid.

An investment in a Fund provides limited liquidity because the Shares are not freely transferable and Shareholders may not cause a Fund to redeem their Shares. As described below, a Fund may offer to repurchase Shares from Shareholders. Distributions of proceeds upon the repurchase of a Shareholder’s Shares may be subject to restrictions imposed upon withdrawals under the terms of the Investment Funds or, in the event that a Funds and/or the Adviser has engaged one or more sub-advisers, restrictions imposed by investment advisory agreements pursuant to which the Fund’s assets are invested. An investment in a Fund is suitable only for those investors that do not need liquidity.

Payment for repurchased Shares of a Fund may require the Master Fund to liquidate its investments in Investment Funds earlier than the Adviser would otherwise liquidate these holdings, potentially resulting in losses and increased fees, and may increase the Master Fund’s portfolio turnover. The Adviser intends to take measures (subject to such policies as may be established by the Investment Committee) to attempt to avoid or minimize potential losses and portfolio turnover resulting from the repurchase of Shares.

Shares Not Listed; Repurchases of Shares

Neither Fund intends to list Shares for trading on any securities exchange. There is no secondary trading market for Shares, and none is expected to develop. Shares are, therefore, not readily marketable. Because each Fund is a closed-end investment company, its Shares will not be redeemable at the option of Shareholders and they will not be exchangeable for shares or interests of any other fund. Although the Board may, in its sole discretion, cause a Fund to offer to repurchase outstanding Shares at their NAV, and the Adviser expects to recommend that the Board do so on a quarterly basis with a Valuation Date (as defined below in “REPURCHASES OF SHARES”) on or about March 31, June 30, September 30 and December 31 of each year, Shares are considerably less liquid than shares of funds that trade on a stock exchange, or shares of open-end registered investment companies.

There will be a substantial period of time between the date as of which Shareholders must accept a Fund’s offer to repurchase their Shares and the date they can expect to receive payment for their Shares from the Fund. Shareholders whose Shares are accepted for repurchase bear the risk that a Fund’s NAV may fluctuate significantly between the time that they accept the Fund’s offer to repurchase their Shares and the date as of which such Shares are valued for purposes of such repurchase. Shareholders will

have to decide whether to accept a Fund’s offer to repurchase their Shares without the benefit of having current information regarding the value of Shares on a date proximate to the date on which Shares are valued by the Fund for purposes of effecting such repurchases. See “REPURCHASES OF SHARES.”

Further, repurchases of Shares, if any, may be suspended, postponed or terminated by the Board under certain circumstances. See “REPURCHASES OF SHARES—Periodic Repurchases.” An investment in a Fund is suitable only for investors who can bear the risks associated with the limited liquidity of Shares and the underlying investments of the Fund. Also, because Shares will not be listed on any securities exchange, neither Fund is required, nor intends, to hold annual meetings of its Shareholders.

Non-Diversified Status

Each Fund is a “non-diversified” investment company. This means that there are no percentage limitations imposed by the 1940 Act on the percentage of a Fund’s assets that may be invested in the securities of any one issuer. The Adviser will follow a general policy of seeking to invest the Funds’ capital broadly among multiple Investment Funds. As a consequence of a potential large investment in a particular Investment Fund, losses suffered by such an Investment Fund could result in a higher reduction in the Funds’ capital than if such capital had been more proportionately allocated among a larger number of Investment Funds.

Limited Operating History

Certain of the Investment Funds in which the Master Fund invests may have limited or no operating histories. In such cases, the Adviser may evaluate among other things the past investment performance of the Investment Managers of such Investment Funds. However, past investment performance may not be indicative of the future results of an investment in such an Investment Fund. The results of other investment funds or accounts managed by the Adviser (or by Investment Managers) which have or have had an investment objective similar to or different from that of the Fund (or an Investment Fund in the case of Investment Managers) are not indicative of the results that the Fund (or an Investment Fund) may achieve.

Ability to Borrow

The Master Fund and the Funds may borrow money to purchase portfolio securities and for portfolio management purposes. To the extent that a Fund and/or Master Fund are not able to borrow, or enter into a credit facility of an appropriate size, such inability to borrow could adversely impact the Fund’s operations to the extent that the Fund or Master Fund needed to access borrowed funds.

Governmental, Legal, Tax and Regulatory Risks

The global financial markets have undergone, and in many respects are continuing to undergo, pervasive and fundamental disruptions that have led to extensive and unprecedented governmental intervention. Such intervention has, in certain cases, been implemented on an “emergency” basis with little or no notice, with the consequence that some market participants’ ability to continue to implement certain strategies or manage the risk of their outstanding positions has been suddenly and/or substantially eliminated or otherwise negatively implicated. Given the complexities of the global financial markets and the limited time frame within which governments have been able to take action, these interventions have sometimes been unclear in scope and application, resulting in confusion and uncertainty, which in itself has been materially detrimental to the efficient functioning of such markets as well as previously successful investment strategies.

Legal, tax and regulatory changes could occur that may materially adversely affect the Funds. For example, the regulatory and tax environment for Investment Funds and for derivative instruments in which Investment Managers may participate is changing rapidly, and changes in the regulation or taxation of derivative instruments may materially adversely affect the Funds. In particular, the CFTC has proposed changes to investment company regulation concerning investment in derivatives and commodities. The SEC for a period banned short selling in 2008, which disrupted many Investment Funds that used such strategies, and uncertainty surrounding certain derivatives and potential regulation of derivatives may materially adversely affect the value of derivative instruments held by the Investment Funds or the Funds and the ability of the Investment Managers or the Adviser to pursue their trading strategies. Similarly, the regulatory environment for leveraged investors and for private funds generally is changing rapidly, and changes in the direct or indirect regulation of leveraged investors or private funds, including tax regulation applicable thereto, may materially adversely affect the ability of the Funds to pursue investment objectives or strategies. In particular, Congress has held hearings regarding potential restructuring of U.S. financial regulations, taxation policy as it relates to leveraged investors, tax-exempt investors and private funds, and the SEC has recently engaged in a general as well as specific investigations of private funds, which has resulted in increased regulatory oversight and other legislation and regulation relating to private fund managers, private funds and funds of private funds. Due to recent events in the markets, further regulatory change may be more likely than not and should be expected to occur.

It is impossible to predict with certainty what additional interim or permanent governmental restrictions may be imposed on the markets and/or the effect of such restrictions on the Adviser’s ability to fulfill the Funds’ investment objective. Legislation or

regulation, which could be substantial and is unpredictable, could pose additional risks and result in material adverse consequences to the Investment Funds or the Funds and/or limit potential investment strategies that would have otherwise been used by the Investment Managers or the Funds in order to seek to obtain higher returns. The Adviser believes that there is a high likelihood of significantly increased regulation of the global financial markets; any such increased regulation could be materially detrimental to the operation and performance of the Funds. Certain tax risks associated with an investment in the Funds are discussed in “TAX ASPECTS.”

Master/Feeder Structure

The Master Fund may accept investments from other investors (including other feeder funds), in addition to the Funds. Because each feeder fund can set its own transaction minimums, feeder-specific expenses, and other conditions, one feeder fund could offer access to the Master Fund on more attractive terms, or could experience better performance, than another feeder fund. Smaller feeder funds may be harmed by the actions of larger feeder funds. For example, investors in a larger feeder fund will have more voting power than a Fund over the operations of the Master Fund. If investors of other feeder funds tender for a significant portion of their shares in a repurchase offer, the assets of the Master Fund will decrease. This could cause a Fund’s expense ratio to increase to the extent that subsequent investments in the Master Fund do not offset the cash outflows. In addition, a single large investor, or investors, in a feeder fund may be able to exercise similar influence on the Master Fund, and indirectly affect a Fund, by actions relating to the feeder in which such an investor(s) invests. This risk may be higher during a period in which a Fund does not have significant assets or has less assets relative to another feeder fund, such as upon commencement of operations of a Fund.

Significant Selling Agents; Substantial Repurchases; Change in Control of the Funds

To the extent that substantial numbers of investors have a relationship with any particular Selling Agent, such Selling Agent may have the ability to influence investor behavior, which may affect the Funds. To the extent that any such Selling Agents or other financial intermediaries exercise collective influence over such investors’ decisions to request repurchases of Shares, the Master Fund and the Funds may make larger repurchase offers than would otherwise be the case. Substantial acceptance of a Fund’s offers to repurchase Shares could require the Master Fund to liquidate certain of its investments more rapidly than otherwise desirable in order to raise cash to fund the repurchases and achieve a market position appropriately reflecting a smaller asset base. This could have a material adverse effect on the performance of the Funds and the value of Shares. Similarly, if such Selling Agents or other financial intermediaries exercise collective influence over Shareholders’ voting of Shares, they could, subject to compliance with SEC rules and state law, change the composition of the Board, which in turn could lead to a change in the Adviser to a Fund. If effected, such changes could have a material adverse effect on the performance of the Fund and the value of Shares. In addition, the global financial markets have undergone, and to an extent are currently undergoing, pervasive and fundamental disruptions, which have led to departures of brokers and financial advisors employed at Selling Agents and other financial intermediaries. This may have an uncertain but potentially adverse impact on a Fund.

Special Considerations Applicable to Purchases of Shares

The Funds may accept purchase orders for Shares as determined by the Board, in its sole discretion. Additional purchases may dilute the indirect interests of existing Shareholders in the Funds’ investment portfolio prior to such purchases, which could have an adverse impact on the existing Shareholders’ Shares in a Fund if future Fund investments underperform the prior investments. In addition, it is expected that Investment Managers may structure performance-based compensation so that compensation is paid only if gains exceed prior losses. Appreciation in the net assets managed by an Investment Manager at any given time will be shared pro rata by all of the Shareholders at such time, not just those who were Shareholders at the time prior losses were incurred. The value attributable to the fact that no performance-based compensation will be paid to an Investment Manager until its gains exceed its prior losses will not be taken into account in determining the NAV of a Fund. Such value to existing Shareholders will be diluted by new sales of Shares, because the new Shares will participate in any positive performance by the Investment Manager until its gains exceed its prior losses without the Investment Manager being paid any performance-based compensation.

In addition, Shares represent beneficial interests in an operating fund that may have significant open positions. Since these Shares will share in open positions which may have been held by the Funds for some period of time prior to the issuance of the additional Shares, the application of the relevant Investment Manager’s trading approach to such positions may have a qualitatively different effect on the performance of the additional Shares than it does on the performance of previously issued Shares. For example, a number of trading approaches may become more aggressive in terms of willingness to tolerate losses in a position and increase the size of a position after an open trade has generated a substantial profit because subsequent losses (up to a certain level) are perceived as being only a partial give-back of prior profits, not an actual loss. As subsequent purchasers of Shares will not have received the benefit of any profits on open positions prior to the date on which they purchase the Shares, subsequent losses will constitute an absolute loss to such holders, not only a partial give-back of profits. In addition, certain trading approaches may follow profit-taking strategies whereby they will liquidate or partially liquidate a position after it has generated a predetermined amount of profit. Since the new Shares will not have had the benefit of any such profit prior to the date on which they were issued, Shareholders holding such Shares may find themselves liquidated out of a position (which would have continued to generate substantial profits) due to an

Investment Manager “taking profits,” none of which had inured to their benefit. Some approaches apply similar analyses based on overall portfolio performance, not just the performance of particular positions, with generally analogous effects.

Special Tax Risks

Special tax risks are associated with an investment in the Funds. Each Fund and the Master Fund has elected to, and intends to meet the requirements necessary to, qualify as a “regulated investment company” or “RIC” under Subchapter M of the Code. As such, a Fund must satisfy, among other requirements, certain ongoing asset diversification, source-of-income and annual distribution requirements.

If before the end of any quarter of its taxable year, the Master Fund believes that it may fail the asset diversification requirement, the Master Fund may seek to take certain actions to avert such a failure. The Master Fund may try to acquire additional interests in Investment Funds to come into compliance with the asset diversification test. However, the action frequently taken by RICs to avert such a failure, the disposition of non-diversified assets, may be difficult for the Master Fund to pursue because the Master Fund may redeem its interest in an Investment Fund only at certain times specified by the Investment Fund’s governing documents. While relevant provisions also afford the Master Fund a 30-day period after the end of the relevant quarter in which to cure a diversification failure by disposing of non-diversified assets, the constraints on the Master Fund’s ability to effect a redemption from an Investment Fund referred to above may limit utilization of this cure period.

If the Master Fund fails to meet the asset diversification test described above with respect to any quarter, the Master Fund will nevertheless be considered to have satisfied the requirements for such quarter if the Master Fund cures such failure within 6 months and either (i) such failure is de minimis or (ii) (a) such failure is due to reasonable cause and not due to willful neglect and (b) the Master Fund reports the failure under Treasury Regulations to be adopted and pays an excise tax.

So long as the Master Fund meets its asset diversification requirements, each Fund also will be treated as meeting those asset diversification requirements.

If a Fund fails to satisfy the asset diversification or other RIC requirements, it may lose its status as a RIC under the Code. In that case, all of its taxable income would be subject to U.S. federal income tax at regular corporate rates without any deduction for distributions to Shareholders. In addition, all distributions (including distributions of net capital gain) would be taxed to their recipients as dividend income to the extent of a Fund’s current and accumulated earnings and profits. Accordingly, disqualification as a RIC would have a material adverse effect on the value of a Fund’s Shares and the amount of the Fund’s distributions.

Additional Tax Considerations; Distributions to Shareholders and Payment of Tax Liability

Each Fund will distribute substantially all of its net investment income and gains to Shareholders. These distributions are taxable as ordinary income or capital gains to the Shareholders. Shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them. Each Fund will inform Shareholders of the amount and character of its distributions to Shareholders. See “TAX ASPECTS” below for more information. If a Fund distributes in a calendar year less than an amount equal to the sum of 98% of its ordinary income for such calendar year and 98.2% of its capital gain net income for the twelve-month period ending October 31 of such year, plus any such amounts that were not distributed in previous calendar years, then the Fund will be subject to a nondeductible 4% excise tax with respect to the Fund’s undistributed amounts.

In addition, each Fund, through the Master Fund, invests in Investment Funds located outside the U.S. Such Investment Funds may be subject to withholding tax on their investments in other jurisdictions. Any such withholding tax would reduce the return on a Fund’s investment in such Investment Funds and thus on the Shareholders’ investment in the Fund. See “TAX ASPECTS.”

S PECIAL RISKS OF THE FUND OF FUNDS STRUCTURE

This section discusses certain risks related to the fact that the Master Fund generally invests in Investment Funds.

Investments in the Investment Funds Generally

Because the Master Fund invests in Investment Funds, the value of an investment in the Master Fund will be affected by the investment policies and decisions of the Investment Manager of each Investment Fund in direct proportion to the amount of Master Fund assets that are invested in each Investment Fund. The NAV of the interests of the Investment Funds, and as a result, the NAVs of the Master Fund and the Funds, will fluctuate in response to, among other things, various market and economic factors related to the markets in which the Investment Funds invest and the financial condition and prospects of issuers in which the Investment Funds

invest. Certain risks related to the investment strategies and techniques utilized by the Investment Managers are described under “INVESTMENT RELATED RISKS” below.

Investment Funds Generally Not Registered

The Investment Funds in which the Master Fund invests will generally not be registered as investment companies under the 1940 Act. Therefore, the Master Fund and the Funds will not be entitled to the protections of the 1940 Act with respect to investments in unregistered Investment Funds. In addition, the Investment Managers of the Investment Funds in certain cases may not be registered as investment advisers under the Advisers Act. Therefore, the Master Fund as an investor in the Investment Funds managed by such Investment Managers, and the Funds, as indirect investors through their investment in the Master Fund, will not have the benefit of certain of the protections of the Advisers Act. In addition, to the extent that such an unregistered Investment Manager registers, there is a risk that the Investment Manager may not comply with the requirements of the Advisers Act, or may encounter operational or regulatory difficulties that arise from such compliance requirements. The Investment Funds may not maintain their securities and other assets in the custody of a bank or a member of a securities exchange, as generally required of registered investment companies under SEC rules. A registered investment company that places its securities in the custody of a member of a securities exchange is required to have a written custodian agreement, which provides that securities held in custody will be at all times individually segregated from the securities of any other person and marked to clearly identify such securities as the property of such investment company, and which contains other provisions designed to protect the assets of such investment company. It is anticipated that the Investment Funds in which the Master Fund will invest may maintain custody of their assets with brokerage firms that do not separately segregate such customer assets, as would be required in the case of registered investment companies. Under the provisions of the Securities Investor Protection Act of 1970, as amended, the bankruptcy of any such brokerage firm could have a greater adverse effect on the Master Fund than would be the case if custody of assets were maintained in accordance with the requirements applicable to registered investment companies. There is also a risk that an Investment Manager could convert assets committed to it by the Master Fund to its own use or that a custodian could convert assets committed to it by an Investment Manager to its own use. There can be no assurance that the Investment Managers or the entities they manage will comply with all applicable laws and that assets entrusted to the Investment Managers will be protected. In this regard, although the Adviser performs initial and continuing due diligence, there remains a risk of Investment manager fraud and/or misconduct that could subject the Funds to losses.

Investment Funds Generally Non-Diversified

Investment Funds may be non-diversified, although some Investment Funds may undertake to comply with certain investment concentration limits. Investment Funds may at certain times hold large positions in a relatively limited number of investments. Investment Funds may target or concentrate their investments in particular markets, sectors, or industries. Those Investment Funds that concentrate in a specific industry or target a specific sector will also be subject to the risks of that industry or sector, which may include, but are not limited to, rapid obsolescence of technology, sensitivity to regulatory changes, minimal barriers to entry, and sensitivity to overall market swings. As a result, the NAVs of such Investment Funds may be subject to greater volatility than those of investment companies that are more fully diversified, and this may negatively impact the NAVs of the Master Fund and the Funds.

Investment Funds’ Securities Are Generally Illiquid

The securities of the Investment Funds in which the Master Fund invests or plans to invest may be illiquid. Subscriptions to purchase the securities of Investment Funds are generally subject to restrictions or delays. Similarly, the Master Fund may not be able to dispose of Investment Fund securities that it has purchased in a timely manner and, if adverse market conditions were to develop during any period in which the Master Fund is unable to sell Investment Fund securities, the Master Fund, when it is able to redeem, might obtain a less favorable price than that which prevailed when it decided to buy or sell such securities.

Industry Trend Towards Longer Lock-Ups; Modification of Portfolio Liquidity Requirements

Many Investment Funds have lengthened the lock-up periods during which an investor must hold an investment in an Investment Fund and the Adviser believes that this trend may continue. If this trend does continue, it could negatively impact the liquidity of the Master Fund (and consequently the Funds), which may force the Adviser to forgo investing in certain Investment Funds that are attractive due to the longer lock-up periods being employed.

Valuation of Investments in Investment Funds

The valuation of the Master Fund’s investments in Investment Funds is ordinarily determined based upon valuations calculated by the Independent Administrator (as defined below), in many cases based on information provided by the Investment Managers or third party administrators of such Investment Funds. Certain securities in which the Investment Funds invest may not have a readily ascertainable market price and will be valued by the Investment Managers or their administrators. In this regard, an Investment Manager may face a conflict of interest in valuing the securities, as their value will affect the Investment Manager’s compensation. The Master Fund and the Funds have established a Valuation Committee of their Boards, which oversees the actions of

the “Adviser’s Valuation Committee.” The Adviser’s Valuation Committee is composed of members of the Investment Committee as well as other representatives of the Adviser. Certain members of the Adviser’s Valuation Committee may face conflicts of interest in overseeing the value of the Master Fund’s investments, as the valuation of the Master Fund’s investments will affect the Adviser’s compensation. Although the Adviser’s Valuation Committee reviews the valuation procedures used by the Investment Managers, neither the Adviser’s Valuation Committee, the Independent Administrator, nor the Adviser can confirm or review the accuracy of valuations provided by Investment Managers or their administrators.

If an Investment Manager’s valuations are consistently delayed or inaccurate, the Adviser generally will consider whether the Investment Fund continues to be an appropriate investment for the Funds. The Master Fund may be unable to redeem or otherwise dispose of interests in such an Investment Fund quickly, and could therefore be obligated to continue to hold such interests for an extended period of time. In such a case, such interests would continue to be valued without the benefit of the Investment Manager’s valuations, and the Adviser’s Valuation Committee will determine the value, and may discount the value of the interests, if deemed to be the estimated fair value of such holding in keeping with the Funds’ valuation procedures.

Multiple Levels of Fees and Expenses

Although, in many cases, investor access to the Investment Funds may be limited or unavailable, an investor who meets the conditions imposed by an Investment Fund may be able to invest directly with the Investment Fund. By investing indirectly in Investment Funds indirectly through the Funds and the Master Fund, the investor bears asset-based fees at the Fund and Master Fund level, in addition to any asset-based fees and performance-based fees and allocations at the Investment Fund level. Moreover, an investor in the Funds bears a proportionate share of the fees and expenses of the Funds and the Master Fund (including management fees, expenses, operating costs, sales charges, brokerage transaction expenses (if any), and administrative and servicing fees) and, indirectly, expenses of the Investment Funds. Thus, an investor in the Funds may be subject to higher operating expenses than if he, she or it invested in an Investment Fund directly or in a closed-end fund that did not utilize a “fund of funds” structure.

Certain of the Investment Funds may be subject to a performance-based fee or allocation, irrespective of the performance of other Investment Funds and the Funds generally. Accordingly, an Investment Manager to an Investment Fund with positive performance may receive performance-based compensation from the Investment Fund, and thus indirectly from the Funds and its Shareholders, even if the Funds’ overall performance is negative. Generally, fees payable to Investment Managers of the Investment Funds range from 0.50% to 3% (annualized) of the average NAV of such Funds’ investment. In addition, certain Investment Managers charge an incentive allocation or fee generally ranging from 15% to 30% of an Investment Fund’s net profits, although it is possible that such ranges may be exceeded for certain Investment Managers. The performance-based compensation received by an Investment Manager also may create an incentive for that Investment Manager to make investments that are riskier or more speculative than those that it might have made in the absence of the performance-based allocation. Such compensation may be based on calculations of realized and unrealized gains made by the Investment Manager without independent oversight. In addition, if performance of an Investment Fund falls, Investment Fund expenses may increase as a percentage of gross returns, which could result in disproportional decreases in such fund’s performance. Also if Investment Fund performance and/or assets under management decrease yet the fund’s expenses fail to decrease proportionally, the Master Fund’s allocable share of such fund’s operating expense could increase, thus negatively impacting the Master Fund’s performance.

Duplicative Transaction Costs

Investment decisions of the Investment Funds are generally made by their Investment Managers independently of each other. As a result, at any particular time, one Investment Fund may be purchasing securities of an issuer whose securities are being sold by another Investment Fund. Consequently, the Master Fund could indirectly incur transaction costs without accomplishing any net investment result.

Investment Managers Invest Independently

The Investment Managers generally invest wholly independently of one another and may at times hold economically offsetting positions. To the extent that the Investment Managers do, in fact, hold such positions, the Master Fund’s portfolio, considered as a whole, may not achieve any gain or loss despite incurring fees and expenses in connection with such positions. In addition, Investment Managers are compensated based on the performance of their portfolios. Accordingly, there often may be times when a particular Investment Manager may receive incentive compensation in respect of its portfolio for a period even though the Master Fund’s NAV may have decreased during such period. Furthermore, it is possible that from time to time, various Investment Managers selected by the Adviser may be competing with each other for the same positions in one or more markets.

Turnover

The Investment Funds may invest on the basis of short-term market considerations. The turnover rate within the Investment Funds may be significant, potentially involving substantial brokerage commissions and fees. The Master Fund will have no control

over this turnover. In addition, the withdrawal of the Master Fund from an Investment Fund could involve expenses to the Master Fund under the terms of the Master Fund’s investment with that Investment Fund.

Affiliate Funds

The Master Fund may invest in Investment Funds sponsored, managed or co-managed by certain affiliates, subject to obtaining required exemptive relief from the SEC and an affirmative vote of a majority of the Independent Trustees. Such an investment may create a conflict of interest between the Master Fund and the Related Party that has sponsored or is managing or co-managing such Investment Fund. The Independent Trustees will review, among other things, such conflicts of interest in determining whether to approve such investment. However, the Adviser reserves the right to manage certain portions of the Master Fund’s portfolio directly where it has a specific competency do so.

Inability to Vote

The Master Fund typically may determine to limit its investment position in an Investment Fund to less than 5% of the Investment Fund’s outstanding voting securities, absent reliance on an exemptive rule or position under the 1940 Act. The Master Fund may determine to purchase non-voting securities in, or contractually waive or limit its voting interest in, certain Investment Funds (for example, to facilitate investments in smaller Investment Funds determined attractive by the Adviser) in order to avoid becoming subject to certain 1940 Act prohibitions with respect to affiliated transactions or to avoid negative tax consequences of ownership of an offshore Investment Fund. Although the Adviser does not expect that a significant number of waivers of voting rights will be undertaken, the Adviser may, under a policy adopted by the Board, waive certain voting rights in certain instances, subject to reporting to the Board, which waiver would allow the Fund, as well as potentially other clients of the Adviser, to invest in the same Investment Funds or to make larger investments in those Investment Funds. To the extent the Master Fund holds non-voting securities, or contractually forgoes the right to vote in respect of the voting securities of an Investment Fund, the Master Fund will not be able to vote on matters that require the approval of the interest holders of the Investment Fund, including potentially matters adverse to the Funds’ interests. Such waivers potentially could have an adverse impact on the Master Fund. Although the Master Fund may hold non-voting interests, the 1940 Act and the rules and regulations thereunder may nevertheless require the Master Fund to limit its position in any one Investment Fund in accordance with applicable regulatory requirements, as may be determined by the Master Fund in consultation with its counsel. These restrictions could change from time to time as applicable laws, rules or interpretations thereof are modified. The Master Fund could nevertheless be deemed in some circumstances to be an affiliated person of an Investment Fund and therefore subject to certain 1940 Act prohibitions with respect to affiliated transactions.

Waiver of Voting

Although the Adviser does not expect that a significant number of waivers of voting rights will be undertaken, the Adviser may, under a policy adopted by the Board, waive certain voting rights in certain instances, subject to reporting to the Board. Waiving such rights may allow the Master Fund to make an additional investment in an Investment Fund that could be deemed a portfolio affiliate of the Master Fund, in the absence of a waiver, where such investment in such Investment Fund is determined to be desirable and in the best interests of the Funds. A waiver could allow an additional investment where it was determined that an existing investment in the same fund by a Master Fund affiliate could otherwise prevent such an investment. Any waiver may be undertaken as an irrevocable contractual agreement to waive or limit the Master Fund’s ability to vote with regard to the election or removal of Investment Fund directors (or their equivalent).

Investment Managers May Have Limited Capacity to Manage Additional Fund Investments

Certain Investment Managers’ trading approaches presently can accommodate only a certain amount of capital. Each Investment Manager will normally endeavor not to undertake to manage more capital than such Investment Manager’s approach can accommodate without risking a potential deterioration in returns. Accordingly, each Investment Manager has the right, in consultation with the Adviser, to refuse to manage some or all of the Master Fund’s assets that the Adviser may wish to allocate to such Investment Manager. Further, in the case of Investment Managers that limit the amount of additional capital that they will accept from the Master Fund, continued sales of Shares to others would dilute the indirect participation of existing Shareholders with such Investment Manager.

Limitations on Ability to Invest in Investment Funds

In the event that the Master Fund is able to make investments in Investment Funds (including RICs) only at certain times, the Master Fund may invest any portion of its assets that is not invested in Investment Funds in short-term debt securities or money market securities pending investment in Investment Funds. During the time that the Master Fund’s assets are not invested in Investment Funds, that portion of the Master Fund’s assets will not be used to pursue the investment objective of the Master Fund and the Funds. In addition, for temporary defensive or operational reasons, at times the Adviser may vary the investment allocations in the Master Fund by adjusting the allocation to cash or cash equivalents rather than being fully invested in Investment Funds.

Indemnification of Investment Funds and Investment Managers

The Master Fund may agree to indemnify certain of the Investment Funds and the Investment Managers and their respective officers, directors, and affiliates from any liability, damage, cost, or expense arising out of, among other things, acts or omissions relating to the offer or sale of Shares.

I NVESTMENT RELATED RISKS

This section discusses the types of investments that are expected to be made by the Investment Funds (or potentially by the Master Fund directly) and the principal risks associated with such investments. In general, these principal risks exist whether the investment is made by an Investment Fund or by the Master Fund directly and therefore for convenience purposes, the description of such risks in terms of an Investment Fund is intended to include the same risks for investments made directly by the Master Fund. It is possible that an Investment Fund or the Master Fund will make an investment that is not described below, and any such investment will be subject to its own particular risks. For purposes of this discussion, references to the activities of the Investment Funds should generally be interpreted to include the activities of an Investment Manager.

Risks of Investment Activities Generally

All securities investing and trading activities risk the loss of capital. No assurance can be given that the Master Fund’s or any Investment Fund’s investment activities will be successful or that the Shareholders will not suffer losses.

Leverage

The Master Fund may use leverage to pay operating expenses, to repurchase Shares or pay dividends/distributions (while awaiting proceeds from redemptions in underlying Investment Funds) and for certain other purposes including general investment and working capital purposes. A Fund also may borrow to the extent permitted by its fundamental policy on borrowing. In addition, certain Investment Funds may utilize leverage in their investment programs. Such leverage may take the form of loans for borrowed money, trading on margin or other forms of direct and indirect borrowings, or derivative instruments, including, among others, forward contracts, futures contracts, options, swaps and reverse repurchase agreements, and other instruments and transactions that are inherently leveraged. The utilization of leverage will increase the volatility of the Master Fund’s investments. In addition, certain of the Investment Funds may buy and sell securities on margin and otherwise utilize leverage, further increasing the volatility of the Master Fund’s investments. The use of leverage by the Master Fund or the Investment Funds can substantially increase the adverse impact of risks to which an investment in the Funds may be subject. Trading securities on margin results in interest charges and, depending on the amount of trading activity, such charges could be substantial. The level of interest rates generally, and the rates at which the Master Fund and the Investment Funds can borrow in particular, can affect the operating results of the Funds. The low margin deposits normally required in futures and forward trading permit a high degree of leverage; accordingly, a relatively small price movement in a futures contract can result in immediate and substantial losses to the investor. Such a high degree of leverage necessarily entails a high degree of risk.

The rights of any lenders to the Funds, the Master Fund or the Investment Funds to receive payments of interest or repayments of principal will likely be senior to those of the Shareholders or the investors in the Master Fund or such Investment Funds, respectively, and the terms of any borrowings may contain provisions that limit certain activities of the Funds, the Master Fund or the Investment Funds, including the ability to make distributions or to repurchase Shares.

Highly Volatile Markets

The prices of an Investment Fund’s investments, and therefore the NAVs of the Funds’ Shares, can be highly volatile. Price movements of forward contracts, futures contracts and other derivative contracts in which an Investment Fund or the Master Fund may invest are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and national and international political and economic events and policies. In addition, governments from time to time intervene, directly and by regulation, in certain markets, particularly those in currencies, financial instruments and interest rate-related futures and options. Such intervention often is intended directly to influence prices and may, together with other factors, cause all of such markets to move rapidly in the same direction because of, among other things, interest rate fluctuations. Moreover, since internationally there may be less government supervision and regulation of worldwide stock exchanges and clearinghouses than in the U.S., Investment Funds also are subject to the risk of the failure of the exchanges on which their positions trade or of their clearinghouses, and there may be a higher risk of financial irregularities and/or lack of appropriate risk monitoring and controls.

Equity and Equity-Related Instruments

Investment Funds and the Master Fund may invest long and short in equities and equity-related instruments in their investment programs. Stocks, options and other equity-related instruments may be subject to various types of risk, including market

risk, liquidity risk, counterparty credit risk, legal risk and operations risk. In addition, equity-related instruments can involve significant economic leverage and may, in some cases, involve significant risk of loss. “Equity securities” may include common stocks, preferred stocks, interests in real estate investment trusts (“REITs”), convertible debt obligations, convertible preferred stocks, equity interests in trusts, partnerships, joint ventures or limited liability companies and similar enterprises, warrants and stock purchase rights. In general, stock values fluctuate in response to the activities of individual companies and in response to general market and economic conditions. Accordingly, the value of the stocks and other securities and instruments that an Investment Fund holds may decline over short or extended periods. The stock markets tend to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The volatility of equity securities means that the value of an investment in the Funds may increase or decrease. Certain types of equity securities, such as interests in Real Estate Investment Trusts or REITs, carry specific risks to which an Investment Fund may be subject to the extent it invests in REITs. Specifically, an Investment Fund investing in REITs will be subject, in addition to securities market risks, to risks associated with the ownership of real estate, including terrorist attacks, war or other acts that can destroy real property. Some REITs may invest in a limited number of properties, in a narrow geographic area, or in a single property type, which increases the risk that a fund could be unfavorably affected by the poor performance of a single investment or investment type. These companies are also sensitive to factors such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer. Borrowers could default on or sell investments the REIT holds, which could reduce the cash flow needed to make distributions to investors. In addition, REITs may also be affected by tax and regulatory requirements in that a REIT may not qualify for preferential tax treatments or exemptions. REITs require specialized management and pay management expenses. Securities issued by private partnerships in real estate may be more illiquid than securities issued by other Investment funds generally, because the partnerships’ underlying real estate investments may tend to be less liquid than other types of investments. Another type of equity security with specific risks are those issued by companies within the energy or natural resources industries. The production and marketing of commodities, energy and natural resources may be affected by actions and changes in governments. Securities of such companies may be subject to broad price fluctuations, reflecting volatility of energy and basic materials prices and possible instability of supply of various hard assets, as well as changes in demand due to international economic conditions. In addition, some such companies may also be subject to the risks of mining and oil drilling, and the risks of other hazards, such as fire, drought, and increased regulatory and environmental costs.

Short Selling

Investment Funds and the Master Fund may engage in short selling. Short selling involves selling securities that 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 declines in securities. 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 of buying those securities 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 the securities to rise further, thereby exacerbating the loss. In addition, regulation modifying, preventing and/or limiting short sales may adversely affect the ability of certain Investment Funds, the Master Fund or the Funds to meet their objectives.

Fixed Income Securities

Investment Funds and the Master Fund may invest in fixed income securities. Investment in these securities may offer opportunities for income and capital appreciation, and may also be used for temporary defensive purposes and to maintain liquidity. Fixed income securities are obligations of the issuer to make payments of principal and/or interest on future dates, and include, among other securities: bonds, notes, and debentures issued by corporations; debt securities issued or guaranteed by the U.S. government or one of its agencies or instrumentalities or by a foreign government; municipal bonds; and mortgage-backed securities (“MBS”) and asset-backed securities (“ABS”). These securities may pay fixed, variable, or floating rates of interest, and may include zero coupon obligations. Fixed income securities are subject to the risk of the issuer’s or a guarantor’s inability to meet principal and interest payments on its obligations (i.e ., credit risk) and are subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity (i.e ., market risk). In addition, MBS and ABS may also be subject to call risk and extension risk. For example, homeowners have the option to prepay their mortgages. Therefore, the duration of a security backed by home mortgages can either shorten (i.e ., call risk) or lengthen (i.e ., extension risk). In general, if interest rates on new mortgage loans fall sufficiently below the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to increase. Conversely, if mortgage loan interest rates rise above the interest rates on existing outstanding mortgage loans, the rate of prepayment would be expected to decrease. In either case, a change in the prepayment rate can result in losses to investors. The same would be true of asset-backed securities, such as securities backed by car loans. In addition, substantial defaults on underlying mortgages or other assets may occur, and the risks of such defaults have increased due to recent and continuing economic turmoil.

Fixed Income Risk

Certain types of fixed income securities and other credit instruments may be subject to heightened liquidity risk arising from the credit crisis beginning in 2007. Such investments include collateralized debt obligations (“CDOs”), high-yield bonds, debt issued in leveraged buyout transactions, mortgage and asset-backed securities, and short-term asset-backed commercial paper, which became very illiquid in the latter half of 2007, and certain investments have remained illiquid or relatively illiquid. General market uncertainty and consequent re-pricing of risk led to market imbalances between sellers and buyers, which in turn resulted in significant valuation uncertainties in mortgage and credit-related securities and other instruments. These conditions resulted, and in many cases continue to result in, greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many instruments remaining illiquid and of uncertain value. Such market conditions and the above factors may increase the level of difficulty encountered in valuing such securities and other credit instruments which could result in sudden and significant valuation increases or declines in the NAVs of the Master Fund and the Funds.

High Yield Debt; Distressed Debt

High yield bonds (commonly known as “junk bonds”), distressed debt instruments and other lower-rated (or similar but unrated) debt securities (collectively referred to here as “high yield debt”) in which Investment Funds and the Master Fund may invest will typically be junior to the obligations of companies to senior creditors, trade creditors and employees. The lower rating of high yield debt reflects a greater possibility that adverse changes in the financial condition of the issuer or in general economic, financial, competitive, regulatory or other conditions may impair the ability of the issuer to make payments of principal and interest. High yield debt securities have historically experienced greater default rates than investment grade securities. The ability of holders of high yield debt to influence a company’s affairs, especially during periods of financial distress or following insolvency, will be substantially less than that of senior creditors.

Adverse changes in economic conditions or developments regarding the individual issuer are more likely to cause price volatility and weaken the capacity of the issuers of high-yield debt securities to make principal and interests payments than issuers of higher grade debt securities. An economic downturn affecting an issuer of high-yield debt securities may result in an increased incidence of default. In addition, the market for lower grade debt securities may be thinner and less active than for higher grade debt securities, and thus less liquid because, among other reasons, certain investors, due to their investment mandates, are precluded from owning such securities.

As with other investments, there may not be a liquid market for certain high yield debt, which could result in an Investment Fund being unable to sell such securities for an extended period of time, if at all. In addition, as with other types of investments, the market for high yield debt has historically been subject to disruptions that have caused substantial volatility in the prices of such securities. Consolidation as well as turbulence in the financial services industry has resulted in there being fewer market makers for high yield debt, which may result in further risk of illiquidity and volatility with respect to high yield debt, and this trend may continue in the future.

Insolvency Considerations with Respect to Issuers of Indebtedness

Various laws enacted for the protection of creditors may apply to indebtedness in which the Investment Funds and the Master Fund invest. The information in this and the following paragraph is applicable with respect to U.S. issuers subject to U.S. federal bankruptcy law. Insolvency considerations may differ with respect to other issuers. If, in a lawsuit brought by an unpaid creditor or representative of creditors of an issuer of indebtedness, a court were to find that the issuer did not receive fair consideration or reasonably equivalent value for incurring the indebtedness and that, after giving effect to such indebtedness, the issuer: (i) was insolvent; (ii) was engaged in a business for which the remaining assets of such issuer constituted unreasonably small capital; or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature, such court could determine to invalidate, in whole or in part, such indebtedness as a fraudulent conveyance, to subordinate such indebtedness to existing or future creditors of such issuer, or to recover amounts previously paid by such issuer in satisfaction of such indebtedness. The measure of insolvency for purposes of the foregoing will vary. Generally, an issuer would be considered insolvent at a particular time if the sum of its debts was then greater than all of its property at a fair valuation, or if the present fair saleable value of its assets was then less than the amount that would be required to pay its probable liabilities on its existing debts as they became absolute and matured. There can be no assurance as to what standard a court would apply in order to determine whether the issuer was “insolvent” after giving effect to the incurrence of the indebtedness in which an Investment Fund invested or that, regardless of the method of valuation, a court would not determine that the issuer was “insolvent” upon giving effect to such incurrence. In addition, in the event of the insolvency of an issuer of indebtedness in which an Investment Fund invests, payments made on such indebtedness could be subject to avoidance as a “preference” if made within a certain period of time (which may be as long as one year) before insolvency. In general, if payments on indebtedness are avoidable, whether as fraudulent conveyances or preferences, such payments can be recaptured from the Investment Fund to which such payments were made.

The Funds and the Master Fund do not anticipate that the Investment Funds will engage in conduct that would form the basis for a successful cause of action based upon fraudulent conveyance, preference or equitable subordination. There can be no

assurance, however, that the Investment Fund or any lending institution or other party from which the Investment Fund may acquire such indebtedness engaged in any such conduct (or any other conduct that would subject such indebtedness and the Investment Fund to insolvency laws) and, if it did, as to whether such creditor claims could be asserted in a U.S. court (or in the courts of any other country) against the Investment Fund.

Indebtedness consisting of obligations of foreign issuers may be subject to various laws enacted in the countries of their issuance for the protection of creditors. These insolvency considerations will differ depending on the country in which each issuer is located or domiciled and may differ depending on whether the issuer is a non-sovereign or a sovereign entity.

Foreign Investments

Investment Funds and the Master Fund may invest in securities of foreign issuers and the governments of foreign countries. These investments involve special risks not usually associated with investing in securities of U.S. companies or the U.S. government, including political and economic considerations, such as greater risks of expropriation and nationalization, confiscatory taxation, the potential difficulty of repatriating funds, general social, political and economic instability and adverse diplomatic developments; the possibility of the imposition of withholding or other taxes on dividends, interest, capital gain or other income; the small size of the securities markets in such countries and the low volume of trading, resulting in potential lack of liquidity and in price volatility; fluctuations in the rate of exchange between currencies and costs associated with currency conversion; and certain government policies that may restrict the Investment Funds’ investment opportunities. In addition, because foreign entities are not subject to uniform accounting, auditing, and financial reporting standards, practices and requirements comparable with those applicable to U.S. companies, there may be different types of, and lower quality, information available about a foreign company than a U.S. company. There also is less regulation, generally, of the securities markets in many foreign countries than there is in the U.S., and such markets may not provide the same protections available in the U.S. With respect to certain countries there may be the possibility of political, economic or social instability, the imposition of trading controls, import duties or other protectionist measures, various laws enacted for the protection of creditors, greater risks of nationalization or diplomatic developments which could materially adversely affect the Investment Funds’ investments in those countries. Furthermore, individual economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency, and balance of payments position. An Investment Fund’s investment in foreign countries may also be subject to withholding or other taxes, which may be significant and may reduce the Investment Fund’s returns.

Brokerage commissions, custodial services and other costs relating to investment in international securities markets generally are more expensive than in the U.S. In addition, clearance and settlement procedures may be different in foreign countries and, in certain markets, such procedures have been unable to keep pace with the volume of securities transactions, thus making it difficult to conduct such transactions.

Investment in sovereign debt obligations of foreign governments involves additional risks not present in debt obligations of corporate issuers and the U.S. government. The issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and an Investment Fund may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward international lenders, and the political constraints to which the sovereign debtor may be subject. Periods of economic uncertainty may result in the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issues.

Investment in Emerging Markets

Investment Funds and the Master Fund may invest in securities of companies based in emerging markets or issued by the governments of such countries. Securities traded in certain emerging markets may be subject to risks due to the inexperience of financial intermediaries, the lack of modern technology, the lack of a sufficient capital base to expand business operations, and the possibility of temporary or permanent termination of trading. Political and economic structures in many emerging markets may be undergoing significant evolution and rapid development, and emerging markets may lack the social, political and economic stability characteristics of more developed countries. As a result, the risks relating to investments in foreign securities described above, including the possibility of nationalization or expropriation, may be heightened. In addition, certain countries may restrict or prohibit investment opportunities in issuers or industries deemed important to national interests. Such restrictions may affect the market price, liquidity and rights of securities that may be purchased by Investment Funds. Settlement mechanisms in emerging securities markets may be less efficient and less reliable than in more developed markets and placing securities with a custodian or broker-dealer in an emerging country may also present considerable risks. The small size of securities markets in such countries and the low volume of trading may result in a lack of liquidity and in substantially greater price volatility. Many emerging market countries have experienced substantial, and in some periods extremely high rates of inflation for many years. Inflation and rapid fluctuations in inflation rates and corresponding currency devaluations and fluctuations in the rate of exchange between currencies and costs associated with currency

conversion have had and may continue to have negative effects on the economies and securities markets of certain emerging market countries. In addition, accounting and financial reporting standards that prevail in certain of such countries are not equivalent to standards in more developed countries and, consequently, less information is available to investors in companies located in such countries.

Foreign Currency Transactions and Exchange Rate Risk

Investment Funds and the Master Fund may invest in equity and equity-related securities denominated in foreign currencies and in other financial instruments, the price of which is determined with reference to such currencies. Investment Funds may engage in foreign currency transactions for a variety of purposes, including to “lock in” the U.S. dollar price of the security, between the trade and the settlement dates, the value of a security an Investment Fund has agreed to buy or sell, or to hedge the U.S. dollar value of securities the Investment Fund already owns. The Investment Funds may also engage in foreign currency transactions for non-hedging purposes to generate returns. The Master Fund will, however, value its investments and other assets in U.S. dollars. To the extent unhedged, the value of the Master Fund’s net assets will fluctuate with U.S. dollar exchange rates as well as with price changes of an Investment Fund’s investments in the various local markets and currencies. Forward currency contracts and options may be utilized by Investment Funds to hedge against currency fluctuations, but the Investment Funds are not required to utilize such techniques, and there can be no assurance that such hedging transactions will be available or, even if undertaken, effective.

Money Market and Other Liquid Investments

Investment Funds may invest, for defensive purposes or otherwise, some or all of their assets in fixed income securities, money market instruments, and money market mutual funds, or hold cash or cash equivalents in such amounts as their Investment Managers deem appropriate under the circumstances. From time to time, the Master Fund also may invest in these instruments. Money market instruments are short-term fixed income obligations, which generally have remaining maturities of one year or less, and may include U.S. government securities, commercial paper, certificates of deposit, bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation, and repurchase agreements. The Master Fund may be prevented from achieving its objective during any period in which the Master Fund’s assets are not substantially invested in accordance with its principal investment strategies.

Restricted and Illiquid Investments

Investment Funds and the Master Fund may invest a portion or all of the value of their assets in restricted securities and other investments that are illiquid. Restricted securities are securities that may not be sold to the public without an effective registration statement under the Securities Act or, if they are unregistered, may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. These may include restricted securities that can be offered and sold only to “qualified institutional buyers” under Rule 144A under the Securities Act. There is no limit to the percentage of an Investment Fund’s net assets that may be invested in illiquid securities. Positions in restricted or non-publicly traded securities, securities on foreign exchanges and certain futures contracts may be illiquid because certain exchanges limit fluctuations in certain securities and futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular security or futures contract has increased or decreased by an amount equal to the daily limit, positions in that security or contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. This constraint could prevent the Investment Funds from promptly liquidating unfavorable positions and subject the Master Fund, and therefore the Funds, to substantial losses. This could also impair the Funds’ ability to repurchase Shares in a timely manner.

Convergence Risk

The Master Fund may invest in Investment Funds whose Investment Managers take long positions in securities believed to be undervalued and short positions in securities believed to be overvalued. In the event that the perceived mispricings underlying one or more Investment Managers’ trading positions were to fail to converge toward, or were to diverge further from, relationships expected by such Investment Managers, the Master Fund, and therefore the Funds, may incur significant losses.

Corporate Event Risks

Substantial transaction failure risks are involved in companies that are the subject of publicly disclosed mergers, takeover bids, exchange offers, tender offers, spin-offs, liquidations, corporate restructuring, and other similar transactions. Similarly, substantial risks are involved in investments in companies facing negative publicity or uncertain litigation. Thus, there can be no assurance that any expected transaction will take place, that negative publicity will not continue to affect a company or that litigation will be resolved in a company’s favor. Certain transactions are dependent on one or more factors to become effective, such as market conditions which may lead to unexpected positive or negative changes in a company profile, shareholder approval, regulatory and various other third party constraints, changes in earnings or business lines or shareholder activism as well as many other factors. No

assurance can be given that the transactions entered into will result in a profitable investment for the Investment Funds or that the Investment Funds will not incur substantial losses.

Issuer Risks

The issuers of securities acquired by Investment Funds will sometimes involve a high degree of business and financial risk. These companies may be in an early stage of development, may not have a proven operating history, may be operating at a loss or have significant variations in operating results, may be engaged in a rapidly changing business with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, or may otherwise have a weak financial condition.

Issuers of securities acquired by Investment Funds may be highly leveraged. Leverage may have important adverse consequences to these companies and an Investment Fund as an investor. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. In addition, such companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel.

Small and Mid-Capitalization Companies

Investment Funds and the Master Fund may invest in securities of small capitalization companies, mid-capitalization companies and recently organized companies and, conversely, the Investment Funds may establish significant short positions in such securities. Historically, such securities, and particularly securities of smaller capitalization companies, have been more volatile in price than those of larger capitalized, more established companies. Many of the risks apply equally to mid-capitalization companies, and such companies are included in the term “small capitalization companies” for the purposes of this risk factor. The securities of small capitalization and recently organized companies pose greater investment risks because such companies may have limited product lines, distribution channels and financial and managerial resources. In particular, small capitalization companies may be operating at a loss or have significant variations in operating results; may be engaged in a rapidly changing business with products subject to substantial risk of obsolescence; may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position; and may have substantial borrowings or may otherwise have a weak financial condition. In addition, these companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel. Further, there is often less publicly available information concerning such companies than for larger, more established businesses. The equity securities of small capitalization companies are often traded over-the-counter or on regional exchanges and may not be traded in the volumes typical on a national securities exchange. Consequently, the Investment Funds or entities in which the Investment Funds invest may be required to dispose of such securities or cover a short position over a longer (and potentially less favorable) period of time than is required to dispose of or cover a short position with respect to the securities of larger, more established companies. Investments in small capitalization companies may also be more difficult to value than other types of securities because of the foregoing considerations as well as lower trading volumes. Investments in companies with limited or no operating histories are more speculative and entail greater risk than do investments in companies with an established operating record.

Additionally, transaction costs for these types of investments can be higher than those of larger capitalization companies.

Exchange Traded Funds

The Master Fund and Investment Funds may purchase and sell shares of exchange traded funds (“ETFs”), which are a type of investment company bought and sold on a securities exchange. An ETF represents a fixed portfolio of securities designed to track a particular market index. A fund could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market or to hedge other investments. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile. ETFs also have management fees that increase their costs. As a shareholder of an ETF directly, the Master Fund would bear its pro rata portion of the ETF’s expenses, including advisory fees. Similarly, an Investment Fund investing in ETFs also would bear its pro rata portion of the ETF’s expenses, including advisory fees, which the Master Fund indirectly would bear by investing in the Investment Fund. These expenses would be in addition to the fees and other expenses that the Fund or Investment Fund bears directly in connection with its own operations.

Purchasing Securities in Initial Public Offerings

Investment Funds may purchase securities of companies in initial public offerings or shortly after those offerings are complete. Special risks associated with these securities may include a limited number of shares available for trading, lack of a trading history, lack of investor knowledge of the issuer, and limited or no operating history. These factors may contribute to substantial price

volatility for the shares of these companies. The limited number of shares available for trading in some initial public offerings may make it more difficult for an Investment Fund to buy or sell significant amounts of shares without an unfavorable effect on prevailing market prices. In addition, some companies in initial public offerings are involved in relatively new industries or lines of business, which may not be widely understood by investors. Some of these companies may be undercapitalized or regarded as developmental stage companies, without revenues or operating income, or near-term prospects of achieving revenues or operating income.

Risks Associated with Derivative Instruments Generally

Investment Funds and the Master Fund may invest in, or enter into transactions involving, derivative instruments. These are financial instruments that derive their performance, at least in part, from the performance of an underlying asset, index, or interest rate. Examples of derivatives include, but are not limited to, futures contracts, options contracts, and options on futures contracts. A futures contract is an exchange-traded agreement between two parties, a buyer and a seller, to exchange a particular commodity or financial instrument at a specific price on a specific date in the future. An option transaction generally involves a right, which may or may not be exercised, to buy or sell a commodity or financial instrument at a particular price on a specified future date.

An Investment Fund’s or the Master Fund’s use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in securities or more traditional investments, depending upon the characteristics of the particular derivative and the Investment Fund’s portfolio as a whole. Derivatives permit an Investment Fund or the Master Fund to increase or decrease the level of risk of its portfolio, or change the character of the risk to which its portfolio is exposed, in much the same way as the Investment Fund or Master Fund can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities.

Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on an Investment Fund’s or the Master Fund’s performance. If an Investment Fund or the Master Fund invests in derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Investment Fund’s or Master Fund’s return or result in a loss. An Investment Fund or the Master Fund also could experience losses if derivatives are poorly correlated with its other investments, or if an Investment Fund or the Master Fund is unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant, rapid, and unpredictable changes in the prices for derivatives.

If the other party to a derivative (“Counterparty”) defaults, an Investment Fund’s risk of loss consists of the net amount of payments that the Investment Fund contractually is entitled to receive. If a derivative contract calls for payments by the Investment Fund, it must be prepared to make such payments when due. In addition, if the Counterparty’s creditworthiness declined, the value of a derivative contract would be likely to decline, potentially resulting in losses to the Investment Fund. Recent economic events have increased the potential for, and thus risk involved with, Counterparty creditworthiness.

The Master Fund’s or the Investment Funds’ engagement in these transactions involves risk of loss to the Master Fund that could materially adversely affect the value of the Master Fund’s and the Funds’ respective net assets. No assurance can be given that a liquid market will exist for any particular derivative contract at any particular time.

The successful use of futures also is subject to the ability to predict correctly movements in the direction of the relevant market, and, to the extent the transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract.

Forward Contracts

Investment Funds and the Master Fund may enter into forward contracts, which involve the purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the current or spot price, with delivery and settlement at a specified future date.

Because it is a completed contract, a purchase forward contract can be a cover for the sale of a futures contract. The Investment Funds may enter into forward contracts for hedging purposes and non-hedging purposes (i.e ., to increase returns). Forward contracts are transactions involving an Investment Fund’s obligation to purchase or sell a specific instrument at a future date at a specified price. Forward contracts may be used by the Investment Funds for hedging purposes to protect against uncertainty in the level of future foreign currency exchange rates, such as when an Investment Manager of an Investment Fund anticipates purchasing or selling a foreign security. For example, this technique would allow the Investment Fund to “lock in” the U.S. dollar price of the security. Forward contracts may also be used to attempt to protect the value of an Investment Fund’s existing holdings of foreign securities. There may be, however, an imperfect correlation between an Investment Fund’s foreign securities holdings and the forward contracts entered into with respect to those holdings. Forward contracts may also be used for non-hedging purposes to pursue an Investment Fund’s investment objective, such as when an Investment Fund’s Investment Manager anticipates that particular foreign currencies will appreciate or depreciate in value, even though securities denominated in those currencies are not then held in the

Investment Fund’s portfolio. There is no requirement that the Investment Funds hedge all or any portion of their exposure to foreign currency risks.

Forward contracts and options thereon, unlike futures contracts, are not traded on exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and “cash” trading is substantially unregulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience periods of illiquidity, sometimes of significant duration. There have been periods during which certain participants in these markets have refused to quote prices for certain currencies or commodities or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can occur in any market traded by an Investment Manager due to unusually high trading volume, political intervention or other factors. Arrangements to trade forward contracts may be made with only one or a few counterparties, and liquidity problems therefore might be greater than if such arrangements were made with numerous counterparties. The imposition of controls by governmental authorities might also limit such forward (and futures) trading to less than that which the Investment Manager would otherwise recommend, to the possible detriment of an Investment Fund. Market illiquidity or disruption could result in major losses to an Investment Fund. In addition, Investment Funds and/or the Master Fund will be exposed to credit risks with regard to counterparties with whom they trade as well as risks relating to settlement default. Such risks could result in substantial losses to the Investment Fund, the Master Fund and the Funds.

Swap Agreements

Investment Funds and the Master Fund may enter into equity, interest rate, index, currency rate, total return and other types of swap agreements. The transactions are entered into in an attempt to obtain a particular return without the need to actually purchase the reference asset. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the Investment Funds’ exposure to long-term or short-term interest rates (in the U.S. or abroad), foreign currency values, mortgage securities, corporate borrowing rates, or other factors such as security prices, baskets of securities, or inflation rates.

Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” i.e ., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular index.

Swap agreements will tend to shift investment exposure from one type of investment to another. For example, if an Investment Fund agrees to exchange payments in dollars for payments in foreign currency, the swap agreement would tend to decrease the Master Fund’s exposure to U.S. interest rates and increase its exposure to foreign currency and interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of an Investment Fund’s portfolio.

Most swap agreements entered into by an Investment Fund would require the calculation of the obligations of the parties to the agreements on a “net basis.” Consequently, an Investment Fund’s current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). The risk of loss with respect to swaps is limited to the net amount of interest payments that an Investment Fund is contractually obligated to make. If the other party to a swap (“Counterparty”) defaults, an Investment Fund’s risk of loss consists of the net amount of payments that the Investment Fund contractually is entitled to receive. If a swap agreement calls for payments by the Investment Fund, it must be prepared to make such payments when due. In addition, if the Counterparty’s creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses to the Investment Fund. Recent economic events have increased the potential for, and thus risk involved with, Counterparty creditworthiness.

Structured Securities

Investment Funds and the Master Fund may invest in structured securities. Structured securities are securities whose value is determined by reference to changes in the value of specific currencies, interest rates, commodities, indexes or other financial indicators (each, a “Reference”) or the relative change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. Structured securities may be positively or negatively indexed, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, changes in the interest rates or the value of the security at maturity may be a multiple of changes in the value of the Reference. Consequently, structured securities may present a greater degree of market risk than other types of fixed income securities and may be more volatile, less liquid and more difficult to price accurately than less complex securities.

When-Issued and Forward Commitment Securities

Investment Funds and the Master Fund may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment” basis in order to hedge against anticipated changes in interest rates and prices or for speculative purposes. These transactions involve a commitment by an Investment Fund to purchase or sell securities at a future date (ordinarily at least one or two months later). The price of the underlying securities, which is generally expressed in terms of yield, is fixed at the time the commitment is made, but delivery and payment for the securities takes place at a later date. No income accrues on securities that have been purchased pursuant to a forward commitment or on a when-issued basis prior to delivery to the Investment Fund. When-issued securities and forward commitments may be sold prior to the settlement date. If an Investment Fund disposes of the right to acquire a when-issued security prior to its acquisition or disposes of its right to deliver or receive against a forward commitment, it may incur a gain or loss. There is a risk that securities purchased on a when-issued basis may not be delivered and that the purchaser of securities sold by an Investment Fund on a forward basis will not honor its purchase obligation. In such cases, an Investment Fund may incur a loss.

Derivatives with Respect to High Yield and Other Indebtedness

In addition to the credit risks associated with holding high yield debt securities, with respect to derivatives involving high yield and other debt, an Investment Fund or the Master Fund will usually have a contractual relationship only with the Counterparty of the derivative, and not with the issuer of the indebtedness. An Investment Fund generally will have no right to directly enforce compliance by the issuer with the terms of the derivative nor any rights of set-off against the issuer, nor have any voting rights with respect to the indebtedness. An Investment Fund will not directly benefit from the collateral supporting the underlying indebtedness and will not have the benefit of the remedies that would normally be available to a holder of the indebtedness. In addition, in the event of the insolvency of the Counterparty to the derivative, the Investment Fund will be treated as a general creditor of such Counterparty, and will not have any claim with respect to the underlying indebtedness. Consequently, the Investment Fund will be subject to the credit risk of the Counterparty as well as that of the issuer of the indebtedness. As a result, concentrations of such derivatives in any one Counterparty subject the Investment Fund, and/or the Master Fund, to an additional degree of risk with respect to defaults by such Counterparty as well as by the issuer of the underlying indebtedness.

Failure of the Investment Funds’ Counterparties, Brokers and Exchanges

Investment Funds and the Master Fund will be exposed to the credit risk of the Counterparties with which, or the brokers, dealers and exchanges through which, they deal, whether they engage in exchange-traded or off-exchange transactions. An Investment Fund may be subject to risk of loss of its assets on deposit with a broker in the event of the broker’s bankruptcy, the bankruptcy of any clearing broker through which the broker executes and clears transactions on behalf of the Investment Fund, or the bankruptcy of an exchange clearing house. Although the Commodity Exchange Act requires a commodity broker to segregate the funds of its customers, if a commodity broker fails to properly segregate customer funds, the Investment Fund may be subject to a risk of loss of its funds on deposit with such broker in the event of such broker’s bankruptcy or insolvency. The Investment Fund may be subject to risk of loss of its funds on deposit with foreign brokers because foreign regulatory bodies may not require such brokers to segregate customer funds. The Investment Fund may be required to post margin for its foreign exchange transactions either with their broker or other foreign exchange dealers who are not required to segregate funds (although such funds are generally maintained in separate accounts on the foreign exchange dealer’s books and records in the name of the Investment Fund). Under certain circumstances, such as the inability of another customer of the commodity broker or foreign exchange dealer or the commodity broker or foreign exchange dealer itself to satisfy substantial deficiencies in such other customer’s account, the Investment Fund may be subject to a risk of loss of its funds on deposit with such broker or dealer, even if such funds are properly segregated. In the case of any such bankruptcy or customer loss, the Investment Fund might recover, even in respect of property specifically traceable to the Investment Fund, only a pro rata share of all property available for distribution to all of such broker’s or dealer’s customers.

Many of the markets in which the Investment Funds or the Master Fund effects their transactions are “over-the-counter” or “interdealer” markets. Participants in these markets are typically not subject to credit evaluation and regulatory oversight as are members of “exchange-based” markets. To the extent that an Investment Fund invests in swaps, derivatives or synthetic instruments, or other over-the-counter transactions in these markets, the Investment Fund may take a credit risk with regard to parties with which it trades and also may bear the risk of settlement default. These risks may differ materially from those involved in exchange-traded transactions, which generally are characterized by clearing organization guarantees, daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. Transactions entered into directly between two Counterparties generally do not benefit from these protections, which in turn may subject an Investment Fund to the risk that a Counterparty will not settle a transaction in accordance with agreed terms and conditions because of a dispute over the terms of the contract or because of a credit or liquidity problem. Such “Counterparty risk” is increased for contracts with longer maturities when events may intervene to prevent settlement. The ability of the Investment Funds to transact business with any one or any number of Counterparties, the lack of any independent evaluation of the Counterparties’ financial capabilities or their creditworthiness, and the absence of a regulated market to facilitate settlement, may increase the potential for losses by the Master Fund and, therefore, the Funds.

In addition, certain of the Investment Funds may engage in direct or indirect trading of securities, currencies, forward contracts, options, swaps and repurchase agreements on a principal basis. As such, an Investment Fund and/or the Investment Managers as transferee or Counterparty could experience both delays in liquidating the underlying security, future or other investment and losses, including: (a) the risk of the inability or refusal to perform with respect to such transactions on the part of the principals with which the Investment Fund trades; (b) possible decline in the value of any collateral during the period in which the Investment Fund seeks to enforce its rights with respect to such collateral; (c) possible subnormal levels of income and lack of access to income during such period; (d) expenses of enforcing its rights; and (e) legal uncertainty concerning the enforceability of certain rights under swap agreements and possible lack of priority against collateral posted under the swap agreements. Any such failure or refusal, whether due to insolvency, bankruptcy or other causes, could subject the Investment Fund, and in turn the Master Fund and the Funds, to substantial losses. The Investment Fund will not be excused from performance on any such transactions due to the default of third parties in respect of other trades which in the Investment Fund’s trading strategies were to have substantially offset such contracts.

Convertible Securities Risk

Certain Investment Funds may invest in convertible securities. The value of convertible securities may fall when interest rates rise and increase when interest rates fall. Convertible securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than convertible securities with shorter maturities. Their value also tends to change whenever the market value of the underlying common or preferred stock fluctuates. An Investment Fund could lose money if the issuer of a convertible security is unable to meet its financial obligations or goes bankrupt.

Arbitrage Strategies Risk

Certain Investment Funds may invest in various arbitrage strategies, including convertible arbitrage, merger/event-driven arbitrage, fixed income arbitrage, volatility arbitrage and statistical arbitrage. Arbitrage investment typically seeks to take advantage of temporary perceived inefficiencies in the pricing of certain assets. Through research and analysis, arbitrage investors seek to find investment opportunities that have not been deemed to be viable by other investors. Such investments may be available only cyclically or not at all. Furthermore, if assumptions used in the research and analysis of the arbitrage investment are incorrect or if the model used to evaluate arbitrage investments is flawed, arbitrage strategies may be unsuccessful.

Global Macro Investing Risk

Investment Managers using Global Macro strategies typically seek to generate income and/or capital appreciation through a portfolio of investments focused on macro-economic opportunities across numerous markets and instruments. Such strategies rely on the use of, among other things, currency and derivative markets, each of which bear their own risks, as well as certain assumptions about global macro-economic trends. There can be no assurance that such macro-economic assumptions will prove to be correct.

Managed Futures and Commodities Trading Advisors (CTAs) Risk

Certain Investment Funds may be structured as managed futures funds, or CTA funds. These funds typically use futures contracts to go long or short in an underlying commodity, equity index or interest rate, among other things. Most managed futures funds or CTAs use programmatic trading strategies that are created using computer models and simulators. Commodities in particular can exhibit extreme volatility from time to time. These strategies entail several risks, including but not limited to, the leverage inherent in futures contracts, a risk that is potentially magnified by the high levels of volatility of certain commodities underlying some futures contracts, the risk that a programmatic trading model that worked in the past may not work in the current or future market environment, regulatory risks regarding margin maintenance requirements, and operational and execution risks in the implementation of the models.

Investment Funds’ Investment Strategies

Investment Managers will, among other things, seek to utilize specialized investment strategies, follow allocation methodologies, apply investment models or assumptions, achieve a certain level of performance relative to specified benchmarks, and enter into hedging and other strategies intended, among other things, to affect the Investment Funds’ performance, risk levels, and/or market correlation. There can be no assurance that any Investment Manager will have success in achieving any goal related to such practices. The Investment Managers may be unable to or may choose in their judgment not to seek to achieve such goals.

The success of an Investment Manager’s trading activities will depend on, among other things, the Investment Manager’s ability to identify overvalued and undervalued investment opportunities and to exploit price discrepancies in the capital markets. Identification and exploitation of the investment strategies to be pursued by an Investment Manager involve a high degree of uncertainty. No assurance can be given that the Investment Managers will be able to locate suitable investment opportunities in which to deploy all their capital. A reduction in the volatility and pricing inefficiency of the markets in which an Investment Manager may seek to invest, as well as other market factors, will reduce the scope for an Investment Manager’s investment strategies.

Limits of Risk Disclosure

The above discussions relating to various principal risks associated with the Master Fund, the Funds, Shares, and the Investment Funds are not, and are not intended to be, a complete enumeration or explanation of the risks involved in an investment in the Funds. Prospective investors should read this entire Prospectus and should consult with their own advisers before deciding whether to invest in the Funds. In addition, as the Master Fund’s or the Funds’ investment program or market conditions change or develop over time, an investment in the Funds may be subject to risk factors not currently contemplated or described in this Prospectus.

IN VIEW OF THE RISKS NOTED ABOVE, THE FUNDS SHOULD BE CONSIDERED LONG-TERM AND ILLIQUID INVESTMENTS AND INVESTORS SHOULD INVEST IN THE FUNDS ONLY IF THEY CAN MEET THEIR FORESEEABLE LIQUIDITY NEEDS WITH RESOURCES OUTSIDE OF AN INVESTMENT IN THE FUNDS.

NO GUARANTEE OR REPRESENTATION IS MADE THAT THE INVESTMENT PROGRAM OF THE FUNDS, THE MASTER FUND OR ANY INVESTMENT FUND WILL BE SUCCESSFUL, THAT THE VARIOUS INVESTMENT FUNDS SELECTED WILL PRODUCE POSITIVE RETURNS OR THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVE.

M ANAGEMENT OF THE FUNDS

The Board of Trustees

Each Fund’s Board of Trustees has overall responsibility for the management and supervision of the business operations of the Funds and monitoring and overseeing the Funds’ investment program. A majority of the Trustees are Independent Trustees. To the extent permitted by the 1940 Act and other applicable law, the Board may delegate any of its rights, powers and authority to, among others, any person, including without limitation, the officers of a Fund, the Adviser or any committee of the Board.

The Adviser

Subject to the general supervision of the Board and in accordance with the investment objective, policies, and restrictions of the Funds, the Adviser is responsible for the management and operation of the Funds and the selection of the Investment Funds and Investment Managers with which the Funds indirectly invest their assets pursuant to the Investment Management Agreement (as defined below). The Adviser also serves as investment adviser to the Master Fund pursuant to an investment management agreement.

The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (“Advisers Act”), and has its principal offices at 4265 San Felipe, Suite 800, Houston, Texas 77027. The Adviser is also registered with the Commodities Futures Trading Commission (“CFTC”) as a commodity pool operator and commidities trading advisor and is a member of the National Futures Association. The Adviser, which is a Texas limited partnership, is owned by Salient Partners, L.P. (“Salient”), a Houston-based investment firm that advises or consults on over $16 billion in assets as of December 31, 2011. The Adviser’s Investment Committee members responsible for management, selection and oversight of the Funds are experienced and educated investment professionals with a long performance record in alternative investments. They have evaluated, structured, managed and monitored billions of dollars in a wide range of alternative investments and maintain a strong network within the alternative investment community as a result of their experience. The Adviser and its personnel maintain relationships with a large number of Investment Managers. The Adviser believes that, among other things, as a result of these contacts the Funds should have access to a large number of Investment Funds from which to select. The Investment Committee is comprised of John A. Blaisdell, Andrew B. Linbeck, Lee G. Partridge and Jeremy L. Radcliffe. The person who will have day-to-day investment oversight responsibility for the Funds is William K. Enszer. The Adviser’s investment professionals will devote such time to the ongoing operations of each Fund as they deem appropriate in order to implement and monitor their investment program.

The personnel of the Adviser who have primary responsibility for management of the Funds are:

John A. Blaisdell (Managing Director) - John A. Blaisdell is a Managing Director of Salient where he provides client services to many of Salient’s major accounts. Prior to joining Salient in 2002, Mr. Blaisdell served as Chief Executive Officer of Wincrest Ventures, LP (“Wincrest”), a private investment holding company for a high-net-worth Texas family from 1997 to 2002. At Wincrest, he developed and managed large portfolios broadly diversified across a range of asset classes, executed several large private equity transactions, and served in various financial and wealth advisory capacities. Prior to joining Wincrest, Mr. Blaisdell was a partner, President and COO of Leisure Management International (“LMI”) for seven years. Under his leadership, LMI grew to become one of the industry leaders in the management of sports and entertainment facilities around the world. Mr. Blaisdell has served on the Board of Directors of many public, private and charitable organizations in Florida, Texas, and New Mexico. Mr. Blaisdell received a B.S. from Barry University in 1983 and an M.B.A. from the University of Miami in 1987.

William K. Enszer (Director) – William K. Enszer is Director of Investments at Salient, where he leads the firm’s investment efforts in absolute return and enhanced fixed income strategies. Mr. Enszer focuses on the sourcing, evaluation and due diligence of hedge funds under these two strategies. Prior to joining Salient, Mr. Enszer was a Vice President of Investments and member of the Investment Committee of a Houston-based wealth management and alternative investments firm. During his five years there, Mr. Enszer developed and directed their hedge fund research and due diligence processes and assisted in the construction and management of the firm’s three fund of hedge funds. During his tenure there, Mr. Enszer covered CTAs, long/short equity, event-driven, relative value, and credit based hedge fund strategies. Prior to his current field of expertise, Mr. Enszer spent five years at ExxonMobil as a financial analyst and auditor. Mr. Enszer earned a B.B.A. in finance and economics from Baylor University and an M.B.A., Beta Gamma Sigma, from Tulane University’s A.B. Freeman School of Business.

Andrew B. Linbeck (Managing Director) - Andrew B. Linbeck is a Managing Director of Salient, where he provides client services for Salient’s major accounts. Prior to forming Salient Partners in 2002, Mr. Linbeck was a partner and executive officer of The Redstone Companies, L.P., a Houston based investment firm, and certain affiliates thereof (collectively “Redstone”) from 1998 through 2002. Prior thereto, Mr. Linbeck served as an Executive Vice President for PaineWebber, Inc. from 1994 to 1998. He began his career in the financial services industry in 1987 at Kidder, Peabody & Co. He serves on the boards of and is an advisor to several non-profit organizations. Mr. Linbeck received a B.A. from the University of Notre Dame in South Bend, Indiana in 1987, and later graduated from the Executive Management Program at the Jones School of Business at Rice University in 1994.

Lee G. Partridge (Managing Director) – Lee G. Partridge is the Chief Investment Officer of Salient, where he oversees the overall asset, allocation, strategy allocation, fund selection process, due diligence process, ongoing surveillance and hedging routines, where applicable. He is also a Managing Director of Salient, where he is a member of the organizations management committee; works with the investment committee to establish guidelines and best practices related to the firm’s investment practices; and oversees many of the firm’s strategic alliances. In addition to his role at Salient, Mr. Partridge directly oversees the investment program for a $7.7 billion investment portfolio of a public employee retirement plan. Prior to joining Salient, Mr. Partridge was the founder and CEO of Integrity Capital, LLC, which spanned traditional and alternative investment strategies and the Deputy Chief Investment Officer of the Teacher Retirement System of Texas, where he was responsible for global asset allocation, risk management, portfolio construction, external managers, hedge funds, derivative strategies, equity trading, futures trading and risk management. Mr. Partridge holds an M.B.A. degree from Rice University and a B.A. degree in Psychology from the University of Houston. He also holds both the CFA and CAIA designations.

Jeremy L. Radcliffe (Managing Director) - Jeremy L. Radcliffe is a Managing Director of Salient, where his primary responsibility is managing the daily operations of the firm’s investments division. Prior to forming Salient in 2002, he was a partner and managed certain of the private equity investments of Redstone from 1998 to 2002. A native Houstonian, Mr. Radcliffe is a magna cum laude graduate of Princeton University (1996), where he earned an A.B. in Classics while specializing in Latin as well as Roman history and architecture.

The Adviser and certain other entities controlled by Salient manage investment programs that are similar to that of the Funds, and the Adviser and/or Salient in the future may serve as an investment adviser or otherwise manage or direct the investment activities of other registered and/or private investment companies with investment programs similar to the Funds’. See “CONFLICTS OF INTEREST.”

The SAI provides additional information about the Investment Committee members’ and portfolio manager’s compensation, other accounts they manage and their ownership of Shares in the Funds. A discussion of the factors considered by the Trustees when last approving the Investment Management Agreement is contained in the shareholder report of the Funds and the Master Fund covering the period ended June 30, 2011.

I NVESTMENT MANAGEMENT FEE

In consideration of the advisory and other services provided by the Adviser to the Master Fund pursuant to the Investment Management Agreement, each of the Funds and the Master Fund will pay the Adviser an Investment Management Fee, accrued monthly and payable quarterly in arrears, equal to 0.75% on an annualized basis of the Master Fund’s average net assets as of each month-end. In the case of a partial month, the Investment Management Fee is based on the number of days during the month in which the Adviser invested Fund or Master Fund assets. The Investment Management Fee is paid to the Adviser out of the assets of the Master Fund and will decrease the net profits or increase the net losses of the Master Fund. The Investment Management Fee is computed as a percentage of the average net assets of the Master Fund, valued based on the net assets of the Master Fund as of the last business day of each month, and is due and payable in arrears within five business days after the end of the quarter. Net assets mean the total value of all assets of the Master Fund, less an amount equal to all accrued debts, liabilities and obligations of the Master Fund.

So long as the Funds invest all of their investable assets in the Master Fund, the Funds will not directly pay the Adviser an investment management fee; however, each Fund’s Shareholders bear an indirect share of the Investment Management Fee through a Fund’s investment in the Master Fund.

ADMI NISTRATION

Administrator

Citi Fund Services Ohio, Inc. serves as the Independent Administrator of the Funds and the Master Fund and has the responsibility for providing administrative services, including dividend reinvestment administration and transfer agent services, and for assisting the Funds and the Master Fund with their operational needs, pursuant to the Administration Agreement. In consideration for these services, each Fund bears its share of the Independent Administrator’s monthly Administration Fee, which is based on the month-end net assets of the Master Fund. In addition, the Independent Administrator charges a fee for certain other services, and is entitled to reimbursement of certain expenses. The SAI provides additional information about the Administrator.

Servicing Agent

The Adviser also acts as Servicing Agent to the Funds, providing or procuring certain Shareholder servicing and administrative assistance. Shareholder servicing entails the provision of personal, continuing services to investors in the Funds and administrative assistance. The Servicing Agent may, in turn, retain certain parties to act as sub-servicing and sub-administrative servicing agents to assist with investor servicing and administration. The Funds compensate the Servicing Agent for providing or procuring these services and, when the Servicing Agent employs sub-servicing and sub-administrative servicing agents, the Servicing Agent compensates such sub- agents out of its own resources.

In consideration for Shareholder services and administrative assistance, the Funds pay the Adviser, as Servicing Agent, the quarterly Servicing Fee for the SAR Fund and Administrative Servicing Fee for the Institutional Fund based on the average month-end net assets of each Fund over the course of the applicable quarter. For the SAR Fund, the Servicing Fee equals 1.00% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. For the Institutional Fund, the Administrative Servicing Fee equals 0.25% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. The Administrative Servicing Agent may engage one or more Sub-Servicing Agents or Sub-Administrative Servicing Agents, for the SAR Fund and the Institutional Fund, respectively, to provide some or all of the services. Compensation to any Sub-Servicing or Sub-Administrative Servicing Agent is paid by the Adviser as Servicing Agent. The Adviser or its affiliates also may pay a fee out of their own resources to Sub-Servicing or Sub-Administrative Servicing Agents.

Although the Servicing Fee and the Administrative Servicing Fee are paid for the provision of ongoing investor services, and administrative services, and are intended primarily for such services, to any extent that such fees could be considered to support the distribution of the Funds, investors would be paying for distribution of Fund Shares out of a Fund’s assets. To any extent that the Servicing Fee and Administrative Servicing Fee could be considered to support distribution of the Funds, the Adviser would not have to pay such expenses from its own resources, which is an incentive to maintain such fees and considered a conflict of interest. See “CONFLICTS OF INTEREST.”

The Servicing Agent of the Funds has responsibility for Shareholder services and administrative assistance that may include, but shall not be limited to, the provision of personal, continuing services to Shareholders; establishment of Shareholder accounts; Shareholder balance maintenance activity, such as communicating periodically with Shareholders and providing information about the Funds, Shares, and repurchase offers for Shares; handling correspondence from Shareholders about their accounts; maintaining account records; receiving, aggregating and processing purchase and repurchase transactions; providing and keeping retirement plan records; acting as the sole Shareholder of record and nominee for Shareholders; providing beneficial owners with account statements; processing dividend payments; issuing reports to Shareholders and transaction confirmations; providing or procuring accounting services for the Funds and Shareholder accounts; providing sub-accounting services for Shares held beneficially; forwarding Shareholder communications to beneficial owners; receiving, tabulating and transmitting proxies executed by beneficial owners; general account administration activities; administering Board, committee and Shareholder meetings; preparing meeting minutes upon request; administering tender offers, including preparation of filings; assisting the Master Fund’s Valuation Committee upon request; maintaining Fund records; coordinating regulatory and other filings by the Funds; administering Shareholder application review; administering compulsory redemptions, if any; and providing such other administration services as the Funds may request from time to time.

Servicing Agent Payments

The Adviser or its affiliates also may pay from their own resources additional compensation to the Selling Agents or RIAs in connection with placement of Shares or servicing of Shareholders. These arrangements may result in receipt by the Selling Agents and their personnel (who themselves may receive all or a substantial part of the relevant payments) or RIAs of compensation in excess of that which otherwise would have been paid in connection with their placement of shares of a different investment fund. A

prospective investor with questions regarding these arrangements may obtain additional detail by contacting his or her Intermediary or RIA directly. Prospective investors also should be aware that these payments could create incentives on the part of an Intermediary to view a Fund more favorably relative to investment funds not making payments of this nature or making smaller such payments.

FUND EXP ENSES

The Funds and the Master Fund pay all of their expenses other than those that the Adviser or an affiliate of the Adviser assumes, if any. The Funds’ fees and expenses will decrease the returns of the Funds. The SAI provides additional information about the Funds’ expenses.

Each Fund’s offering expenses, which are separate from and in addition to those fees previously discussed and which include among other expenses, the cost of preparing this Prospectus and the SAI, will be amortized over a period of twelve months or less upon commencement of operations, subject to the Funds’ Expense Limitation Agreement.

The Investment Funds will incur various fees and expenses in connection with their operations. In addition, the Master Fund will pay management and incentive or performance based fees to the Investment Funds, which effectively reduce the investment returns of the Investment Funds and thus the returns of the Master Fund. These expenses and fees are in addition to those incurred by the Funds and the Master Fund directly.

Under the Expense Limitation Agreement, the Adviser has contractually agreed to limit the total annualized operating expenses of the SAR Fund, including expenses allocated from the Master Fund (excluding fees and expenses of underlying funds, the SAR Fund’s pro rata share of borrowing and other investment-related costs and fees, taxes, litigation and indemnification expenses, judgments and other extraordinary expenses not incurred in the ordinary course of the SAR Fund’s business), to 2.5%, through April 30, 2013. The Adviser is permitted to recover from the SAR Fund expenses it has borne (whether through reduction of its management fee or otherwise) in later periods to the extent that the SAR Fund’s expenses fall below the annual rate set forth in the Expense Limitation Agreement. Under the Expense Limitation Agreement, for expenses reimbursed since the beginning of the SAR Fund’s 2011 fiscal year, the SAR Fund is not obligated to reimburse such expenses beyond three years from the end of the fiscal year in which the Adviser deferred a fee or reimbursed an expense. Any such recovery by the Adviser will not cause the SAR Fund to exceed the annual limitation rate set forth above in the period in which the Adviser is reimbursed. Under a prior expense limitation agreement for the Institutional Fund, effective through April 30, 2012, the Adviser is permitted to recover expenses it has borne (in the same manner described above), but the Institutional Fund is not obligated to reimburse such expenses beyond three years from the end of such fiscal year in which the Adviser deferred a fee or reimbursed an expense and in any event not if such expense caused the Institutional Fund to exceed its prior expense limit.

THE FUNDS AND T HE MASTER FUND

Each Fund is a Delaware statutory trust, registered under the 1940 Act and classified as a non-diversified, closed-end management investment company. Each Fund invests substantially all of its investable assets in the Master Fund. The Master Fund also is a Delaware statutory trust registered under the 1940 Act and classified as a non-diversified, closed-end management investment company. Each Fund was organized on January 6, 2010. The Master Fund was organized on January 6, 2010, and is the successor to an unregistered investment vehicle that commenced operations on January 1, 2009. The address of the Funds, the Master Fund and Adviser is 4265 San Felipe, Suite 800, Houston, Texas 77027 and the telephone number at such address is: 1-800-725-9456.

Past Performance

Appendix A contains performance information for the Master Fund since its commencement of operations as an investment company registered under the 1940 Act, adjusted for the estimated expenses of the Funds. For the period prior to the Master Fund’s registration, the Appendix also shows the performance, adjusted for the estimated expenses of the Funds, of a private fund that was the Master Fund’s predecessor. The Master Fund’s predecessor, which commenced investment operations on January 1, 2009, was managed by the Adviser with the same Investment Committee (other than Mr. Partridge who joined in November 2010) and operated with substantially the same investment objectives, policies and strategies as the Master Fund. Prospective investors should carefully read the disclosure, including notes, that accompanies the investment performance data and charts in the Appendix. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE INVESTMENT RESULTS .

USE OF PROC EEDS

The Adviser anticipates that the proceeds to each Feeder Fund that are invested in the Master Fund will be fully invested in accordance with the Funds’ investment objectives and policies as soon as practicable after receipt but, in no event, under normal market conditions, later than three months following receipt. There are a number of factors that might cause a delay in the investment of Fund proceeds, including but not limited to, a lack of or a limited number of attractive investment opportunities and delays of the

closing dates of Investment Funds to which the Master Fund has subscribed or plans to subscribe. Significant delays that hinder the ability of the Adviser to invest the Funds’ assets could have an adverse effect on the Funds’ performance.

VO TING

Each Fund’s Shareholder has the right to cast a number of votes equal to the number of Shares held by such Shareholder at a meeting of Shareholders called by the Board. Shareholders will be entitled to vote on any matter on which shareholders of a registered investment company organized as a corporation would be entitled to vote, including certain elections of a Trustee and approval of the Advisory Agreement, in each case to the extent that voting by shareholders is required by the 1940 Act. Notwithstanding their ability to exercise their voting privileges, Shareholders in their capacity as such are not entitled to participate in the management or control of a Fund’s business, and may not act for or bind a Fund.

CONFLIC TS OF INTEREST

The investment activities of the Adviser and its affiliates, directors, trustees, managers, members, partners, officers, and employees (collectively, the “Related Parties”), for their own accounts and other accounts they manage, may give rise to conflicts of interest that could disadvantage the Funds, Shareholders and the Master Fund. The Adviser and other Related Parties provide other investment management services to other funds and discretionary managed accounts that follow investment programs, certain aspects of which are similar to certain aspects of the Funds’ investment program or replicate certain Asset Classes within the Funds’ investment program. The Adviser and other Related Parties are involved with a broad spectrum of financial services and asset management activities, and may, for example, engage in the ordinary course of business in activities in which their interests or the interests of their clients may conflict with those of the Funds or Shareholders. The trading activities of the Related Parties are carried out without references to positions held directly or indirectly by the Funds. In addition and more significantly, the Related Parties may be involved with other investment programs, investment partnerships or separate accounts that use Investment Managers or Investment Funds that are either already a part of the Master Fund’s portfolio or that may be appropriate for investment by the Master Fund. In some cases, these Investment Funds may be capacity constrained. The Related Parties are under no obligation to provide the Master Fund with capacity with respect to these Investment Funds and, accordingly, the Master Fund may not have exposure or may have reduced exposure with respect to these Investment Funds. The Master Fund’s and the Funds’ operations may give rise to other conflicts of interest that could disadvantage the Fund and Shareholders.

Salient provides wealth management and advisory services to its clientele. As a result, the Related Parties and their respective affiliates, directors, partners, trustees, managers, members, officers and employees, including those who may be involved in the investment activities and business operations of the Funds and the Master Fund, are engaged in businesses, and have interests, other than that of managing the Funds and the Master Fund. These are considerations of which investors in the Funds should be aware, and which may cause conflicts that could disadvantage the Funds. These activities and interests include potential multiple advisory, transactional, financial and other interests in securities, instruments and companies that may be purchased or sold by the Master Fund. Present and future activities of the Related Parties may give rise to additional conflicts of interest. In acquiring Shares, a Shareholder is deemed to have acknowledged and assented to the existence of potential conflicts of interest relating to the Related Parties and to the Funds’ and the Master Fund’s operating in the face of these conflicts.

Certain of the Related Parties may participate in the fixed income, equity and other markets in which the Fund and Master Fund directly or indirectly invests. In addition, certain of the Related Parties could engage as investors, advisers, agents and principals, in relation to certain of the same securities, issuers, currencies and other instruments in which the assets of the Funds (through the Master Fund or the Investment Funds) may be invested, and these activities may have a negative effect on the Funds.

Certain of the Related Parties may give advice, and take action, with respect to any of their clients or proprietary or other accounts, that may conflict with the advice given to the Funds, or may involve a different timing or nature of action taken than with respect to the Funds. Such transactions, whether in respect of proprietary accounts, customer accounts other than those advised by the Adviser, or certain other accounts that are advised by the Adviser, may affect the prices and availability of the securities, currencies and other instruments in which the Funds (directly or indirectly through the Master Fund and the Investment Funds) may invest. In addition, accounts or funds managed by the Related Parties may compete with the Funds (directly or indirectly through the Master Fund and the Investment Funds) for investment opportunities. As a result, transactions for the Funds (directly or indirectly through the Master Fund and the Investment Funds) may be effected at prices or rates that may be less favorable than would have been the case absent such conflicts, and the Fund may be negatively affected. The results of the investment activities of the Funds may differ significantly from the results achieved by Related Parties for accounts or accounts managed by them and from the results achieved by the Adviser for other advised accounts. This may have a negative effect on the Funds.

Subject to applicable regulatory requirements, the Funds may invest (directly or indirectly through the Master Fund and the Investment Funds) in securities of companies affiliated with the Related Parties or in which certain of the Related Parties have an equity or participation interest. The purchase, holding and sale of such investments by the Funds (directly or indirectly through the Master Fund and the Investment Funds) may enhance the profitability of the Related Parties’ own investments in such companies.

Certain of the Related Parties may buy and sell securities or other investments for their own accounts, including interests in Investment Funds, and conduct other activities that may cause the same types of conflicts as those conflicts described herein applicable to the proprietary, management, advisory and other activities of Related Parties. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers and employees and affiliates of the Adviser that are the same, different from or made at different times than positions taken for the Funds and the Master Fund or an Investment Fund in which the Funds participate. In connection with the above, each of the Funds and the Adviser has adopted a code of ethics (collectively, the “Codes of Ethics”) in compliance with Rule 17j-1 under the 1940 Act and regulations thereunder that restrict securities trading in the personal accounts of investment professionals and others who normally come into possession of information regarding the Funds’ portfolio transactions. See “CODES OF ETHICS” below.

Accounts or investment funds managed or advised by Related Parties (including those managed by the Adviser) may have investment objectives that are similar to those of the Funds and/or may engage in transactions in the same types of securities, currencies and instruments as the Funds, and from which the Adviser or the Related Parties may receive more or less compensation for its services than the Adviser receives from the Funds. As a result, Related Parties and accounts or funds which Related Parties may manage or advise (including, without limitation, those funds discussed in greater detail below), or in which Related Parties and its personnel may have a proprietary interest, may compete with the Funds for appropriate investment opportunities. For example, Investment Managers may limit the number of investors in or size of an Investment Fund or the amount of assets and accounts that they will manage. The allocation of such opportunities among Related Parties’ funds and accounts may present conflicts, as may the potentially different investment objectives of different investors. In determining such allocations, a number of factors may be considered, which may include the relative sizes of the applicable funds and accounts and their expected future sizes, the expected future capacity of the applicable Investment Funds, the funds available for allocation at any given time and the investment objectives of the Funds and such other funds and accounts. Allocation of investment opportunities among the Funds and other funds and accounts will be made by the Adviser or by Related Parties in their capacities as the managers of such funds and accounts in a reasonable and equitable manner, as determined by them in their sole discretion. The disposition of any such investments is subject to the same conditions. The Related Parties are not under an obligation to share investment opportunities, ideas or strategies with the Funds. The Related Parties may keep any profits, commissions, and fees accruing to them in connection with its activities (including activities described in this “CONFLICTS OF INTEREST” section and its other activities) for themselves and their clients, and the fees or allocations from the Funds will not be reduced thereby.

Subject to applicable regulatory requirements, Related Parties from time to time may invest proprietary or client capital with investment advisers, including Investment Managers selected by the Funds, and may also invest in Investment Funds in which the Funds invests on terms different than the interest held by the Funds. In addition, Related Parties may have other business relationships with such Investment Managers. Related Parties may seek to perform financial services for, and will receive compensation from, Investment Funds, the sponsors of Investment Funds, companies in which Investment Funds invest, or other parties in connection with transactions related to those investments, or otherwise. This compensation could include financial advisory fees, as well as other types of compensation. Compensation for other financial services will not be shared with the Funds and may be received before the Funds realize a return on their investment.

Related Parties may, from time to time, invest in the Funds. Any repurchase of Shares held by the Related Parties will be effected pursuant to an offer to repurchase Shares which is made by the Funds to all Shareholders. Such repurchases may have an adverse effect on the Funds’ investment strategies, the breadth of their allocation of investments and on the fees, expenses and costs incurred by the Funds.

To the extent permitted by applicable law, including, without limitation, the 1940 Act, an Investment Fund may enter into transactions and invest in futures, securities, currencies, swaps, options, forward contracts or other instruments on behalf of the Funds in which one of the Related Parties, acting as principal or on a proprietary basis for its customers, serves as the Counterparty. The Adviser and Related Parties will not, directly or indirectly, purchase securities or other property from, or sell securities or other property to, the Funds. However, subject to compliance with applicable law, including without limitation, the 1940 Act, the Funds may engage in transactions with accounts which are affiliated with the Funds because they are advised by Related Parties or because they have common officers, directors or managers. Such transactions would be made in circumstances where the Adviser has determined that it would be appropriate for the Funds to purchase and the Adviser or another client of the Related Parties to sell, or the Funds to sell and another client of the Related Parties to purchase, the same security or instrument on the same day.

Purchases or sales of securities for the account of the Funds or an Investment Fund (or through a sub-adviser) may be bunched or aggregated with orders for other accounts of the Related Parties, including other investment partnerships (including those in which the Related Parties or their employees have a beneficial interest). Because of the prevailing trading activity, it is frequently not possible to receive the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, which may be disadvantageous to the Funds.

Subject to the Funds’ first obtaining any necessary exemptive relief from the provisions of the 1940 Act, the Adviser may invest the Funds’ assets in Investment Funds or managed accounts managed by Investment Managers affiliated with the Related Parties. There can be no assurance that such exemptive relief will be sought or, if sought, that it will be granted.

The SAR Fund and the Institutional Fund pay, respectively, a Servicing Fee and an Administrative Servicing Fee. Although such fees are paid for the provision of ongoing investor services and are intended primarily for such services, to any extent that the Servicing Fee or Administrative Servicing Fee could be considered to support the distribution of the Funds, investors would be paying for distribution of Fund Shares out of a Fund’s assets. To any extent that a Servicing Fees could be considered to support distribution of the Funds, the Adviser would not have to pay such expenses from its own resources, which is an incentive to maintain Servicing Fees and considered a conflict of interest in this respect. An investment adviser would benefit from the payment by an investment company of distribution expenses, including compensation to intermediaries, to the extent that an investment adviser does not itself need to make such payments.

The SAI provides additional information about Investment Manager Conflicts.

LIMITATIONS O N LIQUIDITY

The Funds and the Master Fund have been organized as closed-end management investment companies. Closed-end funds differ from open-end management investment companies, commonly known as mutual funds, in that closed-end fund shareholders do not have the right to redeem their shares on a daily basis. In order to meet daily redemption requests, mutual funds are subject to more stringent regulatory limitations than closed-end funds. In particular, a mutual fund generally may not invest more than 15% of its assets in illiquid securities. However, private funds, such as the Investment Funds, are often illiquid. For this reason, the Funds and the Master Funds are organized as closed-end funds.

The Investment Funds in which the Master Fund invests may have limitations on withdrawals, such as quarterly withdrawals with notice provisions or even more limited withdrawal rights. The Funds’ and Master Fund’s portfolio is not subject to any minimum liquidity requirement imposed by the 1940 Act. However, to manage the Master Fund’s liquidity and comply with the Code, the Adviser will cause the Master Fund to structure its portfolio such that the Master Fund meets the tests under the Code discussed in this Prospectus.

THE ADVISER WILL STRUCTURE THE MASTER FUND’S PORTFOLIO IN A MANNER THAT THE ADVISER REASONABLY BELIEVES WILL ENABLE IT TO MAKE PERIODIC REPURCHASE OFFERS FOR SHARES. HOWEVER, THIS SHOULD NOT BE CONSTRUED BY SHAREHOLDERS OR PROSPECTIVE INVESTORS TO MEAN THAT THE FUNDS PROVIDE INVESTORS WITH LIQUIDITY. THE SHARES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE AND IT IS NOT ANTICIPATED THAT A SECONDARY MARKET FOR SHARES WILL DEVELOP. THE SHARES ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE DECLARATION OF TRUST OF EACH FUND. ALTHOUGH THE FUND WILL OFFER TO REPURCHASE SHARES FROM TIME TO TIME, SHARES WILL NOT BE REDEEMABLE AT A SHAREHOLDER’S OPTION, NOR WILL THEY BE EXCHANGEABLE FOR SHARES OR INTERESTS OF ANY OTHER FUND. AS A RESULT, A SHAREHOLDER MAY NOT BE ABLE TO SELL OR OTHERWISE LIQUIDATE HIS, HER OR ITS SHARES. THE SHARES ARE APPROPRIATE ONLY FOR THOSE INVESTORS WHO DO NOT REQUIRE A LIQUID INVESTMENT AND WHO ARE AWARE OF THE RISKS INVOLVED IN INVESTING IN THE FUNDS. TO THE EXTENT THAT AN INVESTOR REQUIRES THAT A PORTION OF ITS INVESTMENT PORTFOLIO PROVIDE LIQUIDITY, SUCH PORTION SHOULD NOT BE INVESTED IN THE FUNDS.

R EPURCHASES OF SHARES

No Right of Redemption

No Shareholder (or other person holding Shares (or portions thereof) acquired from a Shareholder) will have the right to require a Fund to redeem its Shares or any portion thereof. No public market exists for trading Shares, and none is expected to develop. Consequently, Shareholders may not be able to liquidate their investment other than as a result of repurchases of Shares by a Fund, as described below.

Periodic Repurchases

The Board, from time to time and in its sole discretion, may determine to cause the Funds to offer to repurchase Shares from Shareholders pursuant to written tenders by Shareholders. However, each Fund’s assets consist primarily of their investment in the Master Fund. Therefore, in order to finance the repurchase of Shares pursuant to repurchase offers, the Funds may find it necessary to liquidate all or a portion of their investments in the Master Fund. Because the Funds may withdraw a portion of their investments in the Master Fund only pursuant to repurchase offers by the Master Fund, the Funds may not conduct repurchase offers for Shares

unless the Master Fund simultaneously conducts a repurchase offer for its shares. In addition, the Adviser, which also serves as investment adviser to the Master Fund, anticipates recommending to the Master Fund’s Board that the Master Fund conduct repurchase offers on a quarterly basis in order to permit the Funds to conduct repurchase offers for Shares. However, the Master Fund’s Board retains the discretion to approve such requests and, therefore, there are no assurances that the Master Fund’s Board will, in fact, decide to undertake any repurchase offer. The Funds would be unlikely to be able to make a repurchase offer larger than a repurchase offer made by the Master Fund. The Master Fund will make repurchase offers, if any, to all investors in the Master Fund on similar terms, which may affect the size of the Funds’ respective repurchase offers. Consequently, the Funds will conduct repurchase offers on a schedule and in amounts that will depend on the Master Fund’s repurchase offers. In addition, the Funds may determine not to conduct a repurchase offer each time the Master Fund conducts a repurchase offer.

Subject to the discussion above, the aggregate value of Shares to be repurchased at any time will be determined by the Board in its sole discretion, and such amount may be a percentage of the value of a Fund’s outstanding Shares. If a repurchase offer is oversubscribed by Shareholders, a Fund will repurchase only a pro rata portion of the Shares tendered by each Shareholder. In determining whether the Funds should offer to repurchase Shares pursuant to written requests, the Board will consider the recommendation of the Adviser. The Adviser expects to recommend quarterly repurchases with Valuation Dates (as defined below) on or about March 31, June 30, September 30 and December 31 of each year. In determining whether to accept the Adviser’s recommendation (in whole or in part), the Board considers the following factors, among others:

•

whether any Shareholders have requested to tender Shares or portions of Shares to the Funds;

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as discussed in more detail below, the composition and liquidity of the Funds’ assets (including fees and costs associated with the Master Fund’s withdrawing from Investment Funds and/or disposing of assets if any allocated to sub-advisers);

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the investment plans and working capital of the Funds;

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the relative economies of scale of the repurchase requests with respect to the size of the Funds;

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the past practice of the Funds in repurchasing Shares;

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the availability of information as to the value of the Master Fund’s interests in underlying Investment Funds;

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the condition of the securities markets and the economy generally, as well as political, national or international developments or current affairs; and

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the anticipated tax consequences of any proposed repurchases of Shares.

The Master Fund, and thus the Funds, will conduct a repurchase offer only if the Master Fund’s Board determines that payment for tendered shares would not disrupt the Master Fund’s investment program or adversely affect shareholders that remain invested in the Master Fund.

Many Investment Funds have lengthened the lock-up periods during which an investor must hold an investment in an Investment Fund and the Adviser believes that this trend may continue. If this trend does continue, it could negatively impact the liquidity of the Master Fund (and, consequently the Funds), which may force the Adviser to forgo investing in certain Investment Funds that are attractive due to the longer lock-up periods being employed, or require that the Master Fund modify its current liquidity guidelines.

The Board will determine if each Fund will offer to repurchase Shares (or portions of Shares) pursuant to written tenders only on terms that the Board deems to be fair to the Funds and the Shareholders. The amount due to any Shareholder whose Shares (or portion thereof) are repurchased will be equal to the Fund’s NAV per the Share being repurchased, as of the Valuation Date (as defined below). If the Board determines that a Fund will offer to repurchase Shares, notice will be provided to Shareholders that describes the commencement date of the repurchase offer, specifies the date on which repurchase requests must be received by the relevant Fund, and contains other information Shareholders should consider in deciding whether and how to participate in such repurchase opportunity. The expiration date of the repurchase offer (the “Expiration Date”) will be a date set by the Board occurring no sooner than 20 business days after the commencement date of the repurchase offer, provided that such Expiration Date may be extended by the Board in its sole discretion. The Funds generally will not accept any repurchase request received by it or its designated agent after the Expiration Date.

Payment by a Fund upon a repurchase of Shares will be made in part or in whole in cash or securities of equivalent value. The Funds do not generally expect to distribute securities as payment for repurchased Shares except in unusual circumstances, including if making a cash payment would result in a material adverse effect on the Funds or the Shareholders, or if the Funds have received distributions from Investment Funds in the form of securities that are transferable to the Shareholders. Securities that are distributed in-kind in connection with a repurchase of Shares may be illiquid. Any in-kind distribution of securities will be valued in accordance with the Funds’ valuation procedures and will be distributed to all tendering Shareholders on a proportional basis. See “CALCULATION OF NET ASSET VALUE; VALUATION.”

In light of liquidity constraints associated with the Funds’ investments in Investment Funds and the possibility that the Funds may have to effect withdrawals from those Investment Funds to pay for Shares being repurchased, the Funds expect to employ the following repurchase procedures:

•

The value of Shares (or portions thereof) being repurchased will be determined as of a date, determined by the Board in its sole discretion, which under normal circumstances, would not be earlier than 30 days after the Expiration Date (the “Valuation Date”). As discussed above, the Adviser expects that it will recommend to the Board that the Funds repurchase Shares quarterly with a Valuation Date on or about March 31, June 30, September 30 and December 31 of each year.

•

The initial payment (the “Initial Payment”) in respect of a repurchase will be made in an amount equal to at least 95% of the estimated value of the repurchased Shares (or portion thereof), determined as of the Valuation Date. The Initial Payment will be made as of the later of: (1) approximately the 35th day after the Valuation Date; or (2) in the sole discretion of the Adviser, if the Funds have requested withdrawals of capital from any Investment Funds in order to fund the repurchase of Shares, within ten business days after a Fund has received at least 95% of the aggregate amount so requested to be withdrawn by the Fund from the Investment Funds (the “Investment Fund Payment Date”).

•

The second and final payment (the “Final Payment”) is expected to be in an amount equal to the excess, if any, of: (1) the value of the repurchased Shares (or portion thereof), determined as of the Valuation Date based upon the results of the annual audit of the Funds’ financial statements for the fiscal year in which the Valuation Date of such repurchase occurred; over (2) the Initial Payment. The Adviser anticipates that the annual audit of the Funds’ financial statements will be completed within 60 days after the end of each fiscal year of the Funds and that the Final Payment will be made as promptly as practicable after the completion of such audit.

•

Although the amounts required to be paid by the Funds will generally be paid in cash, the Fund may, under certain limited circumstances, pay all or a portion of the amounts due by an in-kind distribution of securities.

The repurchase of Shares is subject to regulatory requirements imposed by the SEC. The Funds’ repurchase procedures are intended to comply with such requirements. However, in the event that the Board determines that modification of the repurchase procedures described above is required or appropriate, the Board will adopt revised repurchase procedures as necessary to ensure each Fund’s compliance with applicable regulations or as the Board in its sole discretion deems appropriate. Following the commencement of an offer to repurchase Shares, the Funds may suspend, postpone or terminate such offer in certain circumstances upon the determination of a majority of the Board, including a majority of the Trustees, that such suspension, postponement or termination is advisable for the Fund and its Shareholders, including, without limitation, circumstances as a result of which it is not reasonably practicable for the Fund to dispose of its investments, to determine the value of its net assets, or other unusual circumstances as determined in the Board’s sole discretion.

Each Shareholder whose Shares (or portion thereof) have been accepted for repurchase will continue to be a Shareholder of the Fund until the Valuation Date (and thereafter if its Share are repurchased in part) and may exercise its voting rights with respect to the repurchased Shares (or portion thereof) until the Valuation Date. Moreover, the Shares held by a Shareholder whose Shares (or portion thereof) have been accepted for repurchase will reflect the net profits or net losses of the Funds through the Valuation Date, and such Shareholder’s account shall not be adjusted for the Shares repurchased, as a result of the repurchase, prior to the Valuation Date.

Upon its acceptance of tendered Shares or portions thereof for repurchase, each Fund will utilize (1) cash, (2) liquid securities, (3) borrowings, or (4) interests in Investment Funds that the Funds have requested be withdrawn (or any combination thereof) for payment thereon.

Payments for repurchased Shares may require the Master Fund to liquidate portfolio holdings in Investment Funds earlier than the Adviser otherwise would liquidate such holdings, potentially resulting in losses, and may increase the Funds’ portfolio turnover. The Adviser intends to take measures to attempt to avoid or minimize such potential losses and turnover. The Funds may, but need not, maintain cash or borrow money to meet repurchase requests. Such a practice could increase the Funds’ operating expenses and impact the ability of the Funds to achieve their investment objective.

Intermediaries also may impose terms and conditions on investor accounts and investments in the Funds that are in addition to the terms and conditions set forth in this Prospectus. Such terms and conditions are not imposed by the Funds, the Distributor or any other service provider of the Fund. Any terms and conditions imposed by an Intermediary, or operational limitations applicable to such parties, may affect or limit a Shareholder’s ability to tender Shares for repurchase, or otherwise transact business with the Funds. Investors should direct any questions regarding terms and conditions applicable to their accounts or relevant operational limitations to their Intermediary.

A Shareholder who tenders some but not all of the Shareholder’s Shares for repurchase will be required to maintain a minimum account balance of $25,000 in the Fund. Such minimum account balance requirement may be waived by the Adviser, in its sole discretion. The Fund reserves the right to reduce the amount to be repurchased from a Shareholder so that the required account balance is maintained, or to accommodate operational limitations of an Intermediary.

In accordance with the terms and conditions of its Declaration of Trust, a Fund may repurchase or redeem Shares of a Shareholder without consent or other action by the Shareholder or other person if the Fund determines that: (i) all or a portion of the Shareholder’s Shares have been transferred to, or has vested in, any person, by operation of law in connection with the death, divorce, bankruptcy, insolvency, dissolution or adjudicated incompetence of the Shareholder; (ii) ownership of the Shares by such Shareholder or other person will cause the Fund to be in violation of, or subject the Fund or the Adviser to additional registration or regulation under the securities, commodities, or other laws of the U.S. or any other jurisdiction; (iii) continued ownership of the Shares may be harmful or injurious to the business or reputation of the Fund or the Adviser, or may subject the Fund or any Shareholders to an undue risk of adverse tax or other fiscal or regulatory consequences; (iv) if the Adviser learns that any of the representations and warranties made by a Shareholder or other person in connection with the acquisition of Shares was not true when made or has ceased to be true; or (v) it would be in the best interests of the Fund for the Fund to repurchase or redeem such Shares. Shareholders whose Shares are so repurchased or redeemed by a Fund will not be entitled to a return of any amount of any fees that were charged in connection with the Shareholder’s purchase of such Shares.

In the event that the Adviser or any of its affiliates holds Shares (or portions thereof), such Shares (or portions thereof) may be tendered for repurchase in connection with any repurchase offer made by the Funds, without notice to the other Shareholders.

T RANSFERS OF SHARES

No person shall become a substituted Shareholder of the Fund without the consent of the Fund, which consent may be reasonably withheld in its sole discretion. Shares held by Shareholders may be transferred only: (i) by operation of law in connection with the death, divorce, bankruptcy, insolvency, or adjudicated incompetence of the Shareholder; or (ii) under other circumstances, with the consent of the Board (which may be reasonably withheld in its sole discretion).

Notice to the Fund of any proposed transfer must include evidence satisfactory to the Board or its delegate that the proposed transferee, at the time of transfer, meets any requirements imposed by the Fund with respect to investor eligibility and suitability. See “ELIGIBLE INVESTORS.” Notice of a proposed transfer of Shares must also be accompanied by a properly completed application in respect of the proposed transferee. In connection with any request to transfer Shares (or portions thereof), the Fund may require the Shareholder requesting the transfer to obtain, at the Shareholder’s expense, an opinion of counsel selected by the Fund as to such matters as the Fund may reasonably request. The Board generally will not consent to a transfer if, after the transfer of the Shares, the balance of the account of each of the transferee and transferor is less than $25,000. Each transferring Shareholder and transferee may be charged reasonable expenses, including, but not limited to, attorneys’ and accountants’ fees, incurred by the Fund in connection with the transfer and such fees will be paid by the transferor prior to the transfer being effectuated. If such fees have been incurred by the Fund and have not been paid by the transferor for any reason, including a decision to not transfer the interests, the Fund reserves the right to deduct such expenses from the Shareholder’s account.

Any transferee acquiring Shares or a portion thereof by operation of law in connection with the death, divorce, bankruptcy, insolvency, dissolution or adjudicated incompetence of the Shareholder, will be entitled to the distributions with respect to the Shares or a portion thereof so acquired, to transfer the Shares or a portion thereof in accordance with the terms of the Declaration of Trust and to tender the Shares or a portion thereof for repurchase by the relevant Fund, but will not be entitled to the other rights of a Shareholder unless and until the transferee becomes a substituted Shareholder as specified in the Declaration of Trust.

In purchasing Shares, a Shareholder agrees to indemnify and hold harmless the Fund, the Board, the Adviser, each other Shareholder and any of their affiliates against all losses, claims, damages, liabilities, costs and expenses (including legal or other expenses incurred in investigating or defending against any losses, claims, damages, liabilities, costs and expenses or any judgments, fines and amounts paid in settlement), joint or several, to which those persons may become subject by reason of, or arising from, any transfer made by that Shareholder in violation of these provisions or any misrepresentation made by that Shareholder or a substituted Shareholder in connection with any such transfer.

CALCULATION OF NET ASSET VALUE; VALUATION

Each of the Funds and the Master Fund will calculate its NAV as of the close of business on the last business day of each month and at such other times as the Board may determine, including in connection with repurchases of Shares, in accordance with the procedures described below or as may be determined from time to time in accordance with policies established by the Board. The NAV of each Fund will equal the value of the total assets of the Fund, less all of its liabilities, including accrued fees and expenses. The NAV of the Master Fund will equal the value of the total assets of the Master Fund, less all of its liabilities, including accrued

fees and expenses. Because the Funds intend to invest substantially all of their investable assets in the Master Fund, the value of the assets of the Funds will depend on the value of their share of the Investment Funds or other investments in which the Master Fund invests.

The Board Valuation Committee of the Master Fund oversees, and the Adviser’s Valuation Committee implements, the valuation of the Master Fund’s investments, including interests in the Investment Funds, in accordance with written policies and procedures (the “Valuation Procedures”) that the Boards of the Master Fund and the Funds have approved for purposes of determining the value of securities held by the Master Fund, including the fair value of the Master Fund’s investments in Investment Funds. The Adviser’s Valuation Committee consists of members of the Investment Committee, additional officers of the Fund, and one or more representatives of the Adviser.

As a general principle, the fair valuation of a security should reflect the amount that the Adviser’s Valuation Committee determines that the Master Fund might reasonably expect to receive for the security upon the orderly sale or redemption of the security, based on information available at the time, that the Adviser’s Valuation Committee believes to be reliable. In the case of a security issued by an Investment Fund, this would typically be equal to the amount that a Fund might reasonably expect to receive from the Investment Fund if the Fund’s interest were redeemed on the date as of which it was valued. It is anticipated that the Adviser’s Valuation Committee will make this determination based on the valuation most recently provided by the Investment Fund in accordance with the policies the Investment Fund has established, which may constitute the Investment Fund’s best estimate at the time based upon data then available, as well as any other relevant information reasonably available at the time of the valuation of the Master Fund’s portfolio.

Prior to an investment by the Master Fund in any Investment Fund, the Adviser’s Valuation Committee will conduct a due diligence review of the valuation methodologies used by the Investment Fund. As a general matter, Investment Funds selected by the Master Fund will use market value when available, and otherwise will use principles of fair value applied in good faith. The Adviser’s Valuation Committee will consider whether it is appropriate, in light of the relevant circumstances, to value interests at the NAV as reported by the Investment Fund Manager or the administrator for such Investment Fund at the time of valuation.

Each Fund’s valuation procedures require the Adviser to consider all relevant information available at the time the Fund values its portfolio. The Adviser and/or the Board will consider such information, and may conclude in certain circumstances that the information provided by the Investment Manager of an Investment Fund does not represent the fair value of the Fund’s interest in the Investment Fund. Although redemptions of investments in Investment Funds are subject to advance notice requirements, Investment Funds will typically make available NAV information to holders that will represent the price at which, even in the absence of redemption activity, the Investment Fund would have effected a redemption if any such requests had been timely made or if, in accordance with the terms of the Investment Fund’s governing documents, it would be necessary to effect a mandatory redemption. Following procedures adopted by the Board, in the absence of specific transaction activity in the investment in a particular Investment Fund, the Fund would consider whether it was appropriate, in light of any known relevant circumstances, to value such a position at its NAV as reported at the time of valuation, or whether to adjust such value to reflect a premium or discount to NAV.

To the extent that the Adviser invests the assets of the Master Fund in securities or other instruments that are not investments in Investment Funds (e.g., directly or through Separate Accounts), the Master Fund will generally value such assets as described below. Securities traded: (1) on one or more of the U.S. national securities exchanges or the OTC Bulletin Board will be valued at their last sales price; and (2) on the Nasdaq Stock Market will be valued at the Nasdaq Official Closing Price (“NOCP”), at the close of trading on the exchanges or markets where such securities are traded for the business day as of which such value is being determined. Securities traded on the Nasdaq Stock Market for which the NOCP is not available will be valued at the mean between the closing bid and asked prices in this market. Securities traded on a foreign securities exchange will generally be valued at their closing prices on the exchange where such securities are primarily traded and such valuations translated into U.S. dollars at the current exchange rate. If an event occurs between the close of the foreign exchange and the computation of the Master Fund’s NAV that would materially affect the value of the security, the value of such security will be adjusted to its fair value. Except as specified above, the value of a security, derivative, or synthetic security that is not actively traded on an exchange shall be determined by an unaffiliated pricing service that may use actual trade data or procedures using market indices, matrices, yield curves, specific trading characteristics of certain groups of securities, pricing models, or combinations of these. The Adviser’s Valuation Committee or Independent Administrator, as applicable, will monitor the value assigned to each security by the pricing service to determine if it believes the value assigned to a security is correct. If the Independent Administrator or Adviser’s Valuation Committee, as applicable, believes that the value received from the pricing service is incorrect, then the value of the security will be its fair value as determined in accordance with the Valuation Procedures.

In general, fair value represents a good faith approximation of the current value of a security and will be used when there is no public market or possibly no market at all for the security. The fair values of one or more securities may not be the prices at which those assets are ultimately sold. In such circumstances, the Adviser’s Valuation Committee and/or the Board Valuation Committee, in consultation with the Independent Administrator or the Adviser, will reevaluate the Fund’s fair value methodology to determine, what, if any, adjustments should be made to the methodology.

Although the Valuation Procedures approved by the Board provide that the Adviser’s Valuation Committee will review the valuations provided by the Independent Administrator (via the Investment Managers or their administrators), none of the Board Valuation Committee, the Independent Administrator, the Adviser’s Valuation Committee or the Adviser will be able to confirm independently the accuracy of any unaudited valuations provided thereby.

Prospective investors should be aware that situations involving uncertainties as to the valuation of portfolio positions could have an adverse effect on the Funds’ net assets if the judgments of the Board, the Board Valuation Committee, the Adviser’s Valuation Committee and/or the Independent Administrator (in reliance on the Investment Funds, the Investment Managers and/or their administrators) regarding appropriate valuations should prove incorrect. The Master Fund may desire to dispose of an interest in an Investment Fund, but be unable to dispose of such interest, and could therefore be obligated to continue to hold the interests for an extended period of time. In such a case, the Independent Administrator, upon consultation with the Adviser’s Valuation Committee or the Adviser, may continue to value the interests without the benefit of the Investment Manager’s or its administrator’s valuations, and may, in its sole discretion, determine to discount the value of the interests in accordance with the Valuation Procedures.

T AX ASPECTS

The following is a summary of certain U.S. federal income tax considerations relevant to the acquisition, holding and disposition of Shares by U.S. Shareholders. This summary is based upon existing U.S. federal income tax law, which is subject to change, possibly with retroactive effect. This summary does not discuss all aspects of U.S. federal income taxation which may be important to particular investors in light of their individual investment circumstances, including investors subject to special tax rules, such as U.S. financial institutions, insurance companies, broker-dealers, tax-exempt organizations, partnerships, Shareholders who are not United States persons (as defined in the Code), Shareholders liable for the alternative minimum tax, persons holding Shares through partnerships or other pass-through entities, or investors that have a functional currency other than the U.S. dollar, all of whom may be subject to tax rules that differ significantly from those summarized below. This summary assumes that investors have acquired Shares pursuant to this offering and will hold their Shares as “capital assets” (generally, property held for investment) for U.S. federal income tax purposes.

Prospective Shareholders should consult their own tax advisors regarding the foreign and U.S. federal, state, and local income and other tax considerations that may be relevant to an investment in the Fund.

In addition to the particular matters set forth in this section, tax-exempt entities should review carefully those sections of this Prospectus and the SAI regarding liquidity and other financial matters to ascertain whether the investment objectives of the Fund are consistent with their overall investment plans.

Taxation of the Funds and the Master Fund

Each of the Funds and the Master Fund intends to qualify as a regulated investment company (a “RIC”) under federal income tax law. If a Fund so qualifies and distributes each year to its Shareholders at least 90% of its investment company taxable income and net tax-exempt income, if any, the Fund will not be required to pay federal income taxes on any income it distributes to shareholders. If a Fund distributes in any calendar year less than an amount equal to the sum of 98% of its ordinary income for such calendar year and 98.2% of its capital gain net income for the twelve-month period ending October 31 of such calendar year, plus any amounts that were not distributed in previous calendar years, then the Fund will be subject to a nondeductible 4% excise tax on the undistributed amounts.

Each Fund is required to use the accrual method of accounting and uses the twelve-month period ending October 31 as its tax year for income tax purposes.

As described below under “Investments in Passive Foreign Investment Companies,” the Master Fund expects that gains from the Investment Funds, if any, will be treated as ordinary income for U.S. federal income tax purposes.

Distributions to Shareholders

Each Fund contemplates declaring as dividends each year all or substantially all of its taxable income. In general, distributions will be taxable to Shareholders for federal, state and local income tax purposes to the extent of the distributing Fund’s current and accumulated earnings and profits. Such distributions are taxable whether they are received in cash or reinvested in Fund shares. The Funds expect that their distributions attributable to distributions they receive from the Master Fund will generally be taxable to Shareholders at ordinary income rates. Distributions by a Fund in excess of the Fund’s current and accumulated earnings and profits will be treated as a tax-free return of capital to the extent of (and in reduction of) the Shareholders’ tax basis in their Shares and any such amount in excess of their basis will be treated as gain from the sale of Shares, as discussed below.

term capital gains. Likewise, the Funds do not anticipate that any of their dividends paid to Shareholders that are corporations will be eligible for the “dividends received” deduction.

Shareholders are generally taxed on any dividends from a Fund in the year they are actually distributed. But dividends declared in October, November or December of a year, and paid in January of the following year, will generally be treated for federal income tax purposes as having been paid to Shareholders on December 31 of the year they are declared.

Shareholders who are not citizens or residents of the United States generally will be subject to a 30% U.S. federal withholding tax, or U.S. federal withholding tax at such lower rate as prescribed by applicable treaty, on distributions by a Fund. Accordingly, the Funds may not be appropriate investments for non-U.S. investors.

Each Fund will inform its Shareholders of the source and status of distributions made in a given calendar year after the close of such calendar year. See “Distribution Policy.”

Income from Repurchases and Transfers of Shares

The repurchase or transfer of a Fund’s Shares may result in a taxable gain or loss to the tendering Shareholder. Different tax consequences may apply for tendering and non-tendering Shareholders in connection with a repurchase offer. For example, if a Shareholder does not tender all of his or her Shares, under some circumstances, such repurchase may not be treated as an exchange for U.S. federal income tax purposes and may result in deemed distributions to non-tendering Shareholders. On the other hand, Shareholders who tender all of their Shares (including Shares deemed owned by Shareholders under constructive ownership rules) will be treated as having sold their Shares and generally will realize a capital gain or loss. Such gain or loss is measured by the difference between the Shareholder’s amount received and his or her adjusted tax basis of the Shares. For non-corporate Shareholders, gain or loss from the transfer or repurchase of shares generally will be taxable at a U.S. federal income tax rate dependent upon the length of time the Shares were held. Shares held for a period of one year or less at the time of such repurchase or transfer will, for U.S. federal income tax purposes, generally result in short-term capital gains or losses, and those held for more than one year will generally result in long-term capital gains or losses.

Additionally, any loss realized on a disposition of Shares of a Fund may be disallowed under “wash sale” rules to the extent the Shares disposed of are replaced with other shares of the same Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of, such as pursuant to a dividend reinvestment in Shares of the Fund. If disallowed, the loss will be reflected in an upward adjustment to the basis of the Shares acquired.

Pursuant to Treasury Regulations directed at tax shelter activity, taxpayers are required to disclose to the Internal Revenue Service certain information on Form 8886 if they participate in a “reportable transaction.” A transaction may be a “reportable transaction” based upon any of several indicia with respect to a shareholder, including the recognition of a loss in excess of certain thresholds (for individuals, $2 million in one year or $4 million in any combination of years). Investors should consult their own tax advisers concerning any possible disclosure obligation with respect to their investment in Fund Shares.

Investments in Passive Foreign Investment Companies

The Master Fund intends to acquire interests in Investment Funds organized outside the United States that are treated as corporations for U.S. tax purposes and that will generally be treated as passive foreign investment companies (“PFICs”) for federal income tax purposes.

The Master Fund intends to elect to “mark to market” all shares that it holds in PFICs at the end of each taxable year. By making this election, the Master Fund will recognize as ordinary income any increase in the value of those PFIC shares as of the close of the taxable year (subject to adjustments for deferral of losses from earlier taxable years) over their adjusted basis and as ordinary loss any decrease in that value unless the loss is required to be deferred. Gains realized with respect to PFICs that the Master Fund has elected to mark to market will be ordinary income. If the Master Fund realizes a loss with respect to such a PFIC, whether by virtue of selling all or part of the Fund’s interest in the PFIC or because of the “mark to market” adjustment described above, the loss will be ordinary to the extent of the excess of the sum of the mark-to-market gains over the mark-to-market losses previously recognized with respect to the PFIC. To the extent that the Master Fund’s mark-to-market loss with respect to a PFIC exceeds that limitation, the loss will effectively be taken into account in offsetting future mark-to-market gains from the PFIC, and any remaining loss will generally be deferred until the PFIC shares are sold, at which point the loss will be treated as a capital loss. Capital losses recognized by the Master Fund in a taxable year will generally be deductible only against capital gains recognized by the Master Fund in that year or one of the following taxable years (limited to the following eight taxable years in the case of capital losses realized in taxable years beginning before December 22, 2010), but the Master Fund does not expect to generate significant capital gains from its investments, which means that capital losses recognized by the Master Fund will generally not result in a reduction of taxable distribution to Shareholders.

By making the mark-to-market election, the Master Fund may be required to recognize income (which generally must be distributed to the Master Fund’s shareholders, including the Funds, and then by the Funds to their Shareholders) in excess of the distributions that it receives from PFICs. Accordingly, the Master Fund may need to borrow money or to dispose of its interests in Investment Funds in order to make the required distributions.

If the Master Fund does not make the “mark to market” election with respect to a PFIC, it may under certain circumstances elect to treat the PFIC as a qualified electing fund (a “QEF”), which would result in the Master Fund recognizing income and gain each year based on its allocable share of the income and gain recognized by the QEF. The Master Fund does not generally anticipate that it will be able to make QEF elections with respect to the Investment Funds. If neither a “mark to market” nor a QEF election is made with respect to an interest in a PFIC, the ownership of the PFIC interest may have significantly adverse tax consequences for the owner. In such a case, the Master Fund would be subject to an interest charge (at the rate applicable to tax underpayments) on tax liability treated as having been deferred with respect to certain distributions and on gain from the disposition of the shares of a PFIC (collectively referred to as “excess distributions”), even if those excess distributions are paid by the Master Fund as a dividend to the Master Fund’s Shareholders, including the Funds, and then by the Funds to their Shareholders.

Certain Withholding Taxes

The Master Fund may be subject to foreign withholding taxes on income or gains attributable to Investment Funds located in foreign countries, and the Investment Funds may be subject to taxes, including withholding taxes, attributable to investments of the Investment Funds. U.S. investors in the Funds will not be entitled to a foreign tax credit with respect to any of those taxes.

State and Local Taxes

In addition to the U.S. federal income tax consequences summarized above, prospective investors should consider the potential state and local tax consequences of an investment in a Fund. Shareholders are generally taxable in their state of residence on dividend and capital gain distributions they receive from a Fund. Each Fund may become subject to taxes in states and localities if it is deemed to conduct business in those jurisdictions. Each Fund will be subject to the Texas franchise tax if it is considered to be conducting an active trade or business in Texas. However, it is the intent of the Adviser to operate the Funds and Master Fund in a manner that would minimize receipts from businesses operated in Texas.

Information Reporting and Backup Withholding

After the end of each calendar year, Shareholders will be sent information regarding the amount and character of distributions received from the relevant Fund during the year.

Legislation passed by Congress in 2008 requires each Fund (or its administrative agent) to report to the Internal Revenue Service and furnish to Shareholders the cost basis information and holding period for such Fund’s Shares purchased on or after January 1, 2012, and repurchased by the Fund on or after that date. A Fund will permit Shareholders to elect from among several permitted cost basis methods. In the absence of an election, each Fund will use average cost as its default cost basis method. The cost basis method a Shareholder elects may not be changed with respect to a repurchase of shares after the settlement date of the repurchase. Shareholders should consult with their tax advisors to determine the best permitted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting rules apply to them.

Information returns generally will be filed with the Internal Revenue Service in connection with distributions with respect to the Shares unless Shareholders establish that they are exempt from the information reporting rules, for example by properly establishing that they are corporations. If Shareholders do not establish that they are exempt from these rules, they generally will be subject to backup withholding on these payments if they fail to provide their taxpayer identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a payment to Shareholders will be allowed as a credit against their U.S. federal income tax liability and may entitle Shareholders to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

Other Taxes

The foregoing is a summary of some of the tax rules and considerations affecting Shareholders and the Funds’ operations, and does not purport to be a complete analysis of all relevant tax rules and considerations, nor does it purport to be a complete listing of all potential tax risks inherent in making an investment in a Fund. All investors are urged to consult with their own tax advisers regarding any proposed investment in a Fund. A Shareholder may be subject to other taxes, including but not limited to, state and local taxes, estate and inheritance taxes, and intangible taxes that may be imposed by various jurisdictions. The Funds also may be subject to state, local, and foreign taxes that could reduce cash distributions to Shareholders. It is the responsibility of each Shareholder to file all appropriate tax returns that may be required.

Each prospective Shareholder is urged to consult with his or her tax adviser with respect to any investment in a Fund.

In addition to the particular matters set forth in this section, tax-exempt entities should review carefully those sections of this Prospectus and the SAI regarding liquidity and other financial matters to ascertain whether the investment objectives of the Funds are consistent with their overall investment plans.

ERISA CONSIDERATIONS

The Funds

Persons who are fiduciaries with respect to an employee benefit plan or other arrangement subject to the Employee Retirement Income Security Act of 1974, as amended (an “ERISA Plan” and “ERISA,” respectively), and persons who are fiduciaries with respect to an IRA, Keogh Plan, or other plan that is subject to the prohibited transaction provisions of Section 4975 of the Code (together with ERISA Plans, “Plans”) should consider, among other things, the matters described below before determining whether to invest in a Fund.

ERISA imposes certain general and specific responsibilities on persons who are fiduciaries with respect to an ERISA Plan, including prudence, diversification, an obligation not to engage in a prohibited transaction and other standards. In determining whether a particular investment is appropriate for an ERISA Plan, Department of Labor (“DOL”) regulations provide that a fiduciary of an ERISA Plan must give appropriate consideration to, among other things, whether the investment is permitted under the Plan’s governing instruments, the role that the investment plays in the ERISA Plan’s portfolio, taking into consideration whether the investment is designed reasonably to further the ERISA Plan’s purposes, an examination of the risk and return factors, the fund’s composition with regard to diversification, the liquidity and current return of the total portfolio relative to the anticipated cash flow needs of the ERISA Plan, the income tax consequences of the investment and the projected return of the total portfolio relative to the ERISA Plan’s funding objectives. Before investing the assets of an ERISA Plan in the Fund, a fiduciary should determine whether such an investment is consistent with its fiduciary responsibilities and the foregoing regulations. If a fiduciary with respect to any such ERISA Plan breaches its or his responsibilities with regard to selecting an investment or an investment course of action for such ERISA Plan, the fiduciary itself or himself may be held liable for losses incurred by the ERISA Plan as a result of such breach.

Because the Fund is registered as an investment company under the 1940 Act, the underlying assets of the Fund should not be considered to be “plan assets” of the Plans investing in the Funds for purposes of the fiduciary responsibility and prohibited transaction rules under ERISA or the Code. Thus, neither the Adviser nor the Investment Managers are fiduciaries within the meaning of ERISA or the Code with respect to the assets of any Plan that becomes a Shareholder in a Fund, solely by reason of the Plan’s investment in the Fund.

Certain prospective investors may currently maintain relationships with the Adviser or one or more Investment Managers in which the Fund invests, or with other entities that are affiliated with the Adviser or Investment Managers. Each of such persons may be deemed to be a party in interest to and/or a fiduciary of any Plan to which it provides investment management, investment advisory, or other services. ERISA and the relevant provisions of the Code prohibit the use of Plan assets for the benefit of a party in interest and also prohibit a Plan fiduciary from using its position to cause the Plan to make an investment from which it or certain third parties in which such fiduciary has an interest would receive a fee or other consideration. Plan investors should consult with legal counsel to determine if participation in the Fund is a transaction that is prohibited by ERISA or the Code and fiduciaries of such plans should not permit an investment in the Fund with plan assets if the Adviser or the Investment Managers, or their affiliates perform or have investment powers over such assets, unless an exemption from the prohibited transaction rules apply with respect to such purchase.

The Funds require Plan fiduciaries proposing to invest in a Fund to certify that (a) the investment by such Plan interest holder in the Fund is prudent for the Plan (taking into account any applicable liquidity and diversification requirements of ERISA); (b) the investment in the Fund is permitted under ERISA, the Code, other applicable law and the Plan’s governing plan documents; (c) neither the Adviser nor any of its affiliates (including, without limitation, any of the Related Parties) has acted as a fiduciary under ERISA with respect to such purchase; (d) no advice provided by the Adviser or any of its affiliates (including, without limitation, any of the Related Parties) has formed a primary basis for any investment decision by such Plan interest holder in connection with such purchase; and (e) the purchase, holding and disposition of the interest in the Fund will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or any materially similar provisions of other law for which an exemption is not available.

The provisions of ERISA and the Code are subject to extensive and continuing administrative and judicial interpretation and review. The discussion of ERISA and the Code contained herein is, of necessity, general and may be affected by future publication of regulations and rulings. Potential Plan investors should consult with their legal advisers regarding the consequences under ERISA and the Code of the acquisition and ownership of an investment in the Fund.

Employee benefit plans that are governmental plans (as defined in Section 3(32) of ERISA) are not subject to requirements of ERISA or the Code discussed above but may be subject to substantively similar provisions of other applicable federal or state law

or may be subject to other legal restrictions on their ability to invest in the Fund. Accordingly, any such governmental plans and the fiduciaries of such plans should consult with their legal counsel concerning all the legal implications of investing in the Fund.

A FUND’S SALE OF SHARES TO PLANS IS IN NO RESPECT A REPRESENTATION OR WARRANTY BY THE FUND, THE ADVISER OR ANY OF THEIR AFFILIATES (INCLUDING, WITHOUT LIMITATION, ANY OF THE RELATED PARTIES), OR BY ANY OTHER PERSON ASSOCIATED WITH THE SALE OF THE SHARES, THAT SUCH INVESTMENT BY PLANS MEETS ALL RELEVANT LEGAL REQUIREMENTS APPLICABLE TO PLANS GENERALLY OR TO ANY PARTICULAR PLAN, OR THAT SUCH INVESTMENT IS OTHERWISE APPROPRIATE FOR PLANS GENERALLY OR FOR ANY PARTICULAR PLAN.

DISTRIBUTION POLICY

Dividends will generally be paid at least annually on each Fund’s Shares in amounts representing substantially all of the net investment income, if any, earned each year. Payments will vary in amount, depending on investment income received and expenses of operation. It is likely that many of the Investment Funds in whose securities the Funds indirectly invest will not pay any dividends, and this, together with the Funds’ expenses, means that there can be no assurance the Fund’s will have substantial income or pay dividends. The Funds are not a suitable investment for any investor who requires dividend income.

It is anticipated that any gains or appreciation in Funds’ investments will be treated as ordinary income. Such amounts will generally be distributed at least annually and such distributions would be taxed as ordinary income dividends to Shareholders that are subject to tax.

It is anticipated that substantially all of any taxable net capital gain realized on investments will be paid to Shareholders at least annually. The NAV of each Share (or portion thereof) that you own will be reduced by the amount of the distributions or dividends that you actually or constructively receive from that Share (or portion thereof).

Automatic Dividend Reinvestment Plan

Pursuant to the Dividend Reinvestment Plan (“DRP”) established by the Master Fund, each Shareholder will automatically be a participant under the DRP and have all income distributions, whether dividend distributions and/or capital gains distributions, automatically reinvested in additional Shares. Election not to participate in the DRP and to receive all income distributions, whether dividend distributions or capital gain distributions, in cash may be made by notice to a Shareholder’s Intermediary (who should be directed to inform the Master Fund). A Shareholder is free to change this election at any time. If, however, a Shareholder requests to change its election within 95 days prior to a distribution, the request will be effective only with respect to distributions after the 95-day period. A Shareholder whose Shares are registered in the name of a nominee (such as an Intermediary) must contact the nominee regarding its status under the DRP, including whether such nominee will participate on such Shareholder’s behalf as such nominee will be required to make any such election.

Generally, for U.S. federal income tax purposes, Shareholders receiving Shares under the DRP will be treated as having received a distribution equal to the amount payable to them in cash as a distribution had the Shareholder not participated in the DRP.

Shares will be issued pursuant to the DRP at their NAV determined on the next valuation date following the ex-dividend date (the last date of a dividend period on which an investor can purchase Shares and still be entitled to receive the dividend). There is no sales load or other charge for reinvestment. A request must be received by a Fund before the record date to be effective for that dividend or capital gain distribution. A Fund may terminate the DRP at any time upon written notice to the participants in the DRP. A Fund may amend the DRP at any time upon 30 day’s written notice to the participants. Any expenses of the DRP will be borne by each Fund.

ELIGIBLE INVESTORS

Investors who meet the qualifications set forth in this Prospectus are referred to as “Eligible Investors.” To qualify as an Eligible Investor, each investor in the Funds must certify that he, she or it is an Eligible Investor, as described below. In addition, Shares are being offered only to investors that are U.S. persons for U.S. federal income tax purposes.

Only certain categories of Eligible Investors may be able to invest in the Institutional Fund. In addition to the above, an investor in the Institutional Fund also must certify that: (i) the investor compensates the financial intermediary directly for its services (for example, an investor participating in a “wrap fee” or similar account with its intermediary); or (ii) in the case of certain institutional investors, invest directly through their financial intermediaries (e.g., pension or similar institutional investors advised by a separately-retained consultant or other intermediary). In addition, employees of the Adviser and affiliates, to the extent they are Eligible Investors, are eligible to invest in the Institutional Fund.

Each prospective investor will be required to complete signature pages of the Fund’s investment application, and must certify there, among other things, that such investor meets the Eligible Investor qualifications, and for the Institutional Fund, that such investor meets the above additional eligibility criteria, and for all investors, that they will not transfer their Shares (or any portion thereof) except in accordance with the Declaration of Trust.

An individual is an Eligible Investor if such individual: (i) has a net worth (or a joint net worth with that person’s spouse) immediately prior to the time of purchase in excess of $1 million; or (ii) an individual who has income in excess of $200,000 (or joint income with the investor’s spouse in excess of $300,000) in each of the two preceding years and has a reasonable expectation of reaching the same income level in the current year. Other eligible investor standards applicable to companies and other investors are set forth in the application. Investors who meet the qualifications set forth in this Prospectus and the application are referred to as Eligible Investors.

Existing Shareholders who request to purchase additional Shares (other than in connection with the DRP), are required to qualify as Eligible Investors and to complete additional application signature pages prior to the additional purchase.

An investment in the Funds involves risks and it is possible that an investor may lose some or all of its investment. In addition, an investment in a Fund is not liquid and investors should provide for adequate liquidity outside of their investment in a Fund to meet their foreseeable liquidity needs. Before making an investment decision, an investor and/or its adviser should (i) consider the suitability of this investment with respect to its investment objectives and personal situation and (ii) consider factors such as its personal net worth, income, age, risk tolerance, and liquidity needs. See “RISK FACTORS.” Short-term investors and investors who cannot bear the loss of some or all of their investment and/or the risks associated with a lack of liquidity should not invest in the Funds.

P URCHASING SHARES

Shares are generally available for purchase as of the first business day of each calendar month, except that Shares may be made available for purchase more or less frequently as determined by the Board in its sole discretion. The minimum initial investment in the Funds by any investor is $25,000, and the minimum additional investment in a Fund by any investor is $10,000. However, a Fund, in its sole discretion, may accept additional investments below the stated minimum additional investment. Certain Intermediaries may impose higher minimums. No investment in either Fund (or any other relationship with the Adviser) will qualify an investor for any type of special treatment.

A prospective investor is required to complete and submit the correct investor Application Agreement Signature Pages, satisfy the investor eligibility standards set forth in this Prospectus and therein and to transfer funds on or prior to the acceptance date set by the Funds and communicated to prospective investors in order to be permitted to invest in a Fund. Each Fund reserves the right to reject in whole or in part, in its sole discretion, any request to purchase Shares in the Fund at any time. Each Fund also reserves the right to suspend or terminate the availability for purchase of Shares at any time. Existing Shareholders seeking to purchase additional Shares are required to qualify as Eligible Investors and to complete additional Application Agreement Signature Pages prior to the additional purchase.

Except as otherwise permitted by the Board, initial and subsequent purchases of Shares will be payable in cash. Each initial or subsequent purchase of Shares will be payable in one installment that will be due prior to the proposed acceptance of the purchase. A prospective investor must submit a completed application and Application Agreement Signature Pages before the acceptance date set by the Funds. Each Fund reserves the right, in their sole discretion, to reject in whole or in part, any application to purchase Shares in the Fund at any time. Although a Fund may, in its sole discretion, elect to accept a purchase order prior to receipt of cleared funds, an investor will not become a Shareholder until cleared funds have been received.

Investments in the Funds are not subject to a sales load. The Adviser or its affiliates may pay a fee out of their own resources to Intermediaries. Intermediaries may charge a fee for their services in conjunction with an investment in a Fund and/or maintenance of investor accounts. Such a fee will be in addition to any fees charged or paid by a Fund and will reduce the amount of an investor’s initial or subsequent investment in the Fund. The payment of any such fees, and their impact on a particular investor’s investment returns, would not be reflected in the returns of a Fund. Investors should direct any questions regarding such fees to the relevant Intermediary.

Intermediaries also may impose terms and conditions on investor accounts and investments in the Funds that are in addition to the terms and conditions set forth in this Prospectus. Such terms and conditions are not imposed by the Funds, the Distributor or any other service provider of the Funds. Any terms and conditions imposed by an Intermediary, or operational limitations applicable to such parties, may affect or limit a Shareholder’s ability to purchase Shares, or otherwise transact business with the Funds. Investors should direct any questions regarding terms and conditions applicable to their accounts or relevant operational limitations to the applicable Intermediary.

P LAN OF DISTRIBUTION

The Distributor, an affiliate of Salient, acts as the distributor of Shares of each Fund on a reasonable best efforts basis, subject to various conditions. A Fund’s Shares may be purchased by Eligible Investors through the Distributor and through broker-dealer Selling Agents that have entered into selling agreements with the Distributor, as well as through RIAs that have entered into an arrangement with the Distributor. Executives of Salient may have a conflict of interest in recommending Shares to Salient clients; provided, however, that such executives shall be required to provide any such prospective client with notice of their relationship with Salient or an affiliate of Salient and the Funds. Neither the Distributor nor any Intermediary is obligated to buy from a Fund any of the Shares. There is no minimum aggregate amount of Shares of a Fund required to be purchased in the offering.

Each Fund’s Shares are offered and may be purchased on a monthly basis or at such other times as may be determined by the Board. The Board may discontinue a Fund’s accepting purchase orders at any time. Shares will be sold at the then-current NAV as of the date on which the purchase order is accepted. No sales load is charged by the Funds. Shares are not available in certificated form.

The servicing agent may engage one or more Sub-Servicing Agents or Sub-Administrative Servicing Agents, for the SAR Fund and the Institutional Fund, respectively, to provide some or all of the services. Compensation to any Sub-Servicing or Sub-Administrative Servicing Agent is paid by the Adviser as servicing agent. The Adviser or its affiliates also may pay a fee out of their own resources to Sub-Servicing or Sub-Administrative Servicing Agents. Shareholder services and administrative assistance may include, but shall not be limited to, the provision of personal, continuing services to Shareholders; establishment of Shareholder accounts; Shareholder balance maintenance activity, such as communicating periodically with Shareholders and providing information about the Funds, Shares, and repurchase offers for Shares; handling correspondence from Shareholders about their accounts; maintaining account records; receiving, aggregating and processing purchase and repurchase transactions; providing and keeping retirement plan records; acting as the sole Shareholder of record and nominee for Shareholders; providing beneficial owners with account statements; processing dividend payments; issuing reports to Shareholders and transaction confirmations; providing or procuring accounting services for the Funds and Shareholder accounts; providing sub-accounting services for Shares held beneficially; forwarding Shareholder communications to beneficial owners; receiving, tabulating and transmitting proxies executed by beneficial owners; general account administration activities; maintaining Fund records; coordinating regulatory and other filings by the Funds; administering Shareholder application review; administering compulsory redemptions, if any; and providing such other administration services as the Funds may request from time to time.

The Adviser or its affiliates may pay from their own resources additional compensation to Intermediaries in connection with sale of Shares or servicing of Shareholders. These arrangements may result in receipt by the Intermediaries and their personnel (who themselves may receive all or a substantial part of the relevant payments) of compensation in excess of that which otherwise would have been paid in connection with their placement of shares of a different investment fund. A prospective investor with questions regarding these arrangements may obtain additional detail by contacting the Intermediary directly. Prospective investors also should be aware that these payments could create incentives on the part of an Intermediary to view a Fund more favorably relative to investment funds not making payments of this nature or making smaller such payments. Such payments may be different for different Intermediaries.

The maximum compensation payable to all member firms (in the aggregate) of the Financial Industry Regulatory Authority participating in the Funds’ distribution will be 7.25% of a Fund’s offering proceeds.

Intermediaries may in addition charge a fee for their services in conjunction with an investment in a Fund and/or maintenance of investor accounts. Such a fee will be in addition to any fees charged or paid by a Fund and will reduce the amount of an investor’s investment in the Fund. The payment of any such fees, and their impact on a particular investor’s investment returns, would not be reflected in the returns of the Fund. Investors should direct any questions regarding such fees to the relevant Intermediary.

RE PORTS TO SHAREHOLDERS; FINANCIAL STATEMENTS

Each Fund furnishes to Shareholders as soon as practicable after the end of each taxable year information on Form 1099 as is required by law to assist the Shareholders in preparing their tax returns. The Funds prepare, and transmit to Shareholders, an unaudited semi-annual and an audited annual report within 60 days after the close of the period for which the report is being made, or as otherwise required by the 1940 Act. Shareholders may also be sent additional reports regarding the Fund’s operations each quarter, at the discretion of the Adviser.

IN QUIRIES

Inquires concerning the Funds and Shares (including procedures for purchasing Shares) should be directed to:


		Salient Advisors, L.P.
		4265 San Felipe, Suite 800
		Houston, Texas 77027
		Attention: Fund Operations
		Toll-Free 1-800-725-9456

Table of Contents

Statement of Additional Information

Page


ADDITIONAL INVESTMENT POLICIES AND PRACTICES			1
FUNDAMENTAL POLICIES			2
BOARD OF TRUSTEES, OFFICERS AND PORTFOLIO MANAGEMENT			3
INVESTMENT MANAGEMENT AGREEMENTS			12
ADMINISTRATION			13
CUSTODIAN			14
FUND AND MASTER FUND EXPENSES			15
PORTFOLIO TRNSACTIONS AND BROKERAGE			16
CONFLICTS OF INTEREST RELATING TO THE INVESTMENT MANAGERS			17
CODES OF ETHICS			18
OUTSTANDING SECURITIES AND RECORD OWNERSHIP			18
PROXY VOTING POLICIES AND PROCEDURES			19
PERFORMANCE INFORMATION			20
GENERAL HISTORY			20
ADDITIONAL TAXATION DISCUSSION			21
ADDITIONAL INFORMATION AND SUMMARY OF THE DECLARATION OF TRUST			26
FISCAL YEAR			27
INDPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			27
LEGAL COUNSEL			27
FINANCIAL STATEMENTS			28

APPENDIX A

PAST PERFORMANCE

This appendix presents past performance information (“Performance”) of (i) the Salient Absolute Return Master Fund’s (the “Master Fund”) predecessor, a private fund that utilized a multi-manager, multi-strategy investment approach from the date of the private fund’s commencement of investment operations on January 1, 2009, and (ii) Salient Absolute Return Fund (the “SAR Fund”) and Salient Absolute Return Institutional Fund (the “Institutional Fund”) thereafter. The private fund was organized and commenced operations as a Delaware limited partnership. The private fund operated as an unregistered investment vehicle from January 1, 2009 until January 31, 2010, at which time the private fund was reorganized into a newly formed master-feeder structure in which the Master Fund, together with the SAR Fund and the Institutional Fund (the “Funds), assumed the private fund’s portfolio, with the private fund investing substantially all of its assets in the Master Fund, and in anticipation of the SAR Fund and the Institutional Fund investing all of their investable assets in the Master Fund. Upon the registration of the Master Fund as an investment company, the Adviser’s personnel that had made investment decisions for the private fund began making investment decisions for the Master Fund. The Adviser employs an investment program for the Funds and the Master Fund that is materially equivalent to the investment program that was employed in managing the private fund. The private fund, during the period for which performance is reported, was the only non-proprietary, fully invested fund managed by the Adviser that had an investment program with substantially the same investment objectives, policies, and strategies as the Master Fund. The Adviser manages the Master Fund in a manner materially equivalent to the private fund. Accordingly, by the Funds investing substantially all of their investable assets in the Master Fund, the Funds participate in the substantially similar investment management that the Adviser renders to the Master Fund and previously rendered to the private fund.

The private fund Performance was adjusted to reflect the fees and estimated expenses of each of the Funds. The Performance is also compared with the performance figures for the benchmark indices appropriate to the Funds. SEE “SUMMARY OF FUND EXPENSES.”

THE PAST PERFORMANCE OF THE PRIVATE FUND IS NO GUARANTEE OF FUTURE RESULTS OF EITHER THE MASTER FUND OR THE FUNDS.

PERFORMANCE FIGURES PRIOR TO JANUARY 31, 2010 ARE NOT THE PERFORMANCE OF THE FUNDS BUT ARE THE HISTORICAL PERFORMANCE OF THE INVESTMENT PORTFOLIO OF THE PRIVATE FUND, THE ASSETS OF WHICH WERE, AS A RESULT OF THE REORGANIZATION, HELD BY THE MASTER FUND IN WHICH EACH FUND INVESTS SUBSTANTIALLY ALL OF ITS INVESTABLE ASSETS. The Performance shown is not an indication of how the Master Fund or the Funds will perform in the future. The Master Fund’s and the Funds’ performance in the future may be different from that shown due to factors, including but not limited to, differences in cash flows, fees, expenses, performance calculation methods, portfolio size, number of underlying pooled investments, all of which, if applicable, could have a negative impact on the Master Fund’s and the Funds’ performance. The private fund was not subject to investment limitations and other restrictions imposed on registered investment companies by the 1940 Act which, if applicable, could have resulted in a negative impact on the private fund’s performance.

The total return figures in the charts are intended to provide investors with information about the historical experience of the Adviser in managing the private fund. Investors should not consider this performance data as an indication of future performance. The tables should be read in conjunction with the notes thereto. The performance information in the tables has not been audited and does not comply with the standards established by the CFA Institute (formerly the Association of Investment Management and Research (AIMR)).

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

THE FOLLOWING INFORMATION MUST BE READ IN CONJUNCTION WITH THE ACCOMPANYING FOOTNOTES APPEARING BELOW.

Performance of the Predecessor Private Fund


Fund & Indices	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec		2009
SAR Fund Adjusted Return	3.99	%	1.15	%	0.49	%	-0.19	%	3.12	%	1.44	%	1.79	%	1.12	%	0.99	%	0.49	%	0.44	%	0.52	%	16.39	%
Institutional Fund Adjusted Return	4.05	%	1.21	%	0.55	%	-0.13	%	3.18	%	1.50	%	1.85	%	1.18	%	1.05	%	0.55	%	0.50	%	0.59	%	17.23	%
HFRX Equal Weighted Strategies Index	1.37	%	-.13	%	-.28	%	1.13	%	2.28	%	0.11	%	1.41	%	1.16	%	0.80	%	0.44	%	0.86	%	0.94	%	10.54	%


T Bills + 5%	0.41	%	0.44	%	0.45	%	0.45	%	0.43	%	0.43	%	0.44	%	0.44	%	0.44	%	0.43	%	0.43	%	0.42	%	5.34	%
S&P 500 TR	-8.43	%	-10.65	%	8.76	%	9.57	%	5.59	%	0.20	%	7.56	%	3.61	%	3.73	%	-1.86	%	6.00	%	1.93	%	26.46	%

Performance of the SAR Fund and the Institutional Fund


Fund & Indices	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec		2010
SAR Fund Adjusted Return	0.44	%	-0.52	%	1.45	%	0.21	%	-2.40	%	-1.31	%	0.21	%	0.35	%	0.81	%	0.76	%	-0.44	%	1.07	%	0.53	%
Institutional Fund Adjusted Return	0.51	%	-0.46	%	1.51	%	0.24	%	-2.53	%	-1.30	%	0.27	%	0.40	%	0.84	%	0.76	%	-0.40	%	1.10	%	0.88	%
HFRX Equal Weighted Strategies Index	0.14	%	0.44	%	1.42	%	0.77	%	-1.84	%	-0.99	%	1.05	%	-0.12	%	1.56	%	1.18	%	0.06	%	1.55	%	5.29	%
T Bills + 5%	0.43	%	0.42	%	0.42	%	0.43	%	0.44	%	0.43	%	0.44	%	0.43	%	0.43	%	0.44	%	0.43	%	0.44	%	5.30	%
S&P 500 TR	-3.60	%	3.10	%	6.03	%	1.58	%	-7.99	%	-5.23	%	7.01	%	-4.51	%	8.92	%	3.81	%	0.01	%	6.68	%	15.06	%


Fund & Indices	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec		2011
SAR Fund Return	0.86	%	0.98	%	-0.08	%	1.28	%	-0.50	%	-1.34	%	-0.28	%	-2.67	%	-1.78	%	0.44	%	-0.64	%	0.31	%	-3.45	%
Institutional Fund Return	0.90	%	1.02	%	-0.06	%	1.34	%	-0.46	%	-1.31	%	-0.24	%	-2.65	%	-1.73	%	0.52	%	-0.56	%	0.40	%	-2.87	%
HFRX Equal Weighted Strategies Index	0.76	%	0.94	%	-0.23	%	0.43	%	-0.98	%	-1.11	%	-0.32	%	-2.77	%	-2.77	%	0.88	%	-0.86	%	-0.23	%	-6.18	%
T Bills + 5%	0.42	%	0.43	%	0.44	%	0.43	%	0.43	%	0.43	%	0.41	%	0.44	%	0.42	%	0.42	%	0.42	%	0.42	%	5.25	%
S&P 500 TR	2.37	%	3.43	%	0.04	%	2.96	%	-1.13	%	-1.67	%	-2.03	%	-5.43	%	-7.03	%	10.93	%	-0.22	%	1.02	%	2.11	%

NOTES TO PERFORMANCE INFORMATION

The information above prior to January 31, 2010 is based on the Master Fund’s predecessor private fund’s investment performance. This information was prepared based on the following facts and assumptions:

1. The private fund commenced investment on January 1, 2009. The Master Fund commenced operations on February 1, 2010. The information is based on investment returns derived from the private fund’s unaudited financial statements as prepared by the private fund’s administrator. The total return figures in the chart are intended to provide investors with information about the historical experience of the Adviser in managing the private fund. Investors should not consider this performance data as an indication of future performance. The performance information in the table has not been audited and does not comply with the standards established by the CFA Institute (formerly the Association of Investment Management and Research (AIMR)).

2. The returns shown above prior to January 31, 2010 reflect the performance of the private fund net of fees and estimated expenses of each of the Funds. Investors in the Master Fund are subject to an annual investment management fee of 0.75%, an administration and custody fee and other expenses, all of which are incurred at the Master Fund and allocated proportionally to each feeder fund. Additionally, investors in the Funds are subject to a 1.00% servicing fee and a 0.25% administrative servicing fee for respectively, the SAR Fund and the Institutional Fund, and other fund expenses incurred at the Fund level. The performance information does not reflect the payment of any fee to a financial intermediary or any taxes payable, which, if reflected, would reduce the performance shown. The return is calculated by dividing the end-of-month account balances by the beginning-of-month account balances. Performance results are calculated on a total return basis, including all portfolio income and expenses, unrealized and realized capital gains and losses and any income, expenses and realized gains and losses. Calculations account for periodic contributions and withdrawals and are geometrically linked. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

3. The HFRX Equal Weighted Strategies Index is an investable, asset-weighted hedge fund index, the constituents of which are structured to provide stable, low volatility performance regardless of market conditions.

T-Bills + 5% provides a return target of 5% above the risk-free rate.

The Standard and Poor’s (“S&P”) 500 Total Return Index (“S&P 500 Index”) is an unmanaged, capitalization-weighted index comprising publicly traded common stocks issued by companies in various industries. The S&P 500 Index is widely recognized as the leading broad-based measurement of changes in conditions of the U.S. equities market.

Performance and other information relating to the benchmarks shown above were obtained from sources believed to be accurate, but no warranty is made as to the accuracy or completeness thereof. The Funds, S&P and HFRX make neither guarantees regarding the accuracy of, nor recommend any investment decision based on, such information.

The information in this Statement of Additional Information is incomplete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities, and we are not soliciting to buy these securities in any state where the offer or sale is not permitted.

STATEMENT OF ADDITIONAL INFORMATION

March 15, 2012

SALIENT ABSOLUTE RETURN FUND

SALIENT ABSOLUTE RETURN INSTITUTIONAL FUND

4265 San Felipe, Suite 800, Houston, Texas 77027

Registrant’s Telephone Number, including Area Code: 1-800-725-9456

This joint Statement of Additional Information (“SAI”) is not a prospectus. This SAI relates to and should be read in conjunction with the joint Prospectus of Salient Absolute Return Fund (the “SAR Fund”) and Salient Absolute Return Institutional Fund (the “Institutional Fund”) (each a “Fund” and, together, the “Funds”) dated March 15, 2012 (the “Prospectus”). Capitalized terms are as defined so in the Prospectus. A copy of the Prospectus may be obtained by contacting a Fund at the telephone number or address set forth above.

Table of Contents

Statement of Additional Information


			Page
ADDITIONAL INVESTMENT POLICIES AND PRACTICES			1
FUNDAMENTAL POLICIES			2
BOARD OF TRUSTEES, OFFICERS AND PORTFOLIO MANAGEMENT			3
INVESTMENT MANAGEMENT AGREEMENTS			12
ADMINISTRATION			13
CUSTODIAN			14
FUND AND MASTER FUND EXPENSES			15
PORTFOLIO TRANSACTIONS AND BROKERAGE			16
CONFLICTS OF INTEREST RELATING TO THE INVESTMENT MANAGERS			17
CODES OF ETHICS			18
OUTSTANDING SECURITIES AND RECORD OWNERSHIP			18
PROXY VOTING POLICIES AND PROCEDURES			19
PERFORMANCE INFORMATION			20
GENERAL HISTORY			20
ADDITIONAL TAXATION DISCUSSION			20
ADDITIONAL INFORMATION AND SUMMARY OF THE DECLARATION OF TRUST			26
FISCAL YEAR			26
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			27
LEGAL COUNSEL			27
FINANCIAL STATEMENTS			28

AD DITIONAL INVESTMENT POLICIES AND PRACTICES

The investment objective and principal investment strategies of each Fund are set forth in the Prospectus. Also set forth in the Prospectus are the principal risks associated with the investment strategies of Salient Absolute Return Master Fund, a Delaware statutory trust (the “Master Fund”).

As described in the Prospectus, each Fund seeks to achieve its objective by investing substantially all of its investable assets in the Master Fund. Certain additional investment information is set forth below. To the extent that certain defined terms are not defined herein, such terms have the same meaning as defined in Prospectus.

ADDITIONAL METHODS OF INVESTING IN INVESTMENT FUNDS

The Master Fund typically invests directly in an Investment Fund by purchasing an interest in such Investment Fund. There may be situations, however, where an Investment Fund is not open or available for direct investment by the Master Fund. On occasions where the Adviser determines that an indirect investment is the most effective or efficient means of gaining exposure to an Investment Fund, the Master Fund may invest in an Investment Fund indirectly by purchasing a structured note or entering into a swap or other contract paying a return approximately equal to the total return of an Investment Fund. In each case, a counterparty would agree to pay to the Master Fund a return determined by the return of the Investment Fund, in return for consideration paid by the Master Fund equivalent to the cost of purchasing an ownership interest in the Investment Fund. Indirect investment through a swap or similar contract in an Investment Fund carries with it the credit risk associated with the counterparty. Indirect investments will generally be subject to transaction and other fees, which will reduce the value of the Master Fund’s investment. There can be no assurance that the Master Fund’s indirect investment in an Investment Fund will have the same or similar results as a direct investment in the Investment Fund, and the Master Fund’s value, and therefore each Fund’s value, may decrease as a result of such indirect investment. When the Master Fund makes an indirect investment in an Investment Fund by investing in a structured note, swap, or other contract intended to pay a return equal to the total return of such Investment Fund, such investment by the Master Fund may be subject to additional regulations.

Applicability of Investment Company Act Limitations

For purposes of determining compliance with each Fund’s investment restrictions and certain investment limitations under the Investment Company Act of 1940, as amended (the “1940 Act”), including for example, leverage limitations, the Funds do not “look through” Investment Funds in which the Master Fund invests, except for: (i) to any extent such an investment may be allowed, Investment Funds managed or distributed by the Fund’s Adviser or Distributor, respectively, or their affiliates; and (ii) any subsidiary vehicles established to pursue the Fund’s investment program. Investment Funds are not subject to the Funds’ investment restrictions and, unless registered under the 1940 Act, are generally not subject to any investment limitations under the 1940 Act or the Code. If, in the future, the Funds obtain exemptive relief to permit the Funds or the Adviser to enter into advisory arrangements with sub-advisers without first obtaining the approval of Shareholders, the Funds and the Master Fund generally will “look through” to the underlying investments of accounts or vehicles established to facilitate the management of the Master Fund’s assets by such sub-advisers.

Futures Transactions

The Funds’, the Master Fund’s or the Investment Funds’ use of derivatives that are subject to regulation by the Commodity Futures Trading Commission (the “CFTC”) and National Futures Association (“NFA”) could cause the Funds to be deemed a commodity pool, which would require the Funds and the Master Fund to comply with certain rules which could result in the Funds being subject to additional costs and constraints. The Adviser is registered with the CFTC as a commodity pool operator and commodities trading advisor and is a member of the NFA. Although, as a general matter, in the past, each of the Funds and the Master Fund has conducted operations in compliance with CFTC Rule 4.5 to avoid regulation by the CFTC as a commodity pool, the CFTC in early 2012 amended Rule 4.5 and the Funds may need to conduct their operations in the future in conforminty with CFTC positions as applied to investment companies operated as commodity pools. Pursuant to regulations and/or published positions of the SEC, a Fund also may be required to segregate cash or liquid securities in connection with futures transactions.

F UNDAMENTAL POLICIES

Each Fund’s fundamental policies listed below may not be changed without an affirmative vote of a majority of a Fund’s voting securities, which means the lesser of: (i) 67% of the Shares present at a meeting at which holders of more than 50% of the Shares are present in person or by proxy; or (ii) more than 50% of the Shares. The Master Fund has adopted the same fundamental policies as the Funds; such policies cannot be changed without the approval of a majority (as such majority vote is defined in the preceding sentence) of the outstanding voting securities of the Master Fund. No other policy, including a Fund’s or the Master Fund’s investment objective, is a fundamental policy. Within the limits of the Funds’ and Master Fund’s fundamental policies, each Fund’s and the Master Fund’s management has reserved freedom of action. To the extent permitted by the 1940 Act, the rules and regulations thereunder, or interpretations, orders, or other guidance provided by the SEC or its staff, each of the Funds and the Master Fund may:

Borrow money or issue any senior security, to the extent permitted under the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.

Not invest 25% or more of the value of its total assets in the securities of issuers in any single industry or group of industries, except that securities issued by the U.S. Government, its agencies or instrumentalities and repurchase agreements collateralized by securities issued by the U.S. Government, its agencies or instrumentalities may be purchased without limitation, and each of the Funds may invest substantially all of its investable assets in one or more registered investment companies. For purposes of this investment restriction, Investment Funds are not considered part of any industry or group of industries. Each of the Funds and the Master Fund may invest in Investment Funds that may concentrate their assets in one or more industries. None of the Funds may invest 25% or more of the value of its total assets in Investment Funds that focus on investing in any single industry or group of related industries.

Not act as an underwriter of securities of other issuers, except to the extent that in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under the federal securities laws.

Not purchase or sell real estate except insofar as such transaction is made through a vehicle whereby the risk of loss is not greater than the investment therein, although it may purchase and sell securities secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein.

Make loans only as permitted under the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.

Not make a direct purchase or sale of physical commodities and commodity contracts, except: (a) insofar as such transaction is made through a vehicle whereby the risk of loss is not greater than the investment therein; and (b) it may: (i) enter into futures contracts and options thereon in accordance with applicable law; and (ii) purchase or sell physical commodities if acquired as a result of ownership of securities or other instruments. The Funds will not consider stock index, currency and other financial futures contracts, swaps, or hybrid instruments to be commodities for purposes of this investment policy.

As an additional policy, the Funds and/or Master Fund may pursue the investment program through one or more subsidiary vehicles. The establishment of such vehicles and the Funds’ and/or Master Fund’s utilization thereof is wholly within the discretion of the Board.

With respect to these policies and other policies and investment restrictions described in the Prospectus and this SAI (except the Funds’ and the Master Fund’s fundamental policies on borrowings and the issuance of senior securities), if a percentage restriction is adhered to at the time of an investment or transaction, a later change in

percentage resulting from a change in the values of investments or the value of a Fund’s or the Master Fund’s total assets, unless otherwise stated, will not constitute a violation of such policy or restriction. The Funds’ and the Master Fund’s investment policies and restrictions do not apply to the activities and transactions of Investment Funds in which assets of the Master Fund are invested, but will apply to investments made by a Fund or the Master Fund directly (or any account consisting solely of a Fund’s or the Master Fund’s assets). The Investment Funds may have different or contrary investment policies.

BOARD OF TRUSTEES, OFFICERS AND PORTFOLIO MANAGEMENT

Each Fund’s operations are managed under the direction and oversight of the Fund’s Board. Each Trustee serves for an indefinite term or until he or she reaches mandatory retirement, if any, as established by the Board. The Board appoints officers of each Fund who are responsible for the Funds’ day-to-day business decisions based on policies set by the Board. The officers serve at the pleasure of the Board.

The Trustees and officers of the Funds also may be directors or officers of some or all of the other registered investment companies managed by the Adviser. The table below shows, for each Trustee and executive officer, his full name, address and age, the position held with the Funds, the length of time served in that position, his principal occupation during the last five years, the number of portfolios in the Fund Complex overseen by the Trustee , and other directorships held by such Trustee during the last five years. The information in the table is current as of December 31, 2011. Unless otherwise noted, each Trustee or officer has served in his current principal occupation or (for Trustees) other directorships for the last five years. The address of each Trustee and officer is c/o Salient Absolute Return Funds, 4265 San Felipe, Suite 800, Houston, Texas 77027.

Interested Trustees


Name and Age	Position(s) with Funds (Since)	Principal Occupation(s) During the Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships During the Past 5 Years
John A. Blaisdell ⁽¹⁾ Age:51	Trustee, Principal Executive Officer (Since January 2010), Chairman of the Board (Since Otober 2011)	Member, Investment Committee of the Adviser, since 2002; Managing Director of Salient, since 2002.	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company).
Andrew B. Linbeck ⁽¹⁾ Age: 47	Trustee(Since January 2010)	Member, Investment Committee of the Adviser, since 2002; Managing Director of Salient, since 2002.	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company).
Jeremy L. Radcliffe Age: 37 ⁽¹⁾	Trustee, Secretary (Since January 2010)	Member, Investment Committee of the Adviser, since 2002; Managing Director of Salient, since 2002.	3	Houston READ Commission.

Name and Age

Position(s)

with Funds

(Since)

Principal Occupation(s)
During the Past 5 Years

Number of
Portfolios in

Fund

Complex

Overseen by
Trustee

Other Directorships During

the Past 5 Years

A. Haag Sherman

Age: 46 ⁽¹⁾

Trustee

(Since January 2010)

Member, Investment Committee of the Adviser, (until 2011); Managing Director of Salient (until 2011).

The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company); Blue Dolphin Energy Company.

⁽¹⁾

This person’s status as an “interested” Trustee arises from his affiliation with the Adviser.

Independent Trustees


Name and Age	Position(s) with Funds	Principal Occupation(s) During the Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships During the Past 5 Years
Karin B. Bonding Age: 72	Trustee (Since August 2010)	Lecturer, University of Virginia, since 1996; President of Capital Markets Institute, Inc. (fee-only financial planner and investment advisor) since 1996.	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company) since 2011; Brandes Investment Trust (investment companies) (four funds), since 2006; Credit Suisse Alternative Capital Funds (investment companies) (six funds), 2005-2010.
Jonathan P. Carroll Age: 50	Trustee (Since January 2010)	President, Lazarus Financial LLC (holding company) since 2006; private investor for past sixteen years.	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company) since 2011; Lazarus Financial LLC, Lazarus Energy Holdings LLC and affiliates, since 2006.
Dr. Bernard A. Harris Age: 55	Trustee (Since January 2010)	Chief Executive Officer and Managing Partner, Vesalius Ventures, Inc. (venture investing), since 2002; President, The Space Agency (marketing) since 1999; President, The Harris Foundation (non-profit), since 1998; clinical scientist, flight surgeon and astronaut for	3	The Endowment Funds (investment companies) (five funds); since 2009; Salient MLP & Energy Infrastructure Fund (investment company) since 2011; Monebo Technologies Inc., since 2009; The National Math and Science Initiative, and Space Agency, since 2008; Sterling Bancshares, Inc., since 2007;


Name and Age	Position(s) with Funds	Principal Occupation(s) During the Past 5 Years	Number of Portfolios in Fund Complex Overseen by Trustee	Other Directorships During the Past 5 Years
		NASA, 1986 to 1996.		Communities in Schools, since 2007; American Telemedicine Association, since 2007; BioHouston, since 2006; U.S. Physical Therapy, Inc., since 2005; Houston Technology Center, since 2004; The Harris Foundation, Inc., since 1998.
Richard C. Johnson Age: 73	Trustee (Since January 2010)	Senior Counsel (retired), Baker Botts LLP (law firm), since 2002; Managing Partner, Baker Botts, 1998 to 2002; practiced law at Baker Botts, 1966 to 2002 (1972 to 2002 as a partner).	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company) since 2011.
G. Edward Powell Age: 75	Trustee, Lead Independent Trustee (Since January 2010)	Principal, Mills & Stowell (private equity), since 2002; Principal, Innovation Growth Partners (consulting), since 2002; Consultant to emerging and middle market businesses, 1994 to 2002; Managing Partner, Price Waterhouse & Co. (Houston office), 1982 to 1994.	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company) since 2011; Energy Services International, Inc., since 2004; Therapy Track, LLC, since 2009.
Scott E. Schwinger Age: 46	Trustee (Since January 2010)	President, The McNair Group (management), since 2006; Senior Vice President and Chief Financial Officer, the Houston Texans (professional football team) (1999).	3	The Endowment Funds (investment companies) (five funds); Salient MLP & Energy Infrastructure Fund (investment company) since 2011; The Make-A-Wish Foundation, since 2008; YES Prep Public Schools, since 2001.

Officers of the Funds Who Are Not Trustees


Name and Age	Position(s) Held with Funds (Since)	Principal Occupation(s) During the Past 5 Years
Paul A Bachtold Age: 38	Chief Compliance Officer (“CCO”) (Since July 2010)	Consultant, Chicago Investment Group (compliance consulting), 2009-2010; US Compliance Manager, Barclays Global Investors, 2005-2008; Consultant, Wells Fargo Bank, 2000-2005.
John E. Price Age: 44	Treasurer; Principal Financial Officer (Since January 2010)	Director and Chief Financial Officer, the Adviser, since 2003; Partner and Director, Salient, since 2003.

Leadership Structure and Board of Trustees

The Board monitors the level and quality of services, including commitments of service providers and the performance of the Adviser. In addition, the Board oversees that processes are in place to assure the Funds’ compliance with applicable rules, regulations, and investment policies and addresses possible conflicts of interest. The Board evaluates the services received under the contracts with service providers by, among other things, receiving reports covering investment performance, shareholder services, marketing, and the Adviser’s profitability in order to determine whether to continue existing contracts or negotiate new contracts.

Mr. Blaisdell, the Chairman of the Board, is an “interested person” (as defined in the 1940 Act) of the Funds. Mr. Powell serves as each Board’s Lead Independent Trustee. As Chairman, Mr. Blaisdell presides at meetings of the Trustees and, as necessary, the Funds’ shareholders. Based on the specific characteristics of the Funds, including their size and focus on alternative investments, the Board has determined it appropriate that Mr. Blaisdell fulfill the role of Chairman. Prior to each Board meeting, Mr. Blaisdell discusses and formulates with Mr. Powell, the Lead Independent Trustee, an agenda to be addressed at the meeting, as well as conferring with other representatives of management and with counsel to the Independent Trustees.

As registered investment companies, the Funds are subject to a number of investment risks (described in this registration statement), as well as financial and compliance risks. These risks are mitigated by written policies approved and overseen by the Board. The Adviser conducts the Funds’ operations and the Board administers an oversight function. The Board oversees the Adviser’s operations and the Funds’ risk management with the assistance of the Board’s Audit, Compliance and Valuation Committees. Each of these Committees is discussed below under “Committees.” At each Board meeting, the Board considers reports regarding the Funds’ operations and oversight thereof, including oversight of risks, as well as reports from the CCO, who also routinely meets privately with the Independent Trustees. Board Committees receive reports, and meetings may entail further discussion of issues concerning oversight of the Funds’ risk management. The Board also may discuss particular risks that are not addressed in the Committee process. Committee Chairs may confer with the Chairman of the Board to discuss various issues discussed in the Committee that may require further discussion by the full Board or separate reports by the Adviser. In addition, the Chairman of the Board confers with the CCO, the Trustees, the Adviser and counsel, including counsel to the Independent Trustees, to discuss risk management issues.

Trustee Qualifications

This section discusses, for each Trustee, the experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a Trustee. The information in this section should not be understood to mean that any of the Trustees is an “expert” within the meaning of the federal securities laws or for any other purpose under state or federal law.

John A. Blaisdell — Through his experience as a senior executive of financial organizations, Mr. Blaisdell contributes his experience in the investment management industry to the Board. The Board also benefits from his experience as a member of the board of other funds.

Karin B. Bonding, CFA — Through her role as a teacher and her insights on financial markets, Ms. Bonding contributes her experience in marketing to the Board. The Board also benefits from her experience as a member of the board of other funds.

Jonathan P. Carroll — Through his experience as the executive of business enterprises, Mr. Carroll contributes experience in overseeing financial and investment organizations to the Board. The Board also benefits from his experience as a member of the board of other funds.

Dr. Bernard A. Harris — Through his experience as a senior officer of and board member of financial and other organizations, Dr. Harris contributes his management and oversight experience to the Board. The Board also benefits from his experience as a member of the board of other funds and operating companies.

Richard C. Johnson — Through his experience as an attorney, Mr. Johnson contributes his insight and management experience to the Board. The Board also benefits from his experience as a member of the board of other funds.

Andrew B. Linbeck — Through his experience as a senior executive of financial organizations, Mr. Linbeck contributes his experience in the investment management industry to the Board. The Board also benefits from his experience as a member of the board of other funds.

G. Edward Powell — Through his experience as a senior executive and accountant, Mr. Powell contributes his accounting and management experience to the Board. The Board also benefits from his experience as a member of the board of other funds and operating companies.

Jeremy L. Radcliffe — Through his experience as a senior executive of financial organizations, Mr. Radcliffe contributes his experience in the investment industry to the Board.

Scott E. Schwinger — Through his experience as a senior executive and financial officer of financial and business enterprises, Mr. Schwinger contributes his financial and management experience to the Board. The Board also benefits from his experience as a member of the board of other funds and operating companies.

A. Haag Sherman — Through his experience as a senior executive of financial organizations, Mr. Sherman contributes his experience in the investment management industry to the Board. The Board also benefits from his experience as a member of the board of other funds.

Committees

Audit Committee

The Board has formed an Audit Committee that is responsible for meeting with the Funds’ independent registered public accounting firm, the Administrator, and the Funds’ officers to review financial statements, accounting reports, and accounting issues. The Audit Committee reports significant issues to the Board and makes recommendations regarding the selection, retention, or termination of the Fund’s independent registered public accounting firm, evaluates its independence, reviews its fees, and pre-approves any non-audit services rendered to the Funds or the Adviser. Messrs. Carroll, Harris, Powell and Schwinger, each an Independent Trustee, constitute the Audit Committee. During the period ended December 31, 2011, the Audit Committee met four times.

Nominating Committee

The Board has formed a Nominating Committee that recommends nominations for Independent Trustee membership on the Board. It evaluates candidates’ qualifications for Board membership and, with respect to nominees for positions as Independent Trustee, as well as their independence from the Adviser and other principal

service providers. The Committee meets as necessary to identify and evaluate nominees for Trustee and to make its recommendations to the Board. The Nominating Committee is composed of all the Independent Trustees.

While the Nominating Committee is solely responsible for the selection and nomination of potential Independent Trustee candidates to serve on the Board, the Nominating Committee may consider and evaluate nominations properly submitted by Shareholders of the Funds. Nominations proposed by Shareholders will be properly submitted for consideration by the Committee only if a Shareholder submits a nomination in accordance with the procedures set forth in the charter of the Nominating Committee. It is in the Nominating Committee’s sole discretion whether to seek corrections of a deficient submission or to exclude a nominee from consideration. During the period ended December 31, 2011, the Nominating Committee did not meet.

Compliance Committee

The Board has formed a Compliance Committee that is responsible for meeting with the Funds’ CCO to review matters relating to compliance with the federal securities laws. The Committee meets at least annually with the CCO without the presence of management to discuss issues arising, among other things, under the Funds’ compliance program and operations. Messrs. Carroll, Johnson and Powell, each an Independent Trustee, constitute the Compliance Committee. During the period ended December 31, 2011, the Compliance Committee met four times.

Valuation Committee

The Board has formed a Valuation Committee that is responsible for overseeing the Funds’ valuation policy, making recommendations to the Board on valuation-related matters, and overseeing implementation by the Adviser’s Valuation Committee (as defined below) of the Fund’s valuation policy and procedures. Ms. Bonding and Messrs. Harris, Johnson and Schwinger constitute the Board Valuation Committee. During the period ended December 31, 2011, the Board Valuation Committee met four times.

In addition, the Board has authorized the establishment of the Adviser’s Valuation Committee consisting of Messrs. Blaisdell, Linbeck, Partridge, and Radcliffe, and additional officers of the Funds and representatives of the Adviser to serve as the Funds’ Adviser’s Valuation Committee. The Adviser’s Valuation Committee is not a Board committee. The Adviser’s Valuation Committee’s function, subject to the oversight of the Board Valuation Committee and the Board, is generally to review the Investment Funds’ valuation methodologies, valuation determinations, and any information provided to the Adviser’s Valuation Committee by the Adviser or the Administrator. The Adviser’s Valuation Committee has been assigned to act in accordance with the Funds’ valuation procedures as approved by the Board and to report to the Board and the Board Valuation Committee. Changes in its membership are subject to Board notification. The Board Valuation Committee members are encouraged to attend Adviser Valuation Committee meetings and the Board Valuation Committee reviews matters arising from the Adviser’s Valuation Committee’s considerations. During the period ended December 31, 2011, the Adviser’s Valuation Committee met twelve times.

Other Committee Information

In addition, the Adviser has established an Investment Committee, as discussed in the Prospectus, which is not a Board committee but to which the Board has authorized the Adviser to delegate certain activities. The Investment Committee considers investment management policies and strategies, investment performance, risk management techniques, and securities trading practices and reports areas of concern to the Board.

Each of the above committees will hold meetings in the current fiscal year. All actions taken by a committee of the Board are recorded and reported to the full Board at its next meeting following such actions.

Trustees’ Holdings

The dollar range of equity securities of the Funds owned by each Trustee is set forth below ⁽¹⁾


Name of Trustee	Dollar Range of Equity Securities in the Funds as of December 31, 2011 ⁽¹⁾⁽²⁾	Aggregate Dollar Range of Equity Securities in all Registered Investment Companies Overseen by Trustee in the Fund Complex as of December 31, 2011 ⁽¹⁾⁽²⁾
Independent Trustees
Karin B. Bonding	None	None
Jonathan P. Carroll	None	None
Dr. Bernard A. Harris	None	None
Richard C. Johnson	None	None
G. Edward Powell	None	None
Scott E. Schwinger	None	None
Trustees who are “Interested Persons” ⁽²⁾⁽³⁾
John A. Blaisdell	Over $100,000	Over $100,000
Andrew B. Linbeck	Over $100,000	Over $100,000
Jeremy L. Radcliffe	Over $100,000	Over $100,000
A. Haag Sherman	Over $100,000	Over $100,000

⁽¹⁾

The dollar ranges of equity securities reflected in the table above are as follows: None; $1 to $10,000; $10,001 to $50,000; $50,001 to $100,000; or over $100,000.

⁽²⁾

Includes the portion of investments made by the Salient Group beneficially owned and personal investments.

⁽³ ⁾

Includes indirect beneficial ownership in the Master Fund through other feeder funds that invest in the Master Fund.

The total of equity securities of the Funds and the Master Fund held directly and indirectly by all Trustees, Officers and members of any advisory board is approximately $4.5 million as of December 31, 2011.

Independent Trustee Ownership of Securities

As of February 15, 2012, the Independent Trustees (and their respective immediate family members) did not beneficially own securities of the Adviser or Distributor, or an entity controlling, controlled by or under common control with the Adviser or Distributor (not including registered investment companies).

As a group, the Trustees and Officers own between 4% and 5% of the outstanding Shares of the Master Fund or of either Fund.

Compensation for Trustees

The Independent Trustees are paid annual compensation for service on the Board and its Committees in an annual amount of $20,000 each. Such compensation encompasses attendance and participation at Board and Committee meetings, including telephonic meetings, if any. There are currently six Independent Trustees. In the interest of recruiting and retaining Independent Trustees of high quality, the Board intends to periodically review such compensation and may modify it as the Board deems appropriate. In addition, the Funds reimburse each Independent Trustee for travel and other expenses incurred in connection with attendance at such meetings. Other Officers (apart from the CCO) and Independent Trustees of the Fund receive no compensation in such role.

Other Accounts Managed by the Investment Committee Members

Certain Investment Committee Members, who are primarily responsible for the management of the Fund and the Master Fund, also manage other registered investment companies, other pooled investment vehicles and other accounts, as indicated below. The following tables identify, as of December 31, 2011: (i) the number of registered investment companies, other pooled investment vehicles and other accounts managed by the Investment Committee Members and the total assets of such companies, vehicles and accounts; and (ii) the number and total assets of such companies, vehicles and accounts with respect to which the advisory fee is based on performance.

Investment

Committee

Member

Registered Investment
Companies Managed by
Investment Committee
Member

Pooled Investment Vehicles
Managed by Investment
Committee Member

Other Accounts Managed by
Investment Committee
Member

Number

Total Assets

Number

Total Assets

Number

Total Assets

John A. Blaisdell

$4.58 billion

$618 million

> 1,420

>$10.2 billion (1)

Andrew B. Linbeck

$4.58 billion

$618 million

> 1,420

>$10.2 billion (1)

Lee G. Partridge

$282 million

$276 million

> 1,420

>$10.2 billion (1)

Jeremy L. Radcliffe

$4.58 billion

$618 million

> 1,420

>$10.2 billion (1)

(1)

Messrs. Blaisdell, Linbeck, Partridge and Radcliffe serve as principal executive officers of Salient Partners, which owns Salient Trust Co., LTA, a trust company chartered under the laws of the State of Texas. In such capacities, Messrs. Blaisdell, Linbeck, Partridge and Radcliffe have investment responsibilities on the clients of such entities. However, the number of accounts and asset figures cited in the table relate to the accounts and assets over which Messrs. Blaisdell, Linbeck, Partridge and Radcliffe have discretion in their capacities as principal executive officers of such entities.


Investment Committee Member	Registered Investment Companies Managed by Investment Committee Member		Pooled Investment Vehicles Managed by Investment Committee Member		Other Accounts Managed by Investment Committee Member
	Number with Performance- Based Fees	Total Assets with Performance Based Fees	Number with Performance- Based Fees	Total Assets with Performance Based Fees	Number with Performance Based Fees	Total Assets with Performance Based Fees
John A. Blaisdell	0	0	1	$152 million	3	$8.3 billion
Andrew B. Linbeck	0	0	1	$152 million	3	$8.3 billion
Lee G. Partridge	0	0	1	$152 million	3	$8.3 billion
Jeremy L. Radcliffe	0	0	1	$152 million	3	$8.3 billion

Conflicts of Interest of the Adviser

From time to time, potential conflicts of interest may arise between an Investment Committee Member’s management of the investments of the Funds, on the one hand, and the management of other registered investment companies, pooled investment vehicles and other accounts (collectively, “other accounts”), on the other. Other accounts might have similar investment objectives or strategies as the Funds, track the same index that the Funds track or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Funds. Other accounts might also have different investment objectives or strategies than the Funds.

Knowledge and Timing of Fund Trades. A potential conflict of interest may arise as a result of the Investment Committee Member’s day-to-day management of the Funds. Because of their positions with the Funds, the Investment Committee Members know the size, timing and possible market impact of the Funds’ trades. It is theoretically possible that the Investment Committee Members could use this information to the advantage of other accounts they manage and to the possible detriment of the Funds.

Investment Opportunities. A potential conflict of interest may arise as a result of the Investment Committee Member’s management of a number of accounts. Often, an investment opportunity may be suitable for both the Funds and other accounts managed by the Investment Committee Member, but may not be available in sufficient quantities for both the Funds and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the Funds and other accounts. The Adviser has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time. However, there is a risk that a conflict of interest may occur when allocating investment opportunities and that the conflict may not be resolved in favor of the Funds. See “CONFLICTS OF INTEREST” in the Prospectus.

Performance Fees. An Investment Committee Member may advise certain accounts with respect to which advisory fees are based entirely or partially on performance. Performance fee arrangements may create a conflict of interest for the Investment Committee Member in that the Member may have an incentive to allocate the investment opportunities that he believes might be the most profitable to such other accounts instead of allocating them to the Funds.

Compensation to Investment Committee Members

Messrs. Blaisdell, Linbeck, Partridge and Radcliffe indirectly own equity interests in the Adviser and the Distributor. As it relates to the Funds and the Fund Complex, Messrs. Blaisdell, Linbeck, Partridge and Radcliffe receive all of their compensation based on the size of the Funds within the Fund Complex and the management and advisory fees charged thereon. Accordingly, they believe that a significant driver of their compensation is the performance of the Funds and the Fund Complex, which has a significant bearing on the ability to raise additional assets. Messrs. Blaisdell, Linbeck, Partridge and Radcliffe also own, indirectly, equity in the general partner of and adviser to other fund complexes and separately managed accounts, including complexes and accounts with incentive allocation provisions. As a result, these individuals are compensated based on the size of the fund for the Fund Complex and for the other fund complex and separately managed accounts including those with incentive allocations, compensation is also based directly on performance. Mr. Partridge is also entitled to conditional compensation based on the size of the assets under management for certain funds and separately managed accounts. In addition, Messrs. Blaisdell, Linbeck, Partridge and Radcliffe are partners and principal executive officers of Salient and related affiliates and subsidiaries (collectively, the “Salient Group”), which pays them a base salary and is obligated to make certain distributions to them, as well as the other partners, on an annual basis. These individuals, among others, are responsible for the investment processes and management of the Salient Group. Messrs. Blaisdell, Linbeck, Partridge and Radcliffe believe that to the extent that they are successful in their investment endeavors, the greater the number of assets over time and the more significant their compensation will be from the Salient Group.

Securities Ownership of Investment Committee Members

The table below shows the dollar range of the Shares of the Funds beneficially owned as of December 31, 2011 by each Investment Committee Member.


Investment Committee Member	Master Fund ⁽¹⁾	SAR Fund ⁽¹⁾	Institutional Fund ⁽¹⁾
John A. Blaisdell	$10,001 to $50,000 ⁽² ⁾	$10,001 to $50,000	$250,001 to $500,000
Andrew B. Linbeck	$10,001 to $50,000 ⁽² ⁾	$10,001 to $50,000	Over $1,000,000
Lee G. Partridge	$1 to $10,000 ⁽² ⁾	$1 to $10,000	$250,001 to $500,000
Jeremy L. Radcliffe	$1 to $10,000 ⁽² ⁾	$1 to $10,000	Over $1,000,000

⁽¹⁾

Includes the portion of investments made by the Salient Group beneficially owned and personal investments

⁽² ⁾

Includes indirect beneficial ownership through an unregistered feeder fund that invests in the Master Fund.

Other Accounts Managed by the Portfolio Manager

The following tables identify, as of December 31, 2011: (i) the number of registered investment companies, other pooled investment vehicles and other accounts managed by the Portfolio Manager and the total assets of such

companies, vehicles and accounts; and (ii) the number and total assets of such companies, vehicles and accounts with respect to which the advisory fee is based on performance.

Portfolio

Manager

Registered Investment
Companies Managed by

Portfolio Manager

Pooled Investment Vehicles
Managed by Portfolio

Manager

Other Accounts Managed by
Portfolio Manager

Number

Total Assets

Number

Total Assets

Number

Total Assets

William K. Enszer

$125 million

N/A

Portfolio

Manager

Registered Investment

Companies Managed by

Portfolio Manager

Pooled Investment Vehicles Managed by
Portfolio Manager

Other Accounts Managed by
Portfolio Manager

Number with Performance

-Based Fees

Total Assets with Performance Based Fees

Number with Performance- Based Fees

Total Assets with Performance Based Fees

Number

with Performance Based

Fees

Total Assets with Performance Based Fees

William K. Enszer

N/A

Portfolio Manager Compensation

Mr. William K. Enszer has significant day-to-day duties in the management of the portfolio of the Master Fund, including providing analysis and recommendations on asset allocation and Investment Fund selection to the Investment Committee.

Securities Ownership of Portfolio Manager

As of December 31, 2011, Mr. Enszer did not own any Shares of the Funds.

INVE STMENT MANAGEMENT AGREEMENTS

Under separate Investment Management Agreements, subject to the general supervision of the Board and in accordance with the investment objective, policies, and restrictions of the Funds and the Master Fund, the Adviser provides each of the Funds and the Master Fund with ongoing investment guidance, policy direction and monitoring of the Fund and the Master Fund.

Each Investment Management Agreement provides that the Adviser (or its delegate) will, subject to the Board’s oversight, provide investment advice consistent with the Fund’s investment objective and policies; buy, retain and sell the Fund’s portfolio investments; select brokers or dealers to execute transactions; prepare and make available to the Fund all necessary research and statistical data; maintain or cause to be maintained all required books, records, and reports, and other information not maintained or furnished by another service provider of the Fund; and all other services required in connection with management of the Fund. The Adviser may, subject to Board approval and oversight, enter into a sub-advisory agreement (a “Sub-Advisory Agreement”), pursuant to which a sub-adviser (“Sub-Adviser”) would provide day-to-day investment management services with respect to such portions of the Fund’s assets as the Adviser in its discretion may determine from time to time. Provided that the Funds obtain the appropriate exemptive relief from the SEC, a Fund, the Master Fund or the Adviser may enter into such sub-advisory arrangements with Sub-Advisers without first obtaining the approval of Shareholders.

Each Investment Management Agreement became effective as of February 1, 2010 with respect to each of the Funds. After an initial two-year term, each Investment Management Agreement continues in effect from year to

year thereafter, but only so long as the continuance of such agreement is specifically approved at least annually by the affirmative vote of: (i) a majority of the Trustees who are not parties to the Investment Management Agreement or interested persons of any party to the Investment Management Agreement, or of any entity regularly furnishing investment advisory services with respect to the Funds or the Master Fund pursuant to an agreement with any party to the Investment Management Agreement, cast in person at a meeting called for the purpose of voting on such approval; and (ii) a majority of the Funds’ Trustees or the holders of a majority of the outstanding voting securities of the Funds.

A discussion of the factors considered by the Trustees when last approving the Investment Management Agreements is contained in the semi-annual shareholder reports of the Funds and the Master Fund covering the period ending June 30, 2012.

Each Investment Management Agreement is terminable at any time without penalty upon 60 days’ written notice by the Board, by vote of holders of a majority of the outstanding voting securities of a Fund, or by the Adviser. Each Investment Management Agreement will terminate automatically with respect to a Fund in the event of its assignment, as defined in the 1940 Act, provided that an assignment to a corporate successor to all or substantially all of the Adviser’s business or to a wholly owned subsidiary of such corporate successor which does not result in a change of actual control or management of the Adviser’s business will not be deemed to be an assignment for the purposes of the Investment Management Agreement. A Sub-Advisory Agreement would terminate upon the termination of the Investment Management Agreement.

Certain affiliates of the Adviser or a Sub-Adviser may provide services to the Investment Funds in compliance with applicable law. SEE “CONFLICTS OF INTEREST” in the Prospectus.

Each Investment Management Agreement provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations to the Fund, the Adviser and any partner, director, officer or employee of the Adviser, or any of their affiliates, executors, heirs, assigns, successors or other legal representatives, will not be liable to the Fund for any error of judgment, for any mistake of law or for any act or omission by the person in connection with the performance of services to the Funds. Each Investment Management Agreement also provides for indemnification by a Fund, to the fullest extent permitted by law, of the Adviser, or any partner, director, officer or employee of the Adviser, and any of their affiliates, executors, heirs, assigns, successors or other legal representatives, against any liability or expense to which the person may be liable that arises in connection with the performance of services to a Fund, so long as the liability or expense is not incurred by reason of the person’s willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations to the Fund.

In 2010 and 2011, the Master Fund paid $649,149 and $993,998, respectively, in investment management fees to the Adviser. In 2010 and 2011, the SAR Fund indirectly paid (through its ownership in the Master Fund) $14,202 and $79,987, respectively, in investment management fees to the Adviser. In 2010 and 2011, the Institutional Fund indirectly paid (through its ownership in the Master Fund) $137,391 and $445,801, respectively, in investment management fees to the Adviser.

ADM INISTRATION

Administration Fee . Citi Fund Services Ohio, Inc. serves as the Independent Administrator of the Funds and the Master Fund and has the responsibility for providing administrative services, and for assisting the Funds and the Master Fund with their operational needs, pursuant to the Administration Agreement. In consideration for administrative, accounting, and recordkeeping services, each Fund will pay the Independent Administrator a monthly fee (“Administration Fee’) based on the month-end aggregate net asset value of the Master Fund and its feeder funds (the “Funds”) (net of any Fund’s net asset value invested in another Fund) (the “Funds’ NAV”). Each Fund will pay its pro rata share of total Administration Fees based on its proportionate net asset value to the aggregate net asset value of all Funds. The Funds are charged on an annual basis, 0.06% on the Funds’ NAV of up to $2 billion, 0.05% on the Funds’ NAV between the amounts of $2 billion and $5 billion, 0.02% on the Funds’ NAV between the amounts of $5 billion and $15 billion and 0.0125% on the Funds’ NAV over $15 billion. The Independent Administrator may also provide the SAR Fund with legal, compliance, transfer agency, and other

investor related services at an additional cost. In addition, the Independent Administrator is entitled to reimbursement of certain expenses. Per the Administration Agreement, the Funds will be charged Administration Fees beginning January 1, 2012, but were not charged Administration Fees prior to January 1, 2012.

Under the Administration Agreement, the Independent Administrator is responsible for, among other things: (1) maintaining a list of Shareholders and generally performing all actions related to the issuance and repurchase of Shares, if any, including with regard to reinvestment of dividends under the DRP; (2) providing the Funds and the Master Fund with certain administrative, clerical, recordkeeping and bookkeeping services; (3) assist in supervising the entities retained by the Funds and the Master Fund, if any, to provide transfer agency services, services related to the payment of distributions, and accounting services; (4) computing the NAV of the Funds and the Master Fund; (5) preparing accounting information, or overseeing the preparation of, monthly, quarterly, semi-annual and annual financial statements of the Funds and the Master Fund, quarterly reports of the operations of the Funds and the Master Fund and maintaining information to facilitate the preparation of annual tax returns; (6) supervising regulatory compliance matters and assisting in the preparation of certain regulatory filings; and (7) performing additional services, as agreed upon, in connection with the administration of the Funds and the Master Fund. Subject to approval of the Board, the Independent Administrator may from time to time delegate its responsibilities under the Administration Agreement to one or more parties selected by the Independent Administrator.

Servicing Fee and Administrative Servicing Fee . The Adviser also acts as servicing agent to the Funds (“Servicing Agent”), whereby it provides or procures certain Shareholder servicing and administrative assistance. Investor servicing entails the provision of personal, continuing services to investors in the Funds and administrative assistance. The Servicing Agent may, in turn, retain certain parties to act as sub-servicing and sub-administrative servicing agents to assist with investor servicing and administration. The Funds compensate the Servicing Agent for providing or procuring these services and, when the Servicing Agent employs sub-servicing and sub-administrative servicing agents, the Servicing Agent compensates such sub- agents out of its own resources.

In consideration for investor services and administrative assistance, each Fund pays the Adviser, as Servicing Agent, a quarterly servicing fee (SAR Fund “Servicing Fee,” and Institutional Fund “Administrative Servicing Fee”) based on the average month-end net assets of the Fund over the course of the applicable quarter. For the SAR Fund, the Servicing Fee equals 1.00% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. For the Institutional Fund, the Administrative Servicing Fee equals 0.25% (on an annualized basis) of the Fund’s average month-end net assets, payable quarterly in arrears. In 2010 and 2011, the SAR Fund paid $18,668 and $106,914, respectively, in Servicing Fees to the Adviser. In 2010 and 2011, the Institutional Fund paid $46,109 and $148,548, respectively, in Administrative Servicing Fees to the Adviser.

CUST ODIAN

JPMorgan Chase Bank, National Association (the “Custodian”) serves as custodian for the Master Fund. Pursuant to a custodian agreement, the Custodian maintains a separate account in the name of the Master Fund, holds and transfers portfolio securities on account of the Master Fund, accepts receipts and makes disbursements of money on behalf of the Master Fund, collects and receives all income and other payments and distributions on account of the Master Fund’s securities. The Master Fund may also enter into principal transactions with one or more affiliates of the Custodian.

Pursuant to the Custodian Agreement, the Master Fund has agreed to adhere to the following provisions:

No Due Diligence on Other Service Providers by Custodian . The selection of custodians, banks, counterparties, auditors, lawyers and other service providers retained on behalf of or providing services to the Funds and the determination as to their suitability remains the responsibility of the Funds. The Custodian has no duty or responsibility to review the performance of these service providers, or to perform any due diligence thereon. The Custodian accepts no liability in the event that the Funds or any Shareholder incurs any loss or liability arising as a result of the appointment or retention by the Funds of any other service provider.

Holdings in Investment Funds . In performing its contractual duties the Custodian will rely on statements of holdings issued by or on behalf of Investment Funds or managed accounts (“Investment Vehicles”) in which the Master Fund invests as evidence of the holdings in the underlying Investment Vehicles. The Master Fund has accepted and acknowledged that the Custodian has no duty or responsibility to investigate these statements or to verify the content thereof and that the Custodian will not make independent judgments on the contents of such statements. The Master Fund may invest in Investment Vehicles which have not appointed third party service providers or service providers which are independent of the Investment Managers of such Investment Vehicles. Statements of holdings, and valuations of such holdings, may therefore not be issued by independent parties. The Custodian accepts no liability for any loss or liability incurred by the Funds as a result of investment in such Investment Vehicles. The Funds and Manager have agreed that in the event the Custodian suffers loss or liability as a result of reliance on statements issued by or on behalf of Investment Vehicles they will jointly and severally indemnify the Custodian against all such loss or liability.

No Investment in Affiliated Funds . The Master Fund will not invest in or be otherwise exposed to the investment performance of Investment Funds which are managed and administered by the Adviser or an affiliated party.

No Due Diligence on Investment Vehicles by Custodian . The selection of underlying Investment Vehicles, and the determination as to their suitability as an investment for the Funds is the responsibility of the Adviser. The Custodian has no duty or responsibility to review investment management decisions made by the Adviser, or to perform any due diligence on Investment Vehicles, or their internal control environment. The Custodian accepts no liability in the event that the Funds or any Shareholder incurs any loss or liability arising as a result of investment by the Master Fund in any Investment Vehicle.

FUND AND MAS TER FUND EXPENSES

The Funds and the Master Fund pay all of their expenses, other than those that the Adviser or an affiliate of the Adviser assumes, if any. The expenses of the Funds and the Master Fund include, but are not limited to, all fees and expenses related to portfolio transactions and positions made in Investment Funds, and enforcing rights in respect of such investments; the Investment Management Fee, the Servicing Fee and Administrative Servicing Fee for the respective Funds; brokerage commissions; interest and fees on any borrowings; Trustee’s fees; directors’ and officers’ insurance; professional fees (including, without limitation, expenses of consultants, experts and specialists); research expenses; fees and expenses of outside legal counsel (including fees and expenses associated with the review of documentation for prospective investments by the Master Fund), including foreign legal counsel; accounting, auditing and tax preparation expenses; fees and expenses in connection with repurchase offers and any repurchases or redemptions of Shares; taxes and governmental fees (including tax preparation fees); fees and expenses of any custodian, subcustodian, transfer agent, and registrar, and any other agent of the Funds or the Master Fund; all costs and charges for equipment or services used in communicating information regarding the Funds’ or the Master Fund’s transactions among the Adviser and any custodian or other agent engaged by the Master Fund; bank services fees; expenses of preparing, printing, and distributing copies of the Prospectus, and any other sales material (and any supplements or amendments thereto), reports, notices, other communications to Shareholders, and proxy materials; expenses of preparing, printing, and filing reports and other documents with government agencies; expenses of Shareholder meetings; expenses of corporate data processing and related services; Shareholder recordkeeping and Shareholder account services, fees, and disbursements; expenses relating to investor and public relations; fees and expenses of the Independent Trustees; insurance premiums; and extraordinary expenses such as litigation expenses. The Master Fund may need to sell portfolio securities to pay fees and expenses, which could affect investment returns to Shareholders of the Funds.

The Adviser bears all of its expenses and its own costs incurred in providing investment advisory services to the Funds and the Master Fund, including travel and other expenses related to the selection and monitoring of Investment Funds. In addition, the Adviser is responsible for the payment of the compensation and expenses of those Trustees and Officers of the Funds and the Master Fund affiliated with the Adviser, and making available, without expense to the Funds, the services of such individuals, subject to their individual consent to serve and to any limitations imposed by law.

Investments in the Funds are subject to no sales load. The Adviser or its affiliates may pay a fee out of their own resources to Intermediaries. Intermediaries may charge a fee for their services in conjunction with an investment in a Fund and/or maintenance of investor accounts. Such a fee is not a sales charge imposed by or paid by the Funds. Investors should direct any questions regarding such fees to the relevant Intermediary.

Organizational Expenses and Offering Costs . Each Fund’s organizational expenses that were incurred by the Fund were expensed at inception. Any offering costs were amortized over the Funds’ first twelve (12) months of operations, subject to the Funds’ expense limitation agreement. Each of the Master Fund’s, SAR Fund’s and Institutional Fund’s direct portion of offering expenses was approximately $162,628, $189,078 and $199,240 respectively.

The Investment Funds will incur various fees and expenses in connection with their operations. In addition, the Master Fund will pay management and incentive or performance-based fees to the Investment Funds, which effectively reduce the investment returns of the Investment Funds and thus the returns of the Master Fund and the Funds. These expenses and fees are in addition to those incurred by the Master Fund directly.

The Funds’ fees and expenses will decrease the net profits or increase the net losses of a Fund that are reflected in the NAV of Shares.

PORTFOLIO TRANSACT IONS AND BROKERAGE

The Funds

It is the policy of the Funds to obtain the best execution of their direct investment portfolio transactions, if any, taking into account certain factors as set forth below. In most instances, the Master Fund will purchase securities directly from an Investment Fund, and such purchases may be, but are generally not, subject to transaction expenses. Nevertheless, the Funds anticipate that some of their portfolio transactions may be subject to expenses.

The Funds contemplates that, consistent with the policy of obtaining the best net result, any brokerage transactions of the Master Fund may be conducted through affiliates of the Adviser. The Board has adopted procedures in conformity with Section 17(e) of the 1940 Act to ensure that all brokerage commissions paid to affiliates are fair and reasonable. As discussed below, the Investment Funds may also conduct brokerage transactions through affiliates of the Adviser. Transactions for the Funds will not be effected on a principal basis with the Adviser, the Distributor, any of their affiliates, or other affiliates of the Funds (unless permitted under the 1940 Act). However, such entities may effect brokerage transactions for the Funds. These transactions would be effected in accordance with procedures adopted by the Funds pursuant to Section 17(e) of the 1940 Act and rules and regulations promulgated thereunder. Among other things, Section 17(e) and those procedures provide that, when acting as broker for the Funds in connection with the sale of securities to or by the Master Fund, the Adviser, the Distributor, or their affiliates may receive compensation not exceeding: (i) the usual and customary broker’s commission for transactions effected on a national securities exchange; (ii) 2% of the sales price for secondary distributions of securities; and (iii) 1% of the sales price for other purchases or sales. Brokerage transactions effected by the Investment Funds with the Adviser, the Distributor, or any of their affiliates will not be subject to the limitations imposed by Section 17(e) of the 1940 Act.

The Funds will bear any commissions or spreads in connection with the Master Fund’s portfolio transactions. In placing orders, it is the policy of the Funds to obtain the best results taking into account the broker-dealer’s general execution and operational facilities, the type of transaction involved, and other factors such as the broker-dealer’s risk in positioning the securities involved. While the Adviser generally seeks reasonably competitive spreads or commissions, the Funds will not necessarily be paying the lowest spread or commission available. In executing portfolio transactions and selecting brokers or dealers, the Adviser seeks to obtain the best overall terms available for the Fund. In assessing the best overall terms available for any transaction, the Adviser considers factors

deemed relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. The overall reasonableness of brokerage commissions paid is evaluated by the Adviser based upon its knowledge of available information as to the general level of commission paid by other institutional investors for comparable services. Transactions on U.S. stock exchanges and on some foreign stock exchanges involve the payment of negotiated brokerage commissions. On the great majority of foreign stock exchanges, however, commissions are fixed. No stated commission is generally applicable to securities traded in over-the-counter markets, but the prices of those securities include undisclosed commissions or mark-ups.

The Investment Funds

The Investment Funds incur transaction expenses in the management of their portfolios, which will decrease the value of the Fund’s investment in the Investment Funds. In view of the fact that the investment program of certain of the Investment Funds may include trading as well as investments, short-term market considerations will frequently be involved, and it is anticipated that the turnover rates of the Investment Funds may be substantially greater than the turnover rates of other types of investment vehicles. In addition, the order execution practices of the Investment Funds may not be transparent to the Funds. Each Investment Fund is responsible for placing orders for the execution of its portfolio transactions and for the allocation of its brokerage. The Adviser will have no direct or indirect control over the brokerage or portfolio trading policies employed by the investment advisers of the Investment Funds. The Adviser expects that each Investment Fund will generally select broker-dealers to effect transactions on the Investment Fund’s behalf substantially in the manner set forth below.

Each Investment Fund generally will seek reasonably competitive commission rates. However, Investment Funds will not necessarily pay the lowest commission available on each transaction, and may engage in transactions with broker-dealers based on different criteria than those considered by the Funds. Investment Funds may not be subject to the same regulatory restrictions on principal and agency transactions. The Funds will indirectly bear the commissions or spreads in connection with the portfolio transactions of the Investment Funds.

No guarantee or assurance can be made that an Investment Fund’s brokerage transaction practices will be transparent or that the Investment Fund will establish, adhere to, or comply with its stated practices. However, as the Investment Funds generally are not investment companies registered under the 1940 Act, they may select brokers on a basis other than that outlined above and may receive benefits other than research or that benefit the Investment Fund’s investment adviser or its affiliates rather than the Investment Fund.

As with the Funds, Investment Funds may make investments directly in the issuers of their underlying securities, and in some instances may not be subject to transaction expenses.

CONFLI CTS OF INTEREST RELATING TO THE INVESTMENT MANAGERS

The Adviser anticipates that each Investment Manager will consider participation by the applicable Investment Fund in all appropriate investment opportunities that are also under consideration for investment by the Investment Manager for other investment funds and accounts managed by the Investment Manager (“Investment Manager Accounts”) that pursue investment programs similar to that of the applicable Investment Fund or the Funds. However, there can be no guarantee or assurance that Investment Managers will follow such practices or that an Investment Manager will adhere to, and comply with, its stated practices, if any. In addition, circumstances may arise under which an Investment Manager will cause its Investment Manager Accounts to commit a larger percentage of their assets to an investment opportunity than to which the Investment Manager will commit assets of the Investment Fund. Circumstances may also arise under which an Investment Manager will consider participation by its Investment Manager Accounts in investment opportunities in which the Investment Manager intends not to invest on behalf of the Investment Fund, or vice versa.

Situations may occur where the Funds could be disadvantaged by investment activities conducted by the Investment Manager for the Investment Manager Accounts. These situations may arise as a result of, among other things: (1) legal restrictions on the combined size of positions that may be taken for an Investment Fund in which the Funds and/or Investment Manager Accounts participate (collectively, “Co-Investors” and, individually, a

“Co-Investor”), limiting the size of the Investment Fund’s position; (2) legal prohibitions on the Co-Investors’ participating in the same instruments; (3) the difficulty of liquidating an investment for a Co-Investor when the market cannot absorb the sale of the combined positions; and (4) the determination that a particular investment is warranted only if hedged with an option or other instrument and the availability of those options or other instrument is limited.

An Investment Manager may from time to time cause an Investment Fund to effect certain principal transactions in securities with one or more Investment Manager Accounts, subject to certain conditions. For example, these transactions may be made in circumstances in which the Investment Manager determined it was appropriate for the Investment Fund to purchase and an Investment Manager Account to sell, or the Investment Fund to sell and the Investment Account to purchase, the same security or instrument on the same day.

Each Investment Manager, its affiliates and their directors, officers and employees, may buy and sell securities or other investments for their own accounts, including interests in Investment Funds, and may have conflicts of interest with respect to investments made on behalf of an Investment Fund in which the Master Fund participates. As a result of differing trading and investment strategies or constraints, positions may be taken by directors, officers, employees and affiliates of the Investment Manager that are the same as, different from or made at different times than positions taken for the Investment Fund in which the Fund participates. Future investment activities of the Investment Managers, or their affiliates, and the principals, partners, directors, officers or employees of the foregoing, may give rise to additional conflicts of interest that could disadvantage the Fund and its Partners.

Investment Managers or their affiliates may from time to time provide investment advisory or other services to private investment funds and other entities or accounts managed by the Investment Manager or its affiliates. In addition, Investment Managers or their affiliates may from time to time receive research products and services in connection with the brokerage services that brokers (including, without limitation, affiliates of the Investment Manager) may provide to one or more Investment Manager Accounts.

CO DES OF ETHICS

The Funds, the Adviser and the Distributor each has adopted a code of ethics as required by applicable law, which is designed to prevent affiliated persons of the Funds, the Adviser and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code of ethics). There can be no assurance that the codes of ethics will be effective in preventing such activities. Each code of ethics may be examined on the Internet from the SEC’s website at www.sec.gov. In addition, each code of ethics can be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. Copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, DC 20549-0102.

The Adviser’s code of ethics allows personnel to invest in securities for their own account, but requires compliance with the code’s provisions. The code of ethics requires prior approval of purchases of securities in initial public offerings or private placements.

O UTSTANDING SECURITIES AND RECORD OWNERSHIP

As of February 15, 2012, Institutional Fund owns of record more than 25% of the Master Fund’s Shares.

As of February 15, 2012, the following persons own of record 5% or more of a Fund’s Shares:


SAR Fund	No. of Shares	Percent of the Assets Held by the Shareholder

W. Lawrence Elliott	99,337	10.12%



John R. Murrell	98,844	10.07%

Sherrill Cameron Garland Trust	83,256	8.48%

Sherrill C. Garland	66,391	6.76%

Bette Barton Vaughn Trust No. 1	53,245	5.42%


Institutional Fund	No. of Shares	Percent of the Assets Held by the Shareholder

Buckner Foundation Inc.	665,127	15.50%

Hackett 1997 Investment LP	264,819	6.17%

Mendenhall Residue Martital Trust	229,167	5.34%

The Viscosity Living Trust	215,029	5.01%

P ROXY VOTING POLICIES AND PROCEDURES

Each Fund invests substantially all of its investable assets in the Master Fund. The Master Fund invests a substantial portion of its assets in securities of Investment Funds. These securities do not typically convey traditional voting rights to the holder and the occurrence of corporate governance or other notices for this type of investment is substantially less than that encountered in connection with registered equity securities. On occasion, however, the Adviser and/or the Master Fund may receive notices from such Investment Funds seeking the consent of holders in order to materially change certain rights within the structure of the security itself or change material terms of the Investment Funds’ limited partnership agreement, limited liability company operating agreement or similar agreement with investors. To the extent that the Master Fund receives notices or proxies from Investment Funds (or receives proxy statements or similar notices in connection with any other portfolio securities) or holds securities in a Separate Account (and thus retains or could retain some voting rights with respect to such securities), the Master Fund has delegated proxy voting responsibilities with respect to the Master Fund’s portfolio securities to the Adviser, subject to the Board’s general oversight and with the direction that proxies should be voted consistent with the Master Fund’s best economic interests.

With respect to proxies issued by the Master Fund, the Funds will not delegate to the Adviser, but instead retain, their respective proxy voting authority and shall exercise such authority as described below. After a Fund receives a proxy issued by the Master Fund, the Fund will solicit its Shareholders to instruct the Fund to vote for or against the matter presented by the Master Fund. Each Fund will then calculate the proportion of Shares voted for to those voted against (ignoring for purposes of this calculation the Shares for which it receives no voting instructions) and will subsequently vote its shares in the Master Fund for or against the matter in the same proportion. The Funds will not hold their own meetings to solicit Shareholder instructions.

The Adviser has adopted its own proxy voting policies and procedures for this purpose. As a general principle, the Adviser will vote to maximize shareholder value, while considering all relevant factors, and vote without undue influence from individuals or groups who may have an economic interest in the outcome of the proxy vote. If it is determined that a proxy presents a material conflict of interest, then the Adviser shall vote the proxy in accordance with the recommendations of Institutional Shareholder Services (“ISS”) or another nationally recognized party, if available, or, if ISS or such party has disclosed that it has a conflict of interest with the vote, another independent third party.

The Master Fund is required to file Form N-PX, with its complete proxy voting record for the twelve months ended June 30, no later than August 31 of each year. The Master Fund’s Form N-PX filing for the period ended June 30, 2011 is available: (i) without charge, upon request, by calling 1-800-725-9456, or (ii) by visiting the SEC’s website at www.sec.gov.

P ERFORMANCE INFORMATION

Sales literature relating to the Funds and reports to Shareholders may include quotations of investment performance of the Funds. In these materials, the Funds’ performance will normally be portrayed as the net return to an investor during each month or quarter of the period for which investment performance is being shown. Cumulative performance and year-to-date performance computed by aggregating quarterly or monthly return data may also be used. Investment returns will be generally reported on a net basis, after all fees and expenses. Other methods also may be used to portray the Funds’ investment performance.

Each Fund’s performance results will vary from time to time, and past results are not necessarily indicative of future investment results. Comparative performance information, as well as any published ratings, rankings and analyses, reports and articles discussing the Funds, may also be used to provide to prospective investors in the Funds, including data and materials prepared by recognized sources of such information. Such information may include comparisons of the Master Fund’s investment performance to the performance of recognized market indices, including but not limited to the S&P 500, the Russell 2000, or other lesser known indices (including indices of other pooled investment vehicles investing in hedge funds and private equity venture and buyout funds). Comparisons also may be made to economic and financial trends and data that may be relevant for investors to consider in determining whether to invest in a Fund.

G ENERAL HISTORY

The Master Fund’s predecessor was a private fund that was organized and commenced operations as a Delaware limited partnership which utilized a multi-manager, multi-strategy investment approach from the date of the private fund’s commencement of investment operations on January 1, 2009. The private fund operated as an unregistered investment vehicle from January 1, 2009 until January 31, 2010, at which time the private fund was reorganized into a newly formed master-feeder structure in which the Master Fund assumed the private fund’s portfolio, with the private fund investing all of its investable assets in the Master Fund, except those restricted for liquidation purposes or forced redemptions, and in anticipation of the Funds investing all of their investable assets in the Master Fund. Upon the registration of the Master Fund as an investment company, the Adviser’s personnel that had made investment decisions for the private fund began making investment decisions for the Master Fund. The Adviser employs an investment program for the Funds and the Master Fund that is substantially similar to the investment program that was employed in managing the private fund. The private fund, during the period for which performance is reported, was the only non-proprietary, fully-invested account managed by the Adviser that had an investment program with substantially the same investment objectives, policies, and strategies as the Master Fund. The Adviser manages the Master Fund in a manner substantially similarly to the private fund. Accordingly, by the Funds investing substantially all of their investable assets in the Master Fund, the Funds participate in the substantially similar investment management that the Adviser renders to the Master Fund and previously rendered to the private fund.

AD DITIONAL TAXATION DISCUSSION

that investors have acquired Shares pursuant to this offering and will hold their Shares as “capital assets” (generally, property held for investment) for U.S. federal income tax purposes. Prospective Shareholders should consult their own tax advisors regarding the non-U.S. and U.S. federal, state, and local income and other tax considerations that may be relevant to an investment in the Fund.

In addition to the particular matters set forth in this section, tax-exempt entities should review carefully those sections of this SAI regarding liquidity and other financial matters to ascertain whether the investment objectives of the Funds are consistent with their overall investment plans.

Each of the Funds and the Master Fund qualifies, and intends to continue to qualify as a regulated investment company (a “RIC”) under Subchapter M of Subtitle A, Chapter 1, of the Code. As such, the Funds and the Master Fund generally are not subject to federal income tax on their net investment income and realized capital gains that they distribute to Shareholders. To qualify for treatment as RICs, the Funds and the Master Fund must meet three numerical tests each year.

First, at least 90% of the gross income of a RIC must consist of dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies, or net income derived from interests in qualified publicly traded partnerships.

Second, generally, at the close of each quarter, (a) at least 50% of the value of a RIC’s total assets must consist of (i) cash and cash items, U.S. government securities, the securities of other RICs and (ii) other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the RIC’s total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the value of the RIC’s total assets is invested in the securities (other than U.S. government securities and the securities of other RICs) of (i) any one issuer, (ii) any two or more issuers that the RIC controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or (iii) any one or more qualified publicly traded partnerships.

Third, a RIC must distribute at least 90% of its investment company taxable income (net investment income and the excess of net short-term capital gain over net long-term capital loss) and its net tax-exempt income, if any.

Each of the Funds and the Master Fund intends to comply with these requirements. The Funds will generally satisfy the income and asset requirements through their investment in the Master Fund. If a Fund or the Master Fund were to fail to make sufficient distributions, it could be liable for corporate income tax and for excise tax in respect of the shortfall or, if the shortfall were large enough, be disqualified as a RIC. If for any taxable year a Fund or the Master Fund were to fail to qualify as a RIC, all its taxable income would be subject to tax at regular corporate rates without any deduction for distributions to Shareholders. Also, if the Master Fund were to fail to qualify as a RIC by reason of a failure to meet the income or asset requirements, that, in turn, would cause the Funds to fail to meet the asset requirement. If a Fund fails to qualify as a RIC, the Fund would pay corporate income tax on its income and gains, Shareholders would recognize dividend income on distributions to the extent of the Fund’s current and accumulated earnings and profits, and corporate Shareholders could be eligible for the dividends-received deduction.

If a Fund fails to meet the annual gross income test described above, the Fund will nevertheless be considered to have satisfied the test if (i) (a) such failure is due to reasonable cause and not due to willful neglect and (b) the Fund reports the failure pursuant to Treasury Regulations to be adopted, and (ii) the Fund pays an excise tax equal to the excess non-qualifying income. If a Fund fails to meet the asset diversification test described above with respect to any quarter, the Fund will nevertheless be considered to have satisfied the requirements for such quarter if the Fund cures such failure within 6 months and either (i) such failure is de minimis or (ii) (a) such failure is due to reasonable cause and not due to willful neglect and (b) the Fund reports the failure under Treasury Regulations to be adopted and pays an excise tax.

In order to avoid incurring a nondeductible 4% federal excise tax obligation, the Code requires that a RIC distribute (or be deemed to have distributed) by December 31 of each calendar year an amount at least equal to the sum of (i) 98% of its ordinary income for such year, (ii) 98.2% of its capital gain net income (which is the excess of its realized net long-term capital gain over its realized net short-term capital loss), generally computed on the basis of the one-year period ending on October 31 of such year, after reduction by any available capital loss carryforwards and (iii) 100% of any ordinary income and capital gain net income from the prior year (as previously computed) that were not paid out during such year and on which the Fund paid no federal income tax. The Funds and the Master Fund intend to make sufficient distributions or deemed distributions each year to avoid liability for this excise tax. With respect to PFIC stock held by the Master Fund, if a mark-to-market election is in effect, the Master Fund must calculate this excise tax distribution based on a twelve-month period ending on October 31. With respect to all other ordinary taxable income, the Funds and the Master Fund must calculate the distribution as if the Funds and the Master Fund had a taxable year ending on December 31.

Distributions to Shareholders

Each Fund contemplates declaring as dividends each year all or substantially all of its taxable income. In general, distributions will be taxable to Shareholders for federal, state and local income tax purposes to the extent of the distributing Fund’s current and accumulated earnings and profits. Such distributions are taxable whether they are received in cash or reinvested in Fund Shares pursuant to the dividend reinvestment plan. The Funds expect that their distributions attributable to distributions they receive from the Master Fund will generally be taxable to Shareholders at ordinary income rates. Distributions of net capital gain, if any, designated as capital gains dividends are taxable to a Shareholder as long-term capital gains, regardless of how long the Shareholder has held Fund Shares. Distributions by a Fund in excess of the Fund’s current and accumulated earnings and profits will be treated as a tax-free return of capital to the extent of (and in reduction of) the Shareholders’ tax bases in their Shares and any such amount in excess of their bases will be treated as gain from the sale of Shares, as discussed below.

The Funds do not currently expect that they will earn qualified dividend income or long-term capital gains and, therefore, do not anticipate that their distributions to Shareholders will qualify for lower tax rates applicable to qualified dividend income or long-term capital gains. Likewise, the Funds do not anticipate that any of their dividends paid to Shareholders that are corporations will be eligible for the “dividends received” deduction.

A Fund may elect to retain its net capital gain or a portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate the retained amount as undistributed capital gains in a notice to its Shareholders who will be treated as if each received a distribution of his pro rata share of such gain, with the result that each Shareholder will (i) be required to report his pro rata share of such gain on his tax return as long-term capital gain, (ii) receive a refundable tax credit for his pro rata share of tax paid by the Fund on the gain and (iii) increase the tax basis for his Shares by an amount equal to the deemed distribution less the tax credit.

All or a portion of a loss realized on a sale or other disposition of Master Fund Shares by a Fund may be disallowed under “wash sale” rules to the extent the Fund acquires other Shares of the Master Fund (whether through the reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Master Fund Shares. Any disallowed loss will result in an adjustment to the Fund’s tax basis in some or all of the other Master Fund Shares acquired.

Dividends and distributions on a Fund’s Shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund’s realized income and gains, even though such dividends and distributions may economically represent a return of a particular Shareholder’s investment. Such distributions are likely to occur in respect of Shares purchased at a time when a Fund’s net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when a Fund’s net asset value also reflects unrealized losses. Certain distributions declared in October, November or December to Shareholders of record of such month and paid in the following January will be taxed to Shareholders as if received on December 31 of the year in which they were declared. In addition, certain other distributions made after the close of a taxable year of a Fund may be “spilled back” and treated as paid by the Fund (except for purposes of the non-deductible 4% federal excise tax) during such taxable year. In such case, Shareholders will be treated as having received such dividends in the taxable year in which the distributions were actually made.

For a Shareholder that is a non-U.S. entity, a new withholding tax (known as FATCA) will be imposed on distributions paid after December 31, 2013, and on redemptions and proceeds from sales of Fund shares after December 31, 2014, unless such Shareholder enters into an information sharing agreement with the Internal Revenue Service with respect to the Shareholder’s direct and indirect U.S. owners. A non-U.S. entity must enter into such an agreement with the Internal Revenue Service by June 30, 2013 to insure that it will be identified as FATCA-compliant in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.

Each Fund will inform its Shareholders of the source and status of each distribution made in a given calendar year after the close of such calendar year.

Gain from Repurchases and Transfers of Shares

The repurchase or transfer of a Fund’s Shares may result in a taxable gain or loss to the tendering Shareholder. Different tax consequences may apply for tendering and non-tendering Shareholders in connection with a repurchase offer. For example, if a Shareholder does not tender all of his, her or its Shares, under some circumstances, such repurchase may not be treated as an exchange for U.S. federal income tax purposes and may result in deemed distributions to non-tendering Shareholders. On the other hand, Shareholders who tender all of their Shares (including Shares deemed owned by Shareholders under constructive ownership rules) will be treated as having sold their Shares and generally will realize a capital gain or loss. Such gain or loss is measured by the difference between the Shareholder’s amount received and his or her adjusted tax basis of the Shares. For non-corporate Shareholders, gain or loss from the transfer or repurchase of Shares generally will be taxable at a U.S. federal income tax rate dependent upon the length of time the Shares were held. Shares held for a period of one year or less at the time of such repurchase or transfer will, for U.S. federal income tax purposes, generally result in short-term capital gains or losses, and those held for more than one year will generally result in long-term capital gains or losses.

Selling Shareholders will generally recognize gain or loss in an amount equal to the difference between the Shareholder’s adjusted tax basis in the Shares sold and the sale proceeds. If the Shares are held as a capital asset, the gain or loss will be a capital gain or loss. The maximum tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate for gains recognized on the sale of capital assets held for one year or less, or (ii) 15% for gains recognized on the sale of capital assets held for more than one year (as well as certain capital gain distributions) (0% for individuals in the 10% or 15% tax brackets). The maximum 15% federal income tax rate on long-term capital gain is scheduled to increase to 20% for tax years beginning after 2012.

Any loss realized upon the sale or exchange of Fund Shares with a holding period of six months or less will be treated as a long-term capital loss to the extent of any capital gain distributions received with respect to such Shares. In addition, all or a portion of a loss realized on a sale or other disposition of Fund Shares may be disallowed under “wash sale” rules to the extent the Shareholder acquires other Shares of the same Fund (whether through the reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of the Shares. Any disallowed loss will result in an adjustment to the Shareholder’s tax basis in some or all of the other Shares acquired.

Sales charges paid upon a purchase of Shares cannot be taken into account for purposes of determining gain or loss on a sale of the Shares before the 91st day after their purchase to the extent a sales charge is reduced or eliminated in a subsequent acquisition of Shares of the Fund (or of another fund) pursuant to the reinvestment or exchange privilege on or before January 31 of the year following the calendar year that includes the date of such sale. Any disregarded amounts will result in an adjustment to the Shareholder’s tax basis in some or all of any other Shares acquired.

Pursuant to Treasury Regulations directed at tax shelter activity, taxpayers are required to disclose to the Internal Revenue Service certain information on Form 8886 if they participate in a “reportable transaction.” A transaction may be a “reportable transaction” based upon any of several indicia with respect to a Shareholder, including the recognition of a loss in excess of certain thresholds (for individuals, $2 million in one year or $4 million in any combination of years). Investors should consult their own tax advisers concerning any possible disclosure obligation with respect to their investment in Fund Shares.

Investments in Passive Foreign Investment Companies

The Master Fund intends to elect to “mark to market” all Shares that it holds in PFICs at the end of each taxable year. By making this election, the Master Fund will recognize as ordinary income any increase in the value of those PFIC Shares as of the close of the taxable year (subject to adjustments for deferral of losses from earlier taxable years) over their adjusted basis and as ordinary loss any decrease in that value unless the loss is required to be deferred. Gains realized with respect to PFICs that the Master Fund has elected to mark to market will be ordinary income. If the Master Fund realizes a loss with respect to such a PFIC, whether by virtue of selling all or part of the Fund’s interest in the PFIC or because of the “mark to market” adjustment described above, the loss will be ordinary to the extent of the excess of the sum of the mark-to-market gains over the mark-to-market losses previously recognized with respect to the PFIC. To the extent that the Master Fund’s mark-to-market loss with respect to a PFIC exceeds that limitation, the loss will effectively be taken into account in offsetting future mark-to-market gains from the PFIC, and any remaining loss will generally be deferred until the PFIC Shares are sold, at which point the loss will be treated as a capital loss. Capital losses recognized by the Master Fund in a taxable year will generally be deductible only against capital gains recognized by the Master Fund in that year or one of the following taxable years (limited to the following eight taxable years in the case of capital losses realized in taxable years beginning before December 22, 2010), but the Master Fund does not expect to generate significant capital gains from its investments, which means that capital losses recognized by the Master Fund will generally not result in a reduction of taxable distribution to the Funds, or from the Funds to the Shareholders.

If the Master Fund does not make the “mark to market” election with respect to a PFIC, it may under certain circumstances elect to treat the PFIC as a qualified electing fund (a “QEF”), which would result in the Master Fund recognizing income and gain each year based on its allocable Share of the income and gain recognized by the QEF. The Master Fund does not generally anticipate that it will be able to make QEF elections with respect to the Investment Funds. If neither a “mark to market” nor a QEF election is made with respect to an interest in a PFIC, the ownership of the PFIC interest may have significantly adverse tax consequences for the owner. In such a case, the Master Fund would be subject to an interest charge (at the rate applicable to tax underpayments) on tax liability treated as having been deferred with respect to certain distributions and on gain from the disposition of the Shares of a PFIC (collectively referred to as “excess distributions”), even if those excess distributions are paid by the Master Fund as a dividend to the Master Fund’s shareholders, including the Funds, and then by the Funds to their Shareholders.

Medicare Tax on Investment Income

Under legislation enacted in 2010, effective for tax years beginning after December 31, 2012, certain net investment income received by an individual having modified adjusted gross income in excess of $200,000 (or $250,000 for married individuals filing jointly) will be subject to a tax of 3.8 percent. Undistributed net investment income of trusts and estates in excess of a specified amount will also be subject to this tax. Dividends paid by a Fund will constitute investment income of the type subject to this tax.

Certain Withholding Taxes

State and Local Taxes

Information Reporting and Backup Withholding

After the end of each calendar year, Shareholders will be sent information regarding the amount and character of distributions received from the relevant Fund during the year.

Legislation passed by Congress in 2008 requires each Fund (or its administrative agent) to report to the Internal Revenue Service and furnish to Shareholders the cost basis information and holding period for such Fund’s Shares purchased on or after January 1, 2012, and repurchased by the Fund on or after that date. A Fund will permit Shareholders to elect from among several permitted cost basis methods. In the absence of an election, each Fund will use [ average cost ] as its default cost basis method. The cost basis method a Shareholder elects may not be changed with respect to a repurchase of shares after the settlement date of the repurchase. Shareholders should consult with their tax advisors to determine the best permitted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting rules apply to them.

Other Taxes

The foregoing is a summary of some of the tax rules and considerations affecting Shareholders and the Funds’ operations, and does not purport to be a complete analysis of all relevant tax rules and considerations, nor does it purport to be a complete listing of all potential tax risks inherent in making an investment in a Fund. Investors are urged to consult with their own tax advisers regarding any proposed investment in a Fund. A Shareholder may be subject to other taxes, including but not limited to, state and local taxes, estate and inheritance taxes, and intangible taxes that may be imposed by various jurisdictions. The Funds also may be subject to state, local, and foreign taxes that could reduce cash distributions to Shareholders. It is the responsibility of each Shareholder to file all appropriate tax returns that may be required. Each prospective Shareholder is urged to consult with his or her tax adviser with respect to any investment in a Fund.

A DDITIONAL INFORMATION AND SUMMARY OF THE DECLARATION OF

TRUST

An investor in a Fund will be a Shareholder of the Fund and his or her rights in the Fund will be established and governed by the Fund’s Declaration of Trust (the “DoT”). The following is a summary description of additional items and of select provisions of the DoT that may not be described elsewhere in this SAI or the Prospectus. The description of such items and provisions is not definitive and reference should be made to the complete text of the DoT.

Liability; Indemnification

Under Delaware law and the DoT, each Shareholder will be liable for the debts and obligations of a Fund only to the extent of the value of such Shareholder’s Shares. The DoT provides that the Trustees and the Adviser (including certain of its affiliates, among others) shall not be liable to a Fund or any of the Shareholders for any loss or damage occasioned by any act or omission in the performance of their services as such in the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office or as otherwise required by applicable law.

The DoT also contains provisions for the indemnification, to the extent permitted by law, of the members and former members of the Board and the Adviser (including certain of its affiliates, among others) by a Fund (but not by the Shareholders individually) against any liability and expense to which any of them may be liable that arise in connection with the performance of their activities on behalf of a Fund. None of these persons shall be personally liable to any Shareholder by reason of any change in the federal or state income tax laws applicable to a Fund or its investors. The rights of indemnification and exculpation provided under the DoT shall not be construed so as to limit liability or provide for indemnification of the members and former members of the Board and the Adviser (including certain of its affiliates, among others) for any liability (including liability under applicable federal or state securities laws which, under certain circumstances, impose liability even on persons that act in good faith), to the extent (but only to the extent) that such indemnification or limitation on liability would be in violation of applicable law, but shall be construed so as to effectuate the applicable provisions of the DoT to the fullest extent permitted by law.

Amendment

The DoT may generally be amended, in whole or in part, with the approval of a majority of the Trustees (including a majority of the Independent Trustees, if required by the 1940 Act). Shareholders have the right to vote on any amendment: (i) affecting their right to vote granted under the DoT; (ii) to the DoT’s amendment provision; (iii) for which such vote is required by law; and (iv) submitted to them by the Trustees.

Term, Dissolution and Liquidation

A Fund may be dissolved upon the affirmative vote of a majority of the Trustees without Shareholder approval, unless such approval is required by the 1940 Act. In doing so, the Trustees may: (i) sell the Fund’s assets to another entity in exchange for interests in the acquiring entity; or (ii) sell all of the Fund’s assets for cash. Following such liquidation, the Fund’s Shareholders are entitled to receive the proceeds of such sale, distributed in proportion to the number of Shares held by each Shareholder. Upon termination of the Fund, the Fund will file a certificate terminating its existence as a Delaware statutory trust.

F ISCAL YEAR

For accounting purposes each Fund’s fiscal year is the period ending on December 31. For tax purposes each Fund’s fiscal year is the period ending on October 31.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board has selected KPMG LLP as the independent registered public accounting firm for each Fund. KPMG LLP’s principal business address is located at 191 W. Nationwide Blvd., Suite 500, Columbus, Ohio 43215.

LEGAL COUNSEL

K&L Gates LLP, located at One Lincoln Street, Boston, Massachusetts 02111, serves as legal counsel to the Funds and to the Independent Trustees.

FINANCIAL STATEMENTS

The SAR Fund’s audited financial statements for the fiscal year ended December 31, 2011, the Institutional Fund’s audited financial statements for the fiscal year ended December 31, 2011 and the Master Fund’s audited financial statements for the fiscal year ended December 31, 2011, and the independent registered public accounting firms’s reports thereon are set forth in the following pages.

SALIENT ABSOLUTE RETURN FUND

Shareholders’ Report

December 31, 2011

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Trustees Salient Absolute Return Fund:

We have audited the accompanying statement of assets and liabilities of Salient Absolute Return Fund (the “Fund”), including the schedule of investments, as of December 31, 2011, and the related statements of operations and cash flows for the year then ended and the statements of changes in net assets and the financial highlights for the year then ended and the period from April 1, 2010 (commencement of operations) to December 31, 2010. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian; or other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Salient Absolute Return Fund as of December 31, 2011, the results of its operations and its cash flows for the year then ended and the changes in its net assets and the financial highlights for the year then ended and the period from April 1, 2010 (commencement of operations) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Columbus, Ohio

February 27, 2012

SALIENT ABSOLUTE RETURN FUND

Statement of Assets and Liabilities

December 31, 2011


Assets:
Investment in the Master Fund, at fair value (cost $14,782,596)	$	13,957,436
Investments in securities, at fair value (cost $12,591)		12,591

Total investments		13,970,027
Cash and cash equivalents		176,356
Receivable from Adviser		2,930
Receivable from the Master Fund		448,100
Prepaids and other assets		11,730

Total assets		14,609,143

Liabilities:
Dividends payable		3,825
Subscriptions received in advance		115,000
Redemptions payable		671,204
Shareholder Servicing Fees payable		36,108
Accounts payable and accrued expenses		14,542

Total liabilities		840,679

Net assets	$	13,768,464

Net assets consist of:
Paid-in-capital	$	14,502,132
Accumulated net investment income		118,411
Accumulated net realized loss		(26,919	)
Net unrealized depreciation on investments		(825,160	)

Net assets	$	13,768,464

Net asset value per share outstanding (973,340 shares outstanding)	$	14.15

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN FUND

Schedule of Investments

December 31, 2011


	Shares		Fair Value		% of Net Assets
Investment in the Master Fund
Salient Absolute Return Master Fund (United States) (101.37% of Net Assets)		14,535	$	13,957,436

Total Investment in the Master Fund (Cost $14,782,596)				13,957,436		101.37%

Investments in Securities
Investments in Registered Investment Companies
Money Market Fund (0.09% of Net Assets)
JPMorgan 100% U.S. Treasury Securities Money Market Fund (United States)		12,591		12,591

Total Money Market Fund				12,591

Total Investments in Securities (Cost $12,591)				12,591		0.09%

Total Investments (Cost $14,795,187)			$	13,970,027		101.46%

All securities are income producing.

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN FUND

Statement of Operations

Year Ended December 31, 2011


Dividend income—Master Fund	$	235,336

Total investment income		235,336

Expenses:
Amortization of offering costs		78,280
Shareholder Servicing Fees		106,914
Professional fees		16,337
Printing		13,364
Registration and filing fees		14,439
Other expenses		10,812

Total expenses		240,146
Expenses reimbursed by Adviser		(86,969	)

Net expenses		153,177

Net investment income		82,159

Net realized and unrealized loss from investments:
Net realized loss from investment in Master Fund		(24,015	)
Change in unrealized appreciation/depreciation from investment in Master Fund		(805,360	)

Net realized and unrealized loss from investments		(829,375	)

Net decrease in net assets resulting from operations	$	(747,216	)

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN FUND

Statements of Changes in Net Assets


	Year Ended December 31, 2011			For the period April 1, 2010 through December 31, 2010*
Net assets, beginning of period	$	4,009,936		$	—
Net increase (decrease) in net assets resulting from operations:
Net investment income		82,159			34,736
Net realized loss from investment in Master Fund		(24,015	)		—
Change in unrealized appreciation/depreciation from investment in Master Fund		(805,360	)		(19,800	)

Net increase (decrease) in net assets resulting from operations		(747,216	)		14,936

Distributions from net investment income		(81,872	)		(38,643	)
Distribution from capital gains		(1,452	)		—

Change in net assets from distributions		(83,324	)		(38,643	)

Capital Transactions:
Subscriptions		11,420,000			3,995,000
Proceeds from reinvestment of dividends		79,499			38,643
Redemptions		(910,431	)		—

Change in net assets from capital transactions		10,589,068			4,033,643

Net assets, end of period	$	13,768,464		$	4,009,936

Accumulated net investment income	$	118,411		$	10,278

Share Transactions:
Issued		758,987			269,464
Reinvested		5,620			2,622
Redeemed		(63,353	)		—

Change in shares		701,254			272,086

*	The SAR Fund commenced operations on April 1, 2010.

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN FUND

Statement of Cash Flows

Year Ended December 31, 2011


Cash flows from operating activities:
Net decrease in net assets resulting from operations	$	(747,216	)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:
Purchases of investments		(11,240,407	)
Proceeds from disposition of investments		699,918
Reinvestment of dividends received		(235,336	)
Net realized loss from investment in Master Fund		24,015
Change in unrealized appreciation/depreciation from investment in Master Fund		805,360
Increase in receivable from investments sold		(448,100	)
Increase in receivable from Adviser		(2,930	)
Decrease in prepaids and other assets		55,916
Decrease in payable to Adviser		(63,471	)
Increase in Shareholder Servicing Fees payable		27,068
Decrease in accounts payable and accrued expenses		(1,680	)

Net cash used in operating activities		(11,126,863	)

Cash flows from financing activities:
Subscriptions		11,535,000
Redemptions		(239,227	)

Net cash provided by financing activities		11,295,773

Net increase in cash and cash equivalents		168,910
Cash and cash equivalents at beginning of period		7,446

Cash and cash equivalents at end of period	$	176,356

Supplemental schedule of non-cash activity:
Reinvestment of dividends received	$	235,336
Proceeds from reinvestment of dividends		79,499

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN FUND

Notes to Financial Statements

December 31, 2011

(1) ORGANIZATION

Salient Absolute Return Fund (the “SAR Fund”), a Delaware statutory trust registered under the Investment Company Act of 1940, as amended and the Securities Act of 1933, commenced operations on April 1, 2010, as a non-diversified closed-end management investment company. The SAR Fund was created to serve as a feeder fund for Salient Absolute Return Master Fund (the “Master Fund”). The SAR Fund has authorized 33,333,333 shares of beneficial interest (“Shares”), which may be issued in more than one class or series. For convenience, reference to the SAR Fund may include the Master Fund, as the context requires.

The SAR Fund’s investment objective is to generate positive returns regardless of the overall direction of various markets. The SAR Fund pursues its investment objective by investing substantially all of its assets in the Master Fund which invests its assets across a variety of investment funds (the “Portfolio Funds”). The Master Fund’s financial statements, Schedule of Investments and notes to financial statements, included elsewhere in this report, are an integral part of the SAR Fund’s financial statements that should be read in conjunction with this report. The percentage of the Master Fund’s net assets owned by the SAR Fund on December 31, 2011, was 11.08%.

The board of trustees (the “Board” and each member a “Trustee”) is authorized to engage an investment adviser and it has selected Salient Advisors, L.P. (the “Adviser”), to manage the SAR Fund’s portfolio and operations, pursuant to an investment management agreement (the “Investment Management Agreement”). The Adviser is a Texas limited partnership that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Under the Investment Management Agreement, the Adviser is responsible for the establishment of an investment committee, which is responsible for developing, implementing, and supervising the SAR Fund’s investment program subject to the ultimate supervision of the Board.

Under the SAR Fund’s organizational documents, the SAR Fund’s Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the SAR Fund. In the normal course of business, the SAR Fund enters into contracts with service providers, which also provide for indemnifications by the SAR Fund. The SAR Fund’s maximum exposure under these arrangements is unknown, as this would involve any future potential claims that may be made against the SAR Fund. However, based on experience, management expects that risk of loss to be remote.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) BASIS OF ACCOUNTING

The accounting and reporting policies of the SAR Fund conform with U.S. generally accepted accounting principles (“U.S. GAAP”).

(b) CASH EQUIVALENTS

The SAR Fund considers all unpledged temporary cash investments with a maturity date at the time of purchase of three months or less to be cash equivalents.

(c) PORTOLIO SECURITIES TRANSACTIONS

The SAR Fund records investment transactions on a trade-date basis.

Investments that are held by the SAR Fund are marked to fair value at the date of the financial statements, and the corresponding change in unrealized appreciation/depreciation is included in the Statement of Operations.

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December 31, 2011

(d) VALUATION OF INVESTMENTS

The valuation of the SAR Fund’s investments will be determined as of the close of business at the end of each reporting period, generally monthly. The valuation of the SAR Fund’s investments is calculated by Citi Fund Services Ohio, Inc., the SAR Fund’s independent administrator (the “Independent Administrator”).

The Board has formed a valuation committee (the “Board Valuation Committee”) that is responsible for overseeing the SAR Fund’s valuation policies, making recommendations to the Board on valuation-related matters, and overseeing implementation by the Adviser Valuation Committee (as defined below) of the SAR Fund’s valuation policies.

The Board has authorized the establishment of a valuation committee of the Adviser (the “Adviser Valuation Committee”). The Adviser Valuation Committee’s function, subject to the oversight of the Board Valuation Committee and the Board, is generally to review the Portfolio Funds’ valuation methodologies, valuation determinations, and any information provided to the Adviser Valuation Committee by the Adviser or the Independent Administrator.

Investments held by the SAR Fund are valued as follows:

•

MASTER FUND —The SAR Fund invests substantially all of its assets in the Master Fund. Investments in the Master Fund are recorded at fair value, using the net asset value of the Master Fund as a practical expedient. Valuation of the investments held by the Master Fund is discussed in the notes to the Master Fund’s financial statements included elsewhere in this report.

•

OTHER —Other investments held by the Fund that do not trade on an exchange are valued at the end of day net asset value per share.

(e) INVESTMENT INCOME

For investments in securities, dividend income is recorded on the ex-dividend date, net of withholding taxes. Interest income is recorded as earned on the accrual basis and includes amortization of premiums or accretion of discounts.

(f) FUND EXPENSES

Unless otherwise voluntarily or contractually assumed by the Adviser or another party, the SAR Fund bears all expenses incurred in its business including but not limited to, the following: all costs and expenses related to investment transactions and positions for the SAR Fund’s account; interest expenses and loan fees; legal fees; accounting, auditing and tax preparation fees; recordkeeping and custodial fees; costs of computing the SAR Fund’s net asset value; research expenses; costs of insurance; registration expenses; offering costs; transfer taxes and taxes withheld on non-U.S. dividends; and other types of expenses as may be approved from time to time by the Adviser. Offering costs are amortized over a twelve-month period or less from the date they are incurred. Organization costs, if any, are expensed as incurred.

(g) INCOME TAXES

The SAR Fund expects to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined in Subchapter M of the Internal Revenue Code, and to make distributions from net investment income and from net realized capital gains sufficient to relieve it

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Notes to Financial Statements, continued

December 31, 2011

from all, or substantially all, federal income and excise taxes. The SAR Fund has elected to have a tax year end of October 31. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities.

The SAR Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the SAR Fund’s tax returns to determine whether the tax positions will “more-likely-than-not” be sustained by the SAR Fund upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold and that would result in a tax benefit or expense to the SAR Fund would be recorded as a tax benefit or expense in the current period. For the year ended December 31, 2011, the SAR Fund did not recognize any amounts for unrecognized tax benefit/expense. A reconciliation of unrecognized tax benefit/expense is not provided herein, as the beginning and ending amounts of unrecognized tax benefit/expense are zero, with no interim additions, reductions or settlements. Tax positions taken in tax years which remain open under the statute of limitations (generally three years for federal income tax purposes) are subject to examination by tax authorities.

As of December 31, 2011, the following reclassifications have been made to increase (decrease) such accounts in the SAR Fund with offsetting adjustments as indicated:


Accumulated Net Investment Income (Loss)		Accumulated Net Realized Gains (Losses)			Paid-in-Capital
$	107,846	$	(1,452	)	$	(106,394	)

The tax character of dividends paid to shareholders as of the latest tax year ended October 31, 2011 were as follows:


Ordinary Income		Total Taxable Distributions		Return of Capital		Total Distributions Paid
$	—	$	—	$	38,643	$	38,643

No dividends or distributions were paid by the SAR Fund during the tax year ended October 31, 2010.

As of the latest tax year ended October 31, 2011, the components of accumulated earnings (deficit) on a tax basis were as follows:


Unrealized Appreciation (Depreciation)			Total Accumulated Earnings (Deficit)
$	(602,390	)	$	(602,390	)

(h) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS

Distributions will be paid annually on the Shares in amounts representing substantially all of the net investment income and net capital gains, if any, earned each year. Each shareholder will automatically be a participant under the SAR Fund’s Dividend Reinvestment Plan (“DRP”) and have all income dividends and/or capital gains distributions automatically reinvested in Shares. Election not to participate in the DRP and to receive all income dividends and/or capital gain distributions, if any, in cash may be made by notice to the SAR Fund.

Shares are issued pursuant to the DRP at the SAR Fund’s net asset value determined on the next valuation date following the ex-dividend date (the last date of a dividend period on which an investor can purchase Shares and still be entitled to receive the dividend).

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December 31, 2011

(i) USE OF ESTIMATES

The preparation of the financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences may be significant.

(3) FAIR VALUE MEASUREMENTS

The SAR Fund defines fair value as the price 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 under current market conditions.

The inputs used to determine the fair value of the SAR Fund’s investments are summarized in the three broad levels listed below:

•

Level 1—quoted prices in active markets for identical assets

•

Level 2—investments with other significant observable inputs or investments that can be fully redeemed at the net asset value in the “near term”

•

Level 3—investments with significant unobservable inputs or investments that cannot be fully redeemed at the net asset value in the “near term”; these are investments that generally have one or more of the following characteristics: gated redemptions, suspended redemptions, or have lock-up periods greater than 30 days

The inputs or methodology used to value investments are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary categorization, as of December 31, 2011, of the SAR Fund’s investments based on the level of inputs utilized in determining the value of such investments:


	LEVEL 1		LEVEL 2		LEVEL 3		Total Investments
Investments
Investment in the Master Fund	$	—	$	—	$	13,957,436	$	13,957,436
Investment Securities
Money Market		12,591		—		—		12,591

Total Investments	$	12,591	$	—	$	13,957,436	$	13,970,027

The categorization of the SAR Fund’s investment in the Master Fund as a Level 3 investment does not reflect the fact that many of the underlying investments held by the Investment Funds in which the Master Fund invests, if owned directly by the SAR Fund, may be classified as Level 1 investments.

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December 31, 2011

The following is a reconciliation of Level 3 investments based on the inputs used to determine fair value:


	Investments
	Balance as of December 31, 2010		Gross Purchases		Gross (Sales)			Net Realized Gain (Loss)			Change in Unrealized Appreciation/ Depreciation			Balance as of December 31, 2011
Investments
Investment in the Master Fund	$	4,023,577	$	11,459,327	$	(696,093	)	$	(24,015	)	$	(805,360	)	$	13,957,436

Total Investments	$	4,023,577	$	11,459,327	$	(696,093	)	$	(24,015	)	$	(805,360	)	$	13,957,436

The net realized gain (loss) and change in unrealized appreciation/depreciation in the table above are reflected in the accompanying Statement of Operations. The change in unrealized appreciation/ depreciation from Level 3 investments held at December 31, 2011, is $(805,360).

(4) SHAREHOLDERS ACCOUNTS

(a) ISSUANCE OF SHARES

Upon receipt from an eligible investor of an initial or additional application for Shares, which will generally be accepted as of the first business day of each month, the SAR Fund will issue new Shares. The SAR Fund issues Shares only in private placement transactions in accordance with Regulation D or other applicable exemptions under the 1933 Act. No public market exists for the Shares, and none is expected to develop. The SAR Fund is not required, and does not intend, to hold annual meetings of its shareholders. The Shares are subject to substantial restrictions on transferability and resale and may not be transferred or resold except as permitted under the SAR Fund’s Declaration of Trust.

The SAR Fund reserves the right to reject any applications for subscription of Shares. The $115,000 in subscriptions received in advance as of December 31, 2011, represents subscriptions for SAR Fund Shares received prior to the January 2012 closing.

(b) REPURCHASE OF SHARES

A shareholder will not be eligible to have the SAR Fund repurchase all or any portion of its Shares at the shareholder’s discretion at any time. The Adviser, which also serves as the investment adviser of the Master Fund, expects that it will recommend to the Board that the SAR Fund offer to repurchase Shares each calendar quarter, pursuant to written tenders by shareholders. However, the Board retains the sole discretion to accept or reject the recommendation of the Adviser and to determine the amount of Shares, if any, that will be purchased in any tender offer that it does approve. Since the SAR Fund’s assets are invested in the Master Fund, the ability of the SAR Fund to have its Shares in the Master Fund be repurchased would be subject to the Master Fund’s repurchase policy. In addition, the SAR Fund may determine not to conduct a repurchase offer each time the Master Fund conducts a repurchase offer. In the event Shares are repurchased, there will be a substantial period of time between the date as of which shareholders must accept the SAR Fund’s offer to repurchase their Shares and the date they can expect to receive payment for their Shares from the SAR Fund.

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December 31, 2011

(5) INVESTMENTS IN PORTFOLIO SECURITIES

As of December 31, 2011, substantially all of the investments made by the SAR Fund were in the Master Fund.

(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, the Portfolio Funds in which the SAR Fund invests either directly or through the Master Fund may trade various derivative securities and other financial instruments, and may enter into various investment activities with off-balance sheet risk both as an investor and as a principal. The SAR Fund’s risk of loss in these Portfolio Funds is limited to the SAR Fund’s pro rata share of the value of such Portfolio Funds as held directly or through the Master Fund. In addition, the Master Fund may from time to time invest directly in derivative securities or other financial instruments to provide a certain type of exposure for the Master Fund’s overall portfolio.

(7) ADMINISTRATION AGREEMENT

In consideration for administrative, accounting, and recordkeeping services, the SAR Fund will pay the Independent Administrator a monthly administration fee based on the month end aggregate net asset value of the Master Fund and its feeder funds (the “Funds”) (net of any Fund’s net asset value invested in another Fund) (the “Fund’s NAV”). The SAR Fund will pay its pro rata share of total administration fees based on its proportionate net asset value to the aggregate net asset value of all Funds. The Funds are charged on an annual basis, 6 basis points on the Fund’s NAV of up to $2 billion, 5 basis points on the Fund’s NAV between the amounts of $2 billion and $5 billion, 2 basis points on the Fund’s NAV between the amounts of $5 billion and $15 billion and 1.25 basis points on the Funds NAV over $15 billion. The Independent Administrator may also provide the SAR Fund with legal, compliance, transfer agency, and other investor related services at an additional cost. Per the administration agreement, the SAR Fund will not be charged administration fees until January 1, 2012.

(8) RELATED PARTY TRANSACTIONS

(a) INVESTMENT MANAGEMENT FEE

In consideration of the advisory and other services provided by the Adviser to the Master Fund and the SAR Fund, the Master Fund will pay the Adviser an investment management fee (the “Investment Management Fee”) of 0.75% on an annualized basis of the Master Fund’s net assets calculated based on the Master Fund’s net assets at the end of each month, accrued monthly and payable quarterly in arrears. So long as the SAR Fund invests all of its investable assets in the Master Fund, the SAR Fund will not pay the Adviser directly any Investment Management Fee; however, should the SAR Fund not have all of its investments in the Master Fund, it may be charged the 0.75% Investment Management Fee directly. The SAR Fund’s shareholders bear an indirect portion of the Investment Management Fee paid by the Master Fund, through the SAR Fund’s investment in the Master Fund. For the year ended December 31, 2011, the Master Fund incurred $993,998 in Investment Management Fees.

The Adviser has contractually agreed to limit total annualized expenses of the SAR Fund through January 31, 2012 through an expense limitation agreement (the “Expense Limitation Agreement”), including a portion of the indirect expenses from the SAR Fund’s investment in the Master Fund (exclusive of borrowing and investment-related costs) based on the SAR Fund’s proportionate investment in the Master Fund, to 2.50% of net assets. Under the Expense Limitation Agreement, the Adviser is permitted to recover in later periods expenses it has borne to the extent that the SAR Fund’s expenses fall below the 2.50% rate. The SAR Fund, however, is not obligated to pay any such amount beyond three years after the end of the fiscal year in which the Adviser reimbursed such expense. Any such recovery by the Adviser shall not cause the SAR Fund to exceed the annual

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December 31, 2011

expense limitation rate that was in effect at the time of such waiver or reimbursement. As of December 31, 2011, the recoupments that may potentially be made by the SAR Fund are as follows:


Expires 12/31/13		Expires 12/31/14		Total
$	207,045	$	86,969	$	294,014

(b) DISTRIBUTION AND SERVICING AGREEMENTS

Salient Capital, L.P., an affiliate of the Adviser, acts as the distributor (the “Distributor”) of Shares of the SAR Fund. A Fund’s Shares may be purchased through the Distributor, broker-dealers that have entered into selling agreements with the Distributor (“Selling Agents”), or registered investment advisers (“RIAs”) that have entered into an arrangement with the Distributor for such RIA to offer Shares. Neither the Distributor nor any Selling Agents or RIAs are obligated to buy from the SAR Fund any of the Shares. There is no minimum aggregate amount of Shares of the SAR Fund required to be purchased.

In consideration for providing or procuring investor services and administrative assistance to the SAR Fund, the Adviser will receive a servicing fee (the “Servicing Fee”) equal to 1.00% (on an annualized basis) of each shareholders account balance, calculated at the end of each month, payable quarterly in arrears. The Adviser may engage one or more sub-servicing agents to provide some or all of the services. The Adviser or its affiliates also may pay a fee out of their own resources to sub-servicing agents.

(9) FINANCIAL HIGHLIGHTS


	For the year ended December 31, 2011			For the period from April 1, 2010 through December 31, 2010 ¹
Per share operating performance:
Net asset value, beginning of period	$	14.74		$	15.00
Loss from operations:
Net investment income ²		0.11			0.13
Net realized and unrealized loss from investments		(0.62	)		(0.25	)

Net decrease resulting from operations		(0.51	)		(0.12	)
Distributions to Shareholders from:
Net investment income		(0.08	)		(0.14	)
Net realized gains on investments		—	³		—

Total distributions		(0.08	)		(0.14	)

Total		(0.59	)		(0.26	)

Net asset value, end of period	$	14.15		$	14.74

Net investment income to average net assets ⁴		0.77	%		1.84	%

Total gross operating expenses to average net assets ⁴		2.26	%		12.15	%

Total net operating expenses to average net assets ^4,5		1.44	%		1.21	%

Portfolio turnover ⁶		54.92	%		57.50	%

Total return ⁷		(3.45	)%		(0.78	)%

Net assets, end of period (000’s)	$	13,768		$	4,010

1	The SAR Fund commenced operations on April 1, 2010.

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December 31, 2011

2	Calculated using the average shares.

3	Amount is less than $0.005.

4	Ratios are calculated by dividing the indicated amount by average net assets measured at the end of each month during the period. Ratios have been annualized for periods less than twelve months.

In accordance with the Expense Limitation Agreement, reimbursed expenses include expenses of the Master Fund, accounting for 1.06% for the year ended December 31, 2011 and 1.29% for the period from April 1, 2010 through December 31, 2010. The net expense ratio of the SAR Fund, including the applicable Master Fund expenses, is 2.50%.

6	The SAR Fund is invested substantially in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund.

7	Total return is calculated for the shareholders taken as a whole. Total return is not annualized for periods less than twelve months.

(10) SUBSEQUENT EVENTS

The SAR Fund accepts initial or additional applications for Shares generally as of the first business day of the month. Investor subscriptions for Shares totaled approximately $115,000 and $220,000 for January and February 2012, respectively.

Based on the net assets of the SAR Fund, the Adviser recommended to the Board that a tender offer in an amount of up to $1,000,000 be made for the quarter ending March 31, 2012 to those shareholders who elect to tender their Shares prior to the expiration of the tender offer period. The Board approved such recommendation and shareholders in the SAR Fund were notified of a tender offer with a February 21, 2012 expiration date. At the expiration date the tender was oversubscribed. As a result, it is anticipated that the Board will approve an amendment to increase the amount of the tender offer.

Management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. Based on this evaluation, no adjustments were required to the financial statements as of December 31, 2011.

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Shareholders’ Report

December 31, 2011

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Trustees

Salient Absolute Return Institutional Fund:

We have audited the accompanying statement of assets and liabilities of Salient Absolute Return Institutional Fund (the “Institutional Fund”), including the schedule of investments, as of December 31, 2011, and the related statements of operations and cash flows for the year then ended and the statements of changes in net assets and the financial highlights for the year then ended and the period from April 1, 2010 (commencement of operations) to December 31, 2010. These financial statements and financial highlights are the responsibility of the Institutional Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Salient Absolute Return Institutional Fund as of December 31, 2011, the results of its operations and its cash flows for the year then ended and the changes in its net assets and the financial highlights for the year then ended and the period from April 1, 2010 (commencement of operations) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Columbus, Ohio

February 27, 2012

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Statement of Assets and Liabilities

December 31, 2011


Assets:
Investment in the Master Fund, at fair value (cost $62,615,241)	$	59,733,144
Investments in securities, at fair value (cost $41,895)		41,895

Total investments		59,775,039
Cash and cash equivalents		1,593,406
Receivable from the Master Fund		5,737,996
Prepaids and other assets		17,434

Total assets		67,123,875

Liabilities:
Dividends payable		3,875
Subscriptions received in advance		1,500,000
Redemptions payable		6,097,129
Payable to Adviser for recoupment		77,547
Shareholder Servicing Fees payable		40,850
Accounts payable and accrued expenses		14,544

Total liabilities		7,733,945

Net assets	$	59,389,930

Net assets consist of:
Paid-in-capital	$	62,263,006
Accumulated net investment income		405,930
Accumulated net realized loss		(396,909	)
Net unrealized depreciation on investments		(2,882,097	)

Net assets	$	59,389,930

Net asset value per share outstanding (4,178,935 shares outstanding)	$	14.21

See accompanying notes to financial statements.

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Schedule of Investments

December 31, 2011


	Shares		Fair Value		% of Net Assets

Investment in the Master Fund
Salient Absolute Return Master Fund (United States) (100.58% of Net Assets)		62,207	$	59,733,144

Total Investment in the Master Fund (Cost $62,615,241)				59,733,144		100.58%

Investments in Securities
Investments in Registered Investment Companies
Money Market Fund (0.07% of Net Assets)
JPMorgan 100% U.S. Treasury Securities Money Market Fund (United States)		41,895		41,895

Total Money Market Fund				41,895

Total Investments in Securities (Cost $41,895)				41,895		0.07%

Total Investments (Cost $62,657,136)			$	59,775,039		100.65%

All securities are income producing.

See accompanying notes to financial statements.

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Statement of Operations

Year Ended December 31, 2011


Dividend income—Master Fund	$	1,069,571

Total investment income		1,069,571

Expenses:
Amortization of offering costs		81,668
Shareholder Servicing Fees		148,548
Printing fees		16,779
Professional fees		16,338
Registration and filing fees		35,580
Other expenses		13,998

Total expenses		312,911

Recoupment by the Adviser		143,977

Net expenses		456,888

Net investment income		612,683

Net realized and unrealized loss from investments:
Net realized loss from investment in Master Fund		(396,307	)
Change in unrealized appreciation/depreciation from investment in Master Fund		(2,752,332	)

Net realized and unrealized loss from investments		(3,148,639	)

Net decrease in net assets resulting from operations	$	(2,535,956	)

See accompanying notes to financial statements.

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Statements of Changes in Net Assets


	Year Ended December 31, 2011			For the period April 1, 2010 through December 31, 2010*
Net assets, beginning of period	$	33,124,135		$	—
Net increase (decrease) in net assets resulting from operations:
Net investment income		612,683			340,737
Net realized loss from investment in Master Fund		(396,307	)		—
Change in unrealized appreciation/depreciation from investment in Master Fund		(2,752,332	)		(129,765	)

Net increase (decrease) in net assets resulting from operations		(2,535,956	)		210,972

Distributions from net investment income		(619,359	)		(340,771	)
Distribution from capital gains		(602	)		—

Change in net assets from distributions		(619,961	)		(340,771	)

Capital Transactions:
Subscriptions		37,148,739			32,913,163
Proceeds from reinvestment of dividends		616,086			340,771
Redemptions		(8,343,113	)		—

Change in net assets from capital transactions		29,421,712			33,253,934

Net assets, end of period	$	59,389,930		$	33,124,135

Accumulated net investment income	$	405,930		$	86,383

Share Transactions:
Issued		2,478,860			2,219,293
Reinvested		43,351			23,069
Redeemed		(585,638	)		—

Change in shares		1,936,573			2,242,362

*	The Institutional Fund commenced operations on April 1, 2010.

See accompanying notes to financial statements.

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Statement of Cash Flows

Year Ended December 31, 2011


Cash flows from operating activities:
Net decrease in net assets resulting from operations	$	(2,535,956	)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:
Purchases of investments		(36,839,441	)
Proceeds from disposition of investments		8,025,879
Reinvestment of dividends received		(1,069,571	)
Net realized loss from investment in Master Fund		396,307
Change in unrealized appreciation/depreciation from investment in Master Fund		2,752,332
Decrease in advanced subscriptions to the Master Fund		666,471
Increase in receivable from the Master Fund		(5,737,996	)
Decrease in receivable from Adviser		21,450
Decrease in prepaids and other assets		59,660
Increase in payable to Adviser for recoupment		77,547
Increase in Shareholder Servicing Fees payable		20,792
Decrease in accounts payable and accrued expenses		(1,823	)

Net cash used in operating activities		(34,164,349	)

Cash flows from financing activities:
Subscriptions		37,983,739
Redemptions		(2,245,984	)

Net cash provided by financing activities		35,737,755

Net increase in cash and cash equivalents		1,573,406
Cash and cash equivalents at beginning of period		20,000

Cash and cash equivalents at end of period	$	1,593,406

Supplemental schedule of non-cash activity:
Reinvestment of dividends received	$	1,069,571
Proceeds from reinvestment of dividends		616,086

See accompanying notes to financial statements.

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Notes to Financial Statements

December 31, 2011

(1) ORGANIZATION

Salient Absolute Return Institutional Fund (the “Institutional Fund”), a Delaware statutory trust registered under the Investment Company Act of 1940, as amended and the Securities Act of 1933, commenced operations on April 1, 2010, as a non-diversified closed-end management investment company. The Institutional Fund was created to serve as a feeder fund for Salient Absolute Return Master Fund (the “Master Fund”). The Institutional Fund has authorized 33,333,333 shares of beneficial interest (“Shares”), which may be issued in more than one class or series. For convenience, reference to the Institutional Fund may include the Master Fund, as the context requires.

The Institutional Fund’s investment objective is to generate positive returns regardless of the overall direction of various markets. The Institutional Fund pursues its investment objective by investing substantially all of its assets in the Master Fund which invests its assets across a variety of investment funds (the “Portfolio Funds”). The Master Fund’s financial statements, Schedule of Investments and notes to financial statements, included elsewhere in this report, are an integral part of the Institutional Fund’s financial statements that should be read in conjunction with this report. The percentage of the Master Fund’s net assets owned by the Institutional Fund on December 31, 2011, was 47.44%.

The board of trustees (the “Board” and each member a “Trustee”) is authorized to engage an investment adviser and it has selected Salient Advisors, L.P. (the “Adviser”), to manage the Institutional Fund’s portfolio and operations, pursuant to an investment management agreement (the “Investment Management Agreement”). The Adviser is a Texas limited partnership that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Under the Investment Management Agreement, the Adviser is responsible for the establishment of an investment committee, which is responsible for developing, implementing, and supervising the Institutional Fund’s investment program subject to the ultimate supervision of the Board.

Under the Institutional Fund’s organizational documents, the Institutional Fund’s Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Institutional Fund. In the normal course of business, the Institutional Fund enters into contracts with service providers, which also provide for indemnifications by the Institutional Fund. The Institutional Fund’s maximum exposure under these arrangements is unknown, as this would involve any future potential claims that may be made against the Institutional Fund. However, based on experience, management expects that risk of loss to be remote.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) BASIS OF ACCOUNTING

The accounting and reporting policies of the Institutional Fund conform with U.S. generally accepted accounting principles (“U.S. GAAP”).

(b) CASH EQUIVALENTS

The Institutional Fund considers all unpledged temporary cash investments with a maturity date at the time of purchase of three months or less to be cash equivalents.

(c) PORTOLIO SECURITIES TRANSACTIONS

The Institutional Fund records investment transactions on a trade-date basis.

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Notes to Financial Statements, continued

December 31, 2011

Investments that are held by the Institutional Fund are marked to fair value at the date of the financial statements, and the corresponding change in unrealized appreciation/depreciation is included in the Statement of Operations.

(d) VALUATION OF INVESTMENTS

The valuation of the Institutional Fund’s investments will be determined as of the close of business at the end of each reporting period, generally monthly. The valuation of the Institutional Fund’s investments is calculated by Citi Fund Services Ohio, Inc., the Institutional Fund’s independent administrator (the “Independent Administrator”).

The Board has formed a valuation committee (the “Board Valuation Committee”) that is responsible for overseeing the Institutional Fund’s valuation policies, making recommendations to the Board on valuation-related matters, and overseeing implementation by the Adviser Valuation Committee (as defined below) of the Institutional Fund’s valuation policies.

Investments held by the Institutional Fund are valued as follows:

•

MASTER FUND —The Institutional Fund invests substantially all of its assets in the Master Fund. Investments in the Master Fund are recorded at fair value, using the net asset value of the Master Fund as a practical expedient. Valuation of the investments held by the Master Fund is discussed in the notes to the Master Fund’s financial statements included elsewhere in this report.

•

OTHER —Other investments held by the Fund that do not trade on an exchange are valued at the end of day net asset value per share.

(e) INVESTMENT INCOME

(f) FUND EXPENSES

Unless otherwise voluntarily or contractually assumed by the Adviser or another party, the Institutional Fund bears all expenses incurred in its business including but not limited to, the following: all costs and expenses related to investment transactions and positions for the Institutional Fund’s account; interest expenses and loan fees; legal fees; accounting, auditing and tax preparation fees; recordkeeping and custodial fees; costs of computing the Institutional Fund’s net asset value; research expenses; costs of insurance; registration expenses; offering costs; transfer taxes and taxes withheld on non-U.S. dividends; and other types of expenses as may be approved from time to time by the Adviser. Offering costs are amortized over a twelve-month period or less from the date they are incurred. Organization costs, if any, are expensed as incurred.

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Notes to Financial Statements, continued

December 31, 2011

(g) INCOME TAXES

The Institutional Fund expects to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined in Subchapter M of the Internal Revenue Code, and to make distributions from net investment income and from net realized capital gains sufficient to relieve it from all, or substantially all, federal income and excise taxes. The Institutional Fund has elected to have a tax year end of October 31. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities.

The Institutional Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the Institutional Fund’s tax returns to determine whether the tax positions will “more-likely-than-not” be sustained by the Institutional Fund upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold and that would result in a tax benefit or expense to the Institutional Fund would be recorded as a tax benefit or expense in the current period. For the year ended December 31, 2011, the Institutional Fund did not recognize any amounts for unrecognized tax benefit/expense. A reconciliation of unrecognized tax benefit/expense is not provided herein, as the beginning and ending amounts of unrecognized tax benefit/expense are zero, with no interim additions, reductions or settlements. Tax positions taken in tax years which remain open under the statute of limitations (generally three years for federal income tax purposes) are subject to examination by tax authorities.

As of December 31, 2011, the following reclassifications have been made to increase (decrease) such accounts in the Institutional Fund with offsetting adjustments as indicated:


Accumulated Net Investment Income (Loss)		Paid-in-Capital
$	326,223	$	(326,223	)

The tax character of dividends paid to shareholders as of the latest tax year ended October 31, 2011 were as follows:


Ordinary Income		Total Taxable Distributions		Return of Capital		Total Distributions Paid
$	14,548	$	14,548	$	326,223	$	340,771

No dividends or distributions were paid by the Institutional Fund during the tax year ended October 31, 2010.

As of the latest tax year ended October 31, 2011, the components of accumulated earnings (deficit) on a tax basis were as follows:


Undistributed Long –Term Capital Gains		Unrealized Appreciation (Depreciation)			Total Accumulated Earnings (Deficit)
$	602	$	(2,150,799	)	$	(2,150,197	)

(h) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS

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Notes to Financial Statements, continued

December 31, 2011

and/or capital gains distributions automatically reinvested in Shares. Election not to participate in the DRP and to receive all income dividends and/or capital gain distributions, if any, in cash may be made by notice to the Institutional Fund.

Shares are issued pursuant to the DRP at the Institutional Fund’s net asset value determined on the next valuation date following the ex-dividend date (the last date of a dividend period on which an investor can purchase Shares and still be entitled to receive the dividend).

(i) USE OF ESTIMATES

(3) FAIR VALUE MEASUREMENTS

The Institutional Fund defines fair value as the price 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 under current market conditions.

The inputs used to determine the fair value of the Institutional Fund’s investments are summarized in the three broad levels listed below:

•

Level 1—quoted prices in active markets for identical assets

•

Level 2—investments with other significant observable inputs or investments that can be fully redeemed at the net asset value in the “near term”

•

The inputs or methodology used to value investments are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary categorization, as of December 31, 2011, of the Institutional Fund’s investments based on the level of inputs utilized in determining the value of such investments:


	LEVEL 1		LEVEL 2		LEVEL 3		Total Investments
Investments
Investment in the Master Fund	$	—	$	—	$	59,733,144	$	59,733,144
Investment Securities
Money Market		41,895		—		—		41,895

Total Investments	$	41,895	$	—	$	59,733,144	$	59,775,039

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Notes to Financial Statements, continued

December 31, 2011

The categorization of the Institutional Fund’s investment in the Master Fund as a Level 3 investment does not reflect the fact that many of the underlying investments held by the Investment Funds in which the Master Fund invests, if owned directly by the Institutional Fund, may be classified as Level 1 investments.

The following is a reconciliation of Level 3 investments based on the inputs used to determine fair value:


	Investments
	Balance as of December 31, 2010		Gross Purchases		Gross (Sales)			Net Realized Gain (Loss)			Change in Unrealized Appreciation/ Depreciation			Balance as of December 31, 2011
Investments
Investment in the Master Fund	$	33,040,545	$	37,863,242	$	(8,022,004	)	$	(396,307	)	$	(2,752,332	)	$	59,733,144

Total Investments	$	33,040,545	$	37,863,242	$	(8,022,004	)	$	(396,307	)	$	(2,752,332	)	$	59,733,144

(4) SHAREHOLDERS ACCOUNTS

(a) ISSUANCE OF SHARES

Upon receipt from an eligible investor of an initial or additional application for Shares, which will generally be accepted as of the first business day of each month, the Institutional Fund will issue new Shares. The Institutional Fund issues Shares only in private placement transactions in accordance with Regulation D or other applicable exemptions under the 1933 Act. No public market exists for the Shares, and none is expected to develop. The Institutional Fund is not required, and does not intend, to hold annual meetings of its shareholders. The Shares are subject to substantial restrictions on transferability and resale and may not be transferred or resold except as permitted under the Institutional Fund’s Declaration of Trust.

The Institutional Fund reserves the right to reject any applications for subscription of Shares. The $1,500,000 in subscriptions received in advance as of December 31, 2011, represents subscriptions for Institutional Fund Shares received prior to the January 2012 closing.

(b) REPURCHASE OF SHARES

A shareholder will not be eligible to have the Institutional Fund repurchase all or any portion of its Shares at the shareholder’s discretion at any time. The Adviser, which also serves as the investment adviser of the Master Fund, expects that it will recommend to the Board that the Institutional Fund offer to repurchase Shares each calendar quarter, pursuant to written tenders by shareholders. However, the Board retains the sole discretion to accept or reject the recommendation of the Adviser and to determine the amount of Shares, if any, that will be purchased in any tender offer that it does approve. Since the Institutional Fund’s assets are invested in the Master Fund, the ability of the Institutional Fund to have its Shares in the Master Fund be repurchased would be subject to the Master Fund’s repurchase policy. In addition, the Institutional Fund may determine not to conduct a repurchase offer each time the Master Fund conducts a repurchase offer. In the event Shares are repurchased, there will be a substantial period of time between the date as of which shareholders must accept the Institutional Fund’s offer to repurchase their Shares and the date they can expect to receive payment for their Shares from the Institutional Fund.

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Notes to Financial Statements, continued

December 31, 2011

(5) INVESTMENTS IN PORTFOLIO SECURITIES

As of December 31, 2011, substantially all of the investments made by the Institutional Fund were in the Master Fund.

(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, the Portfolio Funds in which the Institutional Fund invests either directly or through the Master Fund may trade various derivative securities and other financial instruments, and may enter into various investment activities with off-balance sheet risk both as an investor and as a principal. The Institutional Fund’s risk of loss in these Portfolio Funds is limited to the Institutional Fund’s pro rata share of the value of such Portfolio Funds as held directly or through the Master Fund. In addition, the Master Fund may from time to time invest directly in derivative securities or other financial instruments to provide a certain type of exposure for the Master Fund’s overall portfolio.

(7) ADMINISTRATION AGREEMENT

In consideration for administrative, accounting, and recordkeeping services, the Institutional Fund will pay the Independent Administrator a monthly administration fee based on the month end aggregate net asset value of the Master Fund and its feeder funds (the “Funds”) (net of any Fund’s net asset value invested in another Fund) (the “Fund’s NAV”). The Institutional Fund will pay its pro rata share of total administration fees based on its proportionate net asset value to the aggregate net asset value of all Funds. The Funds are charged on an annual basis, 6 basis points on the Fund’s NAV of up to $2 billion, 5 basis points on the Fund’s NAV between the amounts of $2 billion and $5 billion, 2 basis points on the Fund’s NAV between the amounts of $5 billion and $15 billion and 1.25 basis points on the Funds NAV over $15 billion. The Independent Administrator may also provide the Institutional Fund with legal, compliance, transfer agency, and other investor related services at an additional cost. Per the administration agreement, the Institutional Fund will not be charged administration fees until January 1, 2012.

(8) RELATED PARTY TRANSACTIONS

(a) INVESTMENT MANAGEMENT FEE

In consideration of the advisory and other services provided by the Adviser to the Master Fund and the Institutional Fund, the Master Fund will pay the Adviser an investment management fee (the “Investment Management Fee”) of 0.75% on an annualized basis of the Master Fund’s net assets calculated based on the Master Fund’s net assets at the end of each month, accrued monthly and payable quarterly in arrears. So long as the Institutional Fund invests all of its investable assets in the Master Fund, the Institutional Fund will not pay the Adviser directly any Investment Management Fee; however, should the Institutional Fund not have all of its investments in the Master Fund, it may be charged the 0.75% Investment Management Fee directly. The Institutional Fund’s shareholders bear an indirect portion of the Investment Management Fee paid by the Master Fund, through the Institutional Fund’s investment in the Master Fund. For the year ended December 31, 2011, the Master Fund incurred $993,998 in Investment Management Fees.

The Adviser has contractually agreed to limit total annualized expenses of the Institutional Fund through January 31, 2012 through an expense limitation agreement (the “Expense Limitation Agreement”), including a portion of the indirect expenses from the Institutional Fund’s investment in the Master Fund (exclusive of borrowing and investment-related costs) based on the Institutional Fund’s proportionate investment in the Master

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Notes to Financial Statements, continued

December 31, 2011

Fund, to 2.0% of net assets. Under the Expense Limitation Agreement, the Adviser is permitted to recover in later periods expenses it has borne to the extent that the Institutional Fund’s expenses fall below the 2.0% rate. The Institutional Fund, however, is not obligated to pay any such amount beyond three years after the end of the fiscal year in which the Adviser reimbursed such expense. Any such recovery by the Adviser shall not cause the Institutional Fund to exceed the annual expense limitation rate that was in effect at the time of such waiver or reimbursement. During the year ended December 31, 2011, the Adviser recouped $143,977 for expenses reimbursed in 2010. There were no remaining previously reimbursed expenses subject to recoupment as of December 31, 2011.

(b) DISTRIBUTION AND SERVICING AGREEMENTS

Salient Capital, L.P., an affiliate of the Adviser, acts as the distributor (the “Distributor”) of Shares of the Institutional Fund. A Fund’s Shares may be purchased through the Distributor, broker-dealers that have entered into selling agreements with the Distributor (“Selling Agents”), or registered investment advisers (“RIAs”) that have entered into an arrangement with the Distributor for such RIA to offer Shares. Neither the Distributor nor any Selling Agents or RIAs are obligated to buy from the Institutional Fund any of the Shares. There is no minimum aggregate amount of Shares of the Institutional Fund required to be purchased.

In consideration for providing or procuring investor services and administrative assistance to the Institutional Fund, the Adviser will receive a servicing fee (the “Servicing Fee”) equal to 0.25% (on an annualized basis) of each shareholders account balance, calculated at the end of each month, payable quarterly in arrears. The Adviser may engage one or more sub-servicing agents to provide some or all of the services. The Adviser or its affiliates also may pay a fee out of their own resources to sub-servicing agents.

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Notes to Financial Statements, continued

December 31, 2011

(9) FINANCIAL HIGHLIGHTS


	Year Ended December 31, 2011			For the period from April 1, 2010 through December 31, 2010 ¹
Per share operating performance:
Net asset value, beginning of period	$	14.77		$	15.00
Loss from operations:
Net investment income ²		0.15			0.15
Net realized and unrealized loss from investments		(0.57	)		(0.23	)

Net decrease resulting from operations		(0.42	)		(0.08	)
Distributions to Shareholders from:
Net investment income		(0.14	)		(0.15	)
Net realized gains on investments		—	³		—

Total distributions		(0.14	)		(0.15	)

Total		(0.56	)		(0.23	)

Net asset value, end of period	$	14.21		$	14.77

Net investment income to average net assets ⁴		1.04	%		1.84	%

Total operating expenses to average net assets ⁴		0.53	%		1.49	%

Total operating expenses to average net assets net of recoupments ⁴		0.78	%		0.71	%

Portfolio Turnover ⁵		54.92	%		57.50	%

Total return ⁶		(2.87	)%		(0.51	)%

Net Assets, end of period (000’s)	$	59,390		$	33,124

1	The Institutional Fund commenced operations on April 1, 2010.

2	Calculated using the average shares.

3	Amount is less than $0.005.

5	The Institutional Fund is invested substantially in the Master Fund, therefore this ratio reflects the portfolio turnover of the Master Fund.

6	The total return is calculated for the shareholders taken as a whole. Total return is not annualized for periods less than twelve months.

(10) SUBSEQUENT EVENTS

The Institutional Fund accepts initial or additional applications for Shares generally as of the first business day of the month. Investor subscriptions for Shares totaled approximately $1,500,000 and $250,000 for January and February 2012, respectively.

Based on the net assets of the Institutional Fund, the Adviser recommended to the Board that a tender offer in an amount of up to $7,000,000 be made for the quarter ending March 31, 2012 to those shareholders who elect

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Notes to Financial Statements, continued

December 31, 2011

to tender their Shares prior to the expiration of the tender offer period. The Board approved such recommendation and shareholders in the Institutional Fund were notified of a tender offer with a February 21, 2012 expiration date. At the expiration date the tender was oversubscribed. As a result, it is anticipated that the Board will approve an amendment to increase the amount of the tender offer.

SALIENT ABSOLUTE RETURN MASTER FUND

Shareholders’ Report

December 31, 2011

Report of Independent Registered Public Accounting Firm

The Shareholders and Board of Trustees

Salient Absolute Return Master Fund:

We have audited the accompanying statement of assets and liabilities of Salient Absolute Return Master Fund (the “Master Fund”), including the schedule of investments, as of December 31, 2011, and the related statements of operations and cash flows for the year then ended and the statements of changes in net assets and the financial highlights for the year then ended and the period from February 1, 2010 (commencement of operations) to December 31, 2010. These financial statements and financial highlights are the responsibility of the Master Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2011, by correspondence with the custodian and investees; or other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Salient Absolute Return Master Fund as of December 31, 2011, the results of its operations and its cash flows for the year then ended, and the changes in its net assets and the financial highlights for the year then ended and the period from February 1, 2010 (commencement of operations) to December 31, 2010, in conformity with U.S. generally accepted accounting principles.

KPMG LLP

Columbus, Ohio

February 27, 2012

SALIENT ABSOLUTE RETURN MASTER FUND

Statement of Assets and Liabilities

December 31, 2011


Assets:
Investments in Portfolio Funds, at fair value (cost $113,250,063)	$	112,487,157
Investments in affiliated Portfolio Funds, at fair value (cost $23,545,993)		23,459,861
Investments in securities, at fair value (cost $23,352,805)		23,526,175

Total investments		159,473,193
Cash and cash equivalents		154,086
Receivable from investments sold		2,939,511
Dividends and interest receivable		236,258
Prepaids and other assets		3,617

Total assets		162,806,665

Liabilities:
Line of credit		23,022,384
Redemptions payable		13,384,634
Distributions payable		110,000
Investment Management Fees payable		261,258
Interest expense payable		53,957
Accounts payable and accrued expenses		58,058

Total liabilities		36,890,291

Net assets	$	125,916,374

Net assets consist of:
Paid-in-Capital	$	132,492,197
Accumulated net investment loss		(2,818,263	)
Accumulated net realized loss		(3,081,600	)
Net unrealized depreciation on investments		(675,960	)

Net assets	$	125,916,374

Net asset value per share outstanding (131,130 shares outstanding)	$	960.24

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN MASTER FUND

Schedule of Investments

December 31, 2011


	Shares		Fair Value		% of Net Assets

Investments in Portfolio Funds
Passive Foreign Investment Companies
Event Driven (10.96% of Net Assets)
King Street Capital, Ltd. (British Virgin Islands)		16,709	$	2,104,656
Loeb Offshore Fund, Ltd. (Bermuda)		41,527		5,255,159
Revelation Special Situations Fund, Ltd. (Bermuda)		3,520		6,437,267

Total Event Driven				13,797,082

Macro/CTA (38.51% of Net Assets)
Global Macro
MKP Opportunity Offshore, Ltd. (Cayman Islands)		75,000		7,550,172
Top Down Alpha
BlackRock Global Ascent, Ltd. (Cayman Islands)		7,769		6,980,387
BTG Pactual Global Emerging Markets, Ltd. (Cayman Islands)		7,500		7,196,789
D.E. Shaw Heliant International Fund, L.P. (Bermuda) ⁽²⁾				10,182,226
ISAM Systematic Class A Fund (Cayman Islands)		85,342		9,231,449
Salem Global Opportunity Fund (Offshore), Ltd. (Cayman Islands) ⁽¹⁾		7,744		7,347,083

Total Macro/CTA				48,488,106

Relative Value (53.34% of Net Assets)
Bottom Up Alpha
Alphabet Offshore Fund, Ltd. (Cayman Islands)		7,000		6,508,663
AQR Delta Offshore Fund LP (Cayman Islands)				9,878,570
Arrowgrass International Fund, Ltd. (United Kingdom)		7,500		742,360
Black Diamond Relative Value Fund, Ltd. (Cayman Islands)		65,000		6,072,316
Blue Mountain Credit Alternatives Fund, Ltd. (Cayman Islands)		60,000		5,893,754
Carlson Double Black Diamond, Ltd. (Cayman Islands)		46,428		7,094,437
CC ARB International Fund, Ltd. (Cayman Islands)		606		771,145
CCA Absolute Return Muni Strategy Fund (Ireland) ⁽¹⁾		8,297		8,555,424
D.E. Shaw Composite International Fund (Bermuda) ⁽²⁾				59,766
Hudson Bay Overseas Fund, Ltd. (United States)		2,748		5,388,920
Overseas CAP Partners, Inc. (Cayman Islands) ⁽¹⁾		4,395		7,557,354
Saba Capital Offshore Fund, Ltd. (Cayman Islands)		7,500		8,129,117
Waterstone Market Neutral Offshore Fund, Ltd. (Cayman Islands)		2,303		506,332

Total Relative Value				67,158,158

See accompanying notes to financial statements.

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Schedule of Investments, continued

December 31, 2011


	Shares/ Principal Amount*		Fair Value		% of Net Assets

Passive Foreign Investment Companies (continued)
Tactical Credit (5.16% of Net Assets)
Rose Grove Offshore Fund I, Ltd. (Cayman Islands)		5,403	$	6,503,672

Total Tactical Credit				6,503,672

Total Investments in Portfolio Funds (Cost $136,796,056)				135,947,018		107.97%

Investments in Securities
Registered Investment Companies
Money Market Funds (2.89% of Net Assets)
United States
JPMorgan 100% U.S. Treasury Securities Money Market Fund (United States) ⁽²⁾		2,757,166		2,757,166
JPMorgan U.S. Treasury Plus Money Market Fund (United States) ⁽²⁾		883,286		883,286

Total Money Market Funds				3,640,452

Tactical Credit (8.21% of Net Assets)
iShares iBoxx $ High Yield Corporate Bond Fund (United States) ⁽²⁾		69,944		6,255,092
Wisdom Tree Emerging Markets Local Debt Fund (United States) ⁽²⁾		83,883		4,080,069

Total Tactical Credit				10,335,161

Total Registered Investment Companies				13,975,613		11.10%

Corporate Bonds (6.85% of Net Assets)
CHS/Community Health System, 8.875%, 07/15/15 (United States) ⁽²⁾		1,000,000		1,032,500
CIT Group, Inc., 7.00%, 05/01/17 (United States) ⁽²⁾		2,000,000		2,000,000
Continental Airlines 2003-ERJ1, 7.875%, 07/02/18 (United States) ⁽²⁾		825,807		805,162
Continental Airlines 2005-ERJ1, 9.798%, 04/01/21 (United States) ⁽²⁾		986,971		1,006,711
Ford Motor Credit Co, LLC, 8.125%, 01/15/20 (United States) ⁽²⁾		2,000,000		2,354,136
Highland Park CDO Ltd, 0.84%, 11/25/51 (United States) ⁽²⁾⁽³⁾		2,590,821		1,424,952

Total Investments in Corporate Bonds				8,623,461

See accompanying notes to financial statements.

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Schedule of Investments, continued

December 31, 2011


	Shares/ Principal Amount*		Fair Value		% of Net Assets

Sovereign Bonds (0.73% of Net Assets)
Republic Of Mexico, 6.50%, 06/10/21 (Mexico) ⁽²⁾⁽⁴⁾		12,950,000	$	927,101

Total Sovereign Bonds				927,101

Total Investments in Securities (Cost $23,352,805)				23,526,175		18.68%

Total Investments (Cost $160,148,861)			$	159,473,193		126.65%

All securities are non-income producing unless noted otherwise.

*	Shares and principal amounts are listed for each investment as applicable for that investment type.

(1)	Affiliated investments

(2)	Income producing security

(3)	Variable or Floating Rate Security. Rate disclosed is as of December 31, 2011.

(4)	The principal amount is disclosed in local currency and the fair value is disclosed in U.S. Dollars.

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN MASTER FUND

Statement of Operations

Year Ended December 31, 2011


Investment income:
Dividend income	$	721,592
Interest income		173,317

Total investment income		894,909

Expenses:
Investment Management Fees		993,998
Amortization of offering costs		24,870
Trustees fees		120,000
Professional fees		69,512
Interest expense		392,857
Legal fees		94,429
Other expenses		167,574

Total expenses		1,863,240

Net investment loss		(968,331	)

Net realized and unrealized gains (losses) from investments, affiliated investments and foreign currency translations:
Net realized gain from investments and foreign currency translations		58,902
Change in unrealized appreciation/depreciation from investments, affiliated investments, and foreign currency translations		(3,053,324	)

Net realized and unrealized loss from investments, affiliated investments and foreign currency translations		(2,994,422	)

Net decrease in net assets resulting from operations	$	(3,962,753	)

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN MASTER FUND

Statements of Changes in Net Assets


	Year Ended December 31, 2011			For the period February 1, 2010 through December 31, 2010*
Net assets, beginning of period	$	99,974,045		$	—
Net increase (decrease) in net assets resulting from operations:
Net investment loss		(968,331	)		(1,124,877	)
Net realized gain from investments and foreign currency translations		58,902			123,658
Net realized loss from affiliated investments		—			(153,155	)
Change in unrealized appreciation/depreciation from investments, affiliated investments and foreign currency translations		(3,053,324	)		2,377,364

Net increase (decrease) in net assets resulting from operations		(3,962,753	)		1,222,990

Distributions from net investment income		(2,277,491	)		(1,580,169	)

Change in net assets from distributions		(2,277,491	)		(1,580,169	)

Capital Transactions:
Transfers in-kind		—			69,243,855
Subscriptions		48,025,363			40,023,786
Proceeds from reinvestment of dividends		2,167,491			1,380,169
Redemptions		(18,010,281	)		(10,316,586	)

Change in net assets from capital transactions		32,182,573			100,331,224

Net assets, end of period	$	125,916,374		$	99,974,045

Accumulated net investment loss	$	(2,818,263	)	$	(2,503,565	)

Share Transactions:
Issued in-kind		—			69,244
Issued		47,252			39,974
Reinvested		2,257			1,384
Redeemed		(18,635	)		(10,346	)

Change in shares		30,874			100,256

*	The Master Fund commenced operations on February 1, 2010.

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN MASTER FUND

Statement of Cash Flows

Year End December 31, 2011


Cash flows from operating activities:
Net decrease in net assets resulting from operations	$	(3,962,753	)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:
Purchases of investments		(223,895,232	)
Proceeds from disposition of investments		153,623,011
Net realized gain from investments		(59,637	)
Change in unrealized appreciation/depreciation from investments, affiliated investments and foreign currency translations		3,053,324
Amortization of premium		(833	)
Decrease in advanced subscriptions to Portfolio Funds		13,000,000
Decrease in receivable from investments sold		3,274,463
Increase in dividends and interest receivable		(236,550	)
Decrease in prepaids and other assets		36,659
Increase in Investment Management Fees payable		57,560
Decrease in line of credit commitment fees payable		(35,555	)
Decrease in payable to Trustees		(30,000	)
Increase in interest expense payable		53,957
Increase in accounts payable and accrued expenses		1,657

Net cash used in operating activities		(55,119,929	)

Cash flows from financing activities:
Subscriptions		37,042,308
Redemptions		(4,625,647	)
Distributions		(200,000	)
Proceeds from line of credit		90,290,000
Repayments on line of credit		(67,267,616	)

Net cash provided by financing activities		55,239,045

Net increase in cash and cash equivalents		119,116
Cash and cash equivalents at beginning of period		34,970

Cash and cash equivalents at end of period	$	154,086

Supplemental schedule of cash activity:
Cash paid for interest	$	338,900
Supplemental schedule of non-cash activity:
Proceeds from reinvestment of dividends	$	2,167,491

See accompanying notes to financial statements.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements

December 31, 2011

(1) ORGANIZATION

Salient Absolute Return Master Fund (the “Master Fund”), a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), commenced operations on February 1, 2010, as a non-diversified closed-end management investment company. The Master Fund is the master fund in a master-feeder structure in which there are currently three feeder funds. The Master Fund has authorized 900,000 shares of beneficial interest (“Shares”), which may be issued in more than one class or series.

The Master Fund is a “fund of funds” that pursues its investment objective primarily by investing its assets across a variety of investment funds (the “Portfolio Funds”) designed to generate positive returns regardless of the overall direction of various markets. The Master Fund’s investments are managed by a select group of investment managers identified by the Adviser, as hereinafter defined, to have investments that when grouped with other investments of the Master Fund result in a portfolio that is allocated more broadly across styles and strategies.

The board of trustees (the “Board” and each member a “Trustee”) is authorized to engage an investment adviser. It has selected Salient Advisors, L.P. (the “Adviser”), to manage the Master Fund’s portfolio and operations, pursuant to an investment management agreement (the “Investment Management Agreement”). The Adviser is a Texas limited partnership that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. Under the Investment Management Agreement, the Adviser is responsible for the establishment of an investment committee, which is responsible for developing, implementing, and supervising the Master Fund’s investment program subject to the ultimate supervision of the Board.

Under the Master Fund’s organizational documents, the Master Fund’s Trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Master Fund. In the normal course of business, the Master Fund enters into contracts with service providers, which also provide for indemnifications by the Master Fund. The Master Fund’s maximum exposure under these arrangements is unknown, as this would involve any future potential claims that may be made against the Master Fund. However, based on experience, management expects that risk of loss to be remote.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) BASIS OF ACCOUNTING

The accounting and reporting policies of the Master Fund conform with U.S. generally accepted accounting principles (“U.S. GAAP”).

(b) CASH EQUIVALENTS

The Master Fund considers all unpledged temporary cash investments with a maturity date at the time of purchase of three months or less to be cash equivalents.

(c) PORTFOLIO SECURITIES TRANSACTIONS

The Master Fund records investment transactions on a trade-date basis.

Investments that are held by the Master Fund, including those that have been sold short, are marked to fair value at the date of the financial statements, and the corresponding change in unrealized appreciation/depreciation is included in the Statement of Operations.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

Realized gains or losses on the disposition of investments are accounted for based on the first in first out (“FIFO”) method.

(d) VALUATION OF INVESTMENTS

The valuation of the Master Fund’s investments will be determined as of the close of business at the end of each reporting period, generally monthly. The valuation of the Master Fund’s investments is calculated by Citi Fund Services Ohio, Inc., the Master Fund’s independent administrator (the “Independent Administrator”).

The Board has formed a valuation committee (the “Board Valuation Committee”) that is responsible for overseeing the Master Fund’s valuation policies, making recommendations to the Board on valuation-related matters, and overseeing implementation by the Adviser Valuation Committee (as defined below) of the Master Fund’s valuation policies that the Board of the Master Fund has approved for purposes of determining the value of securities held by the Master Fund, including the fair value of the Master Fund’s investments in Portfolio Funds.

The Board has also authorized the establishment of a valuation committee of the Adviser (the “Adviser Valuation Committee”). The Adviser Valuation Committee’s function, subject to the oversight of the Board Valuation Committee and the Board, is generally to review the Portfolio Funds’ valuation methodologies, valuation determinations, and any information provided to the Adviser Valuation Committee by the Adviser or the Independent Administrator.

Investments held by the Master Fund are valued as follows:

•

PORTFOLIO FUNDS —Investments in Portfolio Funds are carried at fair value, using the net asset value (the “NAV”) as a practical expedient, as provided to the Independent Administrator by the investment managers of such Portfolio Funds or the administrators of such Portfolio Funds. These Portfolio Funds value their underlying investments in accordance with policies established by such Portfolio Funds. Prior to investing in any Portfolio Fund, the Adviser Valuation Committee, as part of the due diligence process, conducts a review of the valuation methodologies employed by the Portfolio Fund to determine whether such methods are appropriate for the asset types. All of the Master Fund’s valuations utilize financial information supplied by each Portfolio Fund and are net of management and estimated performance incentive fees or allocations payable to the Portfolio Funds’ managers pursuant to the Portfolio Funds’ agreements. Generally, Portfolio Funds in which the Master Fund invests will use market value when available, and otherwise use principles of fair value applied in good faith. The Adviser Valuation Committee will consider whether it is appropriate, in light of the relevant circumstances, to value shares at net asset value as reported by a Portfolio Fund for valuation purposes, or whether to adjust such reported value to reflect an adjusted fair value. Because of the inherent uncertainty of valuation, fair value may differ significantly from the value that would have been used had readily available markets for the investments in Portfolio Funds existed. The Master Fund’s investments in Portfolio Funds are subject to the terms and conditions of the respective operating agreements and offering memoranda of such Portfolio Funds. Portfolio Funds are typically categorized as Level 2 or 3 in the fair value hierarchy based upon liquidity.

•

SECURITIES LISTED ON A SECURITIES EXCHANGE OR OVER-THE-COUNTER EXCHANGES —In general, the Master Fund values securities at their last sales price on the date of determination, or if no sale occurred on such date, then at the mean between the “bid” and “ask” prices on such date, or if no such prices were quoted on such date, the mean between the “bid” and “ask” prices on the most

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

immediate prior date on which such prices were quoted. If an event occurred between the close of the foreign exchange and the valuation date of the Master Fund’s net asset value that would materially affect the value of the security and the net asset value of the Master Fund, the value of such security and the net asset value of the Master Fund will be adjusted to reflect the change in the estimated value of the security. Fixed-income securities are valued according to prices as furnished by an independent pricing service or broker/dealer quotes and are typically categorized as Level 2 in the fair value hierarchy.

•

OPTIONS —Options that are listed on a securities exchange are valued at the mean between the closing “bid” and “ask” prices for such options on the date of determination, or if no such prices were quoted on such date, or if the last sales price is not between the “bid” and “ask” price, the position will be valued at whichever of the “bid” or “ask” is closest to the last sale. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.

•

OTHER —Investments in open-end registered investment companies that do not trade on an exchange are valued at the end of day NAV per share. Where no value is readily available from a Portfolio Fund or where a value supplied by a Portfolio Fund is deemed not to be indicative of the Portfolio Fund’s value, the Adviser Valuation Committee and/or the Board Valuation Committee, in consultation with the Independent Administrator will determine, in good faith, the fair value of the Portfolio Fund.

•

FOREIGN CURRENCY —The accounting records of the Master Fund are maintained in U.S. dollars. Investments of the Master Fund denominated in a foreign currency, if any, are translated into U.S. dollar amounts at current exchange rates on the date of valuation. Purchases and sales of investments and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts at the exchange rate on the respective dates of such transactions.

(e) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Master Fund itself may purchase or sell options as part of an asset overlay strategy to create investment exposure consistent with the Master Fund’s investment objectives. There was no derivative activity directly at the Master Fund level for the year ended December 31, 2011, however the Portfolio Funds may have directly engaged in derivative transactions during the period.

(f) INVESTMENT INCOME

(g) FUND EXPENSES

Unless otherwise voluntarily or contractually assumed by the Adviser or another party, the Master Fund bears all expenses incurred in its business including but not limited to, the following: all costs and expenses related to investment transactions and positions for the Master Fund’s account; interest expenses and loan fees; legal fees; accounting, auditing and tax preparation fees; recordkeeping and custodial fees; costs of computing the Master Fund’s net asset value; research expenses; costs of insurance; registration expenses; offering costs; transfer taxes and taxes withheld on non-U.S. dividends; and other types of expenses as may be approved from time to time by the Adviser. Offering costs are amortized over a twelve-month period or less from the date they are incurred. Organization costs, if any, are expensed as incurred.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

(h) INCOME TAXES

The Master Fund expects to continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined in Subchapter M of the Internal Revenue Code, and to make distributions from net investment income and from net realized capital gains sufficient to relieve it from all, or substantially all, federal income and excise taxes. When investing in Portfolio Funds, the Master Fund generally invests its assets in foreign corporations that would be classified as passive foreign investment companies (“PFICs”). The Master Fund has elected to have a tax year end of October 31. Investments in foreign securities may result in foreign taxes being withheld by the issuer of such securities.

The Master Fund has evaluated the tax positions taken or expected to be taken in the course of preparing the Master Fund’s tax returns to determine whether the tax positions will “more-likely-than-not” be sustained by the Master Fund upon challenge by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold and that would result in a tax benefit or expense to the Master Fund would be recorded as a tax benefit or expense in the current period. For the year ended December 31, 2011, the Master Fund did not recognize any amounts for unrecognized tax benefit/expense. A reconciliation of unrecognized tax benefit/expense is not provided herein, as the beginning and ending amounts of unrecognized tax benefit/expense are zero, with no interim additions, reductions or settlements. Tax positions taken in tax years which remain open under the statute of limitations (generally three years for federal income tax purposes) are subject to examination by tax authorities.

The Master Fund’s tax cost as of December 31, 2011, was $162,975,311 resulting in accumulated net unrealized depreciation of $3,502,118 consisting of $3,112,051 in gross unrealized appreciation and $6,614,169 in gross unrealized depreciation.

As of December 31, 2011, the following reclassifications have been made to increase (decrease) such accounts in the Master Fund with offsetting adjustments as indicated:


Accumulated Net Investment Income (Loss)		Accumulated Net Realized Gain (Loss)
$	2,931,124	$	(2,931,124	)

The tax character of dividends paid to shareholders as of the latest tax year ended October 31, 2011 were as follows:


Ordinary Income	Total Taxable Distributions		Total Distributions Paid
$1,580,169	$	1,580,169	$	1,580,169

No dividends or distributions were paid by the Master Fund during the tax year ended October 31, 2010.

As of the latest tax year ended October 31, 2011, the components of accumulated earnings (deficit) on a tax basis were as follows:


Undistributed Ordinary Income	Accumulated Capital and Other Losses			Unrealized Appreciation (Depreciation)			Total Accumulated Earnings (Deficit)
$2,380,824	$	(3,151,986	)	$	(3,298,980	)	$	(4,070,142	)

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

At October 31, 2011, the Master Fund had a net capital loss carryforward to offset net capital gains, if any, to the extent provided by the Treasury regulations:


Amount	Expires
$1,141,078		2018
2,010,908		2019

These amounts will be available to offset future taxable capital gains. Under the Regulated Investment Company Modernization Act of 2010, the Master Fund is permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future years will be required to be utilized prior to the losses incurred in pre-enactment tax years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law.

(i) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS

Distributions will be paid annually on the Shares in amounts representing substantially all of the net investment income and net capital gains, if any, earned each year. Each shareholder will automatically be a participant under the Master Fund’s Dividend Reinvestment Plan (“DRP”) and have all income dividends and/or capital gains distributions automatically reinvested in Shares. Election not to participate in the DRP and to receive all income dividends and/or capital gain distributions, if any, in cash may be made by notice to the Master Fund.

Shares are issued pursuant to the DRP at the Master Fund’s NAV determined on the next valuation date following the ex-dividend date (the last date of a dividend period on which an investor can purchase Shares and still be entitled to receive the dividend).

(j) USE OF ESTIMATES

(k) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)” (“ASU 2011-04”). ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to disclose quantitative information about the unobservable inputs used in the fair value measurements categorized within Level 3 of the fair value hierarchy. In addition, ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers in and out of Levels 1 and 2 of the fair value hierarchy. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. Management is currently evaluating the implications of ASU 2011-04 and its impact on the financial statements has not yet been determined.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

(3) FAIR VALUE MEASUREMENTS

The Master Fund defines fair value as the price 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 under current market conditions.

The inputs used to determine the fair value of the Master Fund’s investments are summarized in the three broad levels listed below:

•

Level 1—quoted prices in active markets for identical assets

•

Level 2—investments with other significant observable inputs or investments that can be fully redeemed at the net asset value in the “near term”

•

Level 3—investments with significant unobservable inputs (which may include the Master Fund’s own assumptions in determining the fair value of investments) or investments that cannot be fully redeemed at the net asset value in the “near term”; these are investments that generally have one or more of the following characteristics: gated redemptions, suspended redemptions, or have lock-up periods greater than 30 days

The inputs or methodology used to value investments are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary categorization as of December 31, 2011, of the Master Fund’s investments based on the level of inputs utilized in determining the value of such investments:


	LEVEL 1		LEVEL 2		LEVEL 3		Total Investments
Investments
Portfolio Funds
Passive Foreign Investment Companies
Event Driven	$	—	$	—	$	13,797,082	$	13,797,082
Macro/CTA		—		—		48,488,106		48,488,106
Relative Value		—		—		67,158,158		67,158,158
Tactical Credit		—		—		6,503,672		6,503,672
Investment Securities
Money Market Funds		3,640,452		—		—		3,640,452
Tactical Credit		10,335,161		—		—		10,335,161
Corporate Bonds		—		8,623,461		—		8,623,461
Sovereign Bonds		—		927,101		—		927,101

Total Investments	$	13,975,613	$	9,550,562	$	135,947,018	$	159,473,193

The categorization of investments amongst Levels 1 through 3 does not reflect the fact that many of the underlying investments held by the Portfolio Funds included in Level 3, if owned directly by the Master Fund, may be classified as Level 1 investments.

The Master Fund discloses significant transfers between levels based on valuations at the end of the reporting period. There were no significant transfers between Levels 1, 2 or 3 as of December 31, 2011, based on levels assigned to Portfolio Funds on December 31, 2010.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

The following is a reconciliation of Level 3 investments based on the inputs used to determine fair value:


	Investments
	Balance as of December 31, 2010*		Transfers In		Gross Purchases		Gross Sales			Net Realized Gain (Loss)			Change in Unrealized Appreciation/ Depreciation			Balance as of December 31, 2011
Investments
Portfolio Funds
Passive Foreign Investment Companies
Event Driven	$	17,446,768	$	—	$	15,500,000	$	(18,566,639	)	$	123,078		$	(706,125	)	$	13,797,082
Macro/CTA		—		7,347,083		47,750,000		(5,749,960	)		(98,489	)		(760,528	)		48,488,106
Relative Value		53,563,680		—		45,585,076		(25,240,516	)		1,332,523			(8,082,605	)		67,158,158
Tactical Credit		9,250,693		—		1,500,000		(4,034,297	)		153,409			(366,133	)		6,503,672

Total Investments	$	80,261,141	$	7,347,083	$	110,335,076	$	(53,591,412	)	$	1,510,521		$	(9,915,391	)	$	135,947,018

*	Categories for the beginning balances as of December 31, 2010 may not match the audited financial statements due to categorical changes in strategy type from the Adviser. These changes are assumed to have been made on January 1, 2011.

The net realized gain and change in unrealized appreciation/depreciation in the table above are reflected in the accompanying Statement of Operations. The change in unrealized appreciation/depreciation from Level 3 investments held at December 31, 2011, is $(2,918,804).

The Master Fund is permitted to invest in alternative investments that may not have a readily determinable fair value. For an investment that does not have a readily determinable fair value, the Master Fund uses the NAV reported by the Portfolio Fund as a practical expedient, without further adjustment, unless it is probable that the investment will be sold at a value significantly different than the reported NAV. If the practical expedient NAV is not as of the reporting entity’s measurement date, then the NAV is adjusted to reflect any significant events that would materially affect the value of the security and the NAV of the Master Fund as of the valuation date. A listing of the investments held by the Master Fund and their attributes as of December 31, 2011, that may qualify for this valuation approach is shown in the table below.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

Certain Portfolio Funds in which the Master Fund invests have limitations on liquidity which may result in limitations on redemptions including, but not limited to, early redemption fees. The Portfolio Funds in which the Master Fund invests have withdrawal rights ranging from monthly to annually after a maximum of a two year lock up period from the date of the initial investment or an additional investment.

Investment Category

Investment

Strategy

Fair Value
(in 000’s)

Redemption
Frequency*

Notice
Period
(in Days)*

Redemption
Restrictions

and Terms*

Event Driven ^(a)

Seek to profit from companies expecting to face major corporate events.

13,797

Monthly - Annually

60-90

0-2 years;

up to 4%
redemption fee

Macro/CTA ^(b)

Designed to deliver positive returns from investments that attempt to extract excess return from certain markets or sub-markets.

48,488

Daily - Annually

30-90

0-2 years;

up to 4%
redemption fee

Relative Value ^(c)

Invest simultaneously in long and short positions in equity securities

67,158

Monthly - Quarterly

30-90

0-1 year;

up to 5%
redemption fee

Tactical Credit ^(d)

Seek to generate income and or capital appreciation through a variety of debt and equity securities and other investments across numerous markets

6,504

Daily - Quarterly

5-60

0-1 year;

up to 2%
redemption fee

135,947

The information summarized in the table above represents the general terms for a majority of the investments in Portfolio Funds within the specified investment category. Individual Portfolio Funds may have terms that are different than the general terms indicated for the investment category as a whole. In addition, most Portfolio Funds have the flexibility, as provided for in their constituent documents, to modify and/or waive such terms.

(a)

This category includes Portfolio Funds that invest in securities of companies that are facing a major corporate event. Investments in this category include common and preferred equities as well as debt of companies where the managers expect certain events to occur including mergers, acquisitions, restructurings, spin-offs or significant litigation.

(b)	This category includes Portfolio Funds that utilize strategies that attempt to extract excess return from certain markets or sub-markets. Investments in this category may include futures contracts, domestic and foreign equity securities, and commodities.

(c)

This category includes Portfolio Funds that invest in an identified security or group of securities that are undervalued or overvalued relative to another security or security group. Investments under this category may include derivatives, commodities, fixed income securities, and long and short equity strategies.

(d)

This category includes Portfolio Funds that have access to certain credit markets attractive to the Adviser by utilizing derivatives or fixed income securities. Investments under this category may include emerging market debt denominated in local currencies, domestic floating rate corporate securities, as well as U.S. and foreign corporate fixed rate debt. Investments in this category may be high yield, investment grade, or a combination of both.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

(4) SHAREHOLDERS ACCOUNTS

(a) ISSUANCE OF SHARES

Upon receipt from an eligible investor of an initial or additional application for Shares, which will generally be accepted as of the first business day of each month, the Master Fund will issue new Shares. The Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state. The Master Fund issues Shares only in private placement transactions in accordance with Regulation D or other applicable exemptions under the Securities Act. No public market exists for the Shares, and none is expected to develop. The Master Fund is not required, and does not intend, to hold annual meetings of its shareholders. The Shares are subject to substantial restrictions on transferability and resale and may not be transferred or resold except as permitted under the Master Fund’s Declaration of Trust. The Master Fund reserves the right to reject any applications for Shares.

(b) REPURCHASE OF SHARES

A shareholder will not be eligible to have the Master Fund repurchase all or any portion of its Shares at the shareholder’s discretion at any time. The Adviser expects that it will recommend to the Board that the Master Fund offer to repurchase Shares each calendar quarter, pursuant to written tenders by shareholders. However, the Board retains the sole discretion to accept or reject the recommendation of the Adviser and to determine the amount of Shares, if any, that will be purchased in any tender offer that it does approve. In the event Shares are repurchased, there will be a substantial period of time between the date as of which shareholders must accept the Master Fund’s offer to repurchase their Shares and the date they can expect to receive payment for their Shares from the Master Fund.

(5) INVESTMENTS IN PORTFOLIO SECURITIES

(a) INVESTMENT ACTIVITY

As of December 31, 2011, the Master Fund held investments in Portfolio Funds and securities.

For the year ended December 31, 2011, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were $149,655,999 and $76,717,267, respectively.

(b) PORTFOLIO FUND LIQUIDITY

Certain Portfolio Funds in which the Master Fund invests have restrictions on liquidity which may result in limitations or restrictions on redemptions including, but not limited to, early redemption fees. The Portfolio Funds in which the Master Fund invests have withdrawal rights ranging from monthly to annually after a maximum of a two year lock up period from the date of the initial or an additional investment. Portfolio Funds may, depending on the Portfolio Fund’s governing documents, have the ability to deny or delay a redemption request.

(c) AFFILIATED PORTFOLIO FUNDS

At December 31, 2011, the Master Fund’s investments in certain Portfolio Funds were deemed to be investments in affiliated issuers under the 1940 Act, because the Master Fund owns 5% or more of the Portfolio Funds’ total net assets. The activity resulting from investments in these Portfolio Funds, including interest

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

income as well as realized gains and losses, is identified in the Statement of Operations as transactions with affiliated investments. A listing of these affiliated Portfolio Funds (including 2011 activity) is shown below:


					For the Year Ended 12/31/2011													For the Year Ended 12/31/2011
Portfolio Funds	Shares 12/31/2010		Shares 12/31/2011		Fair Value 12/31/2010		Cost of Purchases		Cost of Sales		Realized Gain/(Loss) on Investments		Change in Unrealized Appreciation/ Depreciation			Fair Value 12/31/2011		Interest/ Dividend Income
CCA Absolute Return Muni Strategy Fund		—		8,297	$	—	$	8,500,000	$	—	$	—	$	55,424		$	8,555,424	$	—
Overseas CAP Partners, Inc.		4,393		4,395		7,461,314		—		—		—		96,040			7,557,354		—
Salem Global Opportunity Fund (Offshore), Ltd.		2,244		7,744		2,439,375		5,500,000		—		—		(592,292	)		7,347,083		—

					$	9,900,689	$	14,000,000	$	—	$	—	$	(440,828	)	$	23,459,861	$	—

(6) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, the Portfolio Funds in which the Master Fund invests may trade various derivative securities and other financial instruments, and may enter into various investment activities with off-balance sheet risk both as an investor and as a principal. The Master Fund’s risk of loss in these Portfolio Funds is limited to the value of the investment in such Portfolio Funds. In addition, the Master Fund may from time to time invest directly in derivative securities or other financial instruments to provide a certain type of exposure for the Master Fund’s overall portfolio.

(7) DUE FROM BROKERS

The Master Fund conducts business with brokers for its investment activities. The clearing and depository operations for the investment activities are performed pursuant to agreements with the brokers. The Master Fund is subject to credit risk to the extent any broker with whom the Master Fund conducts business is unable to deliver cash balances or securities, or clear security transactions on the Master Fund’s behalf. The Master Fund monitors the financial condition of the brokers with which the Master Fund conducts business and believes the likelihood of loss under the aforementioned circumstances is remote.

(8) ADMINISTRATION AGREEMENT

In consideration for administrative, accounting, and recordkeeping services, the Master Fund will pay the Independent Administrator a monthly administration fee based on the month end aggregate net asset value of the Master Fund and its feeder funds (the “Funds”) (net of any Fund’s net asset value invested in another Fund) (the “Fund’s NAV”). The Master Fund will pay its pro rata share of total administration fees based on its proportionate net asset value to the aggregate net asset value of all Funds. The Funds are charged on an annual basis, 6 basis points on the Fund’s NAV of up to $2 billion, 5 basis points on the Fund’s NAV between the amounts of $2 billion and $5 billion, 2 basis points on the Fund’s NAV between the amounts of $5 billion and $15 billion and 1.25 basis points on the Funds NAV over $15 billion. The Independent Administrator may also provide the Master Fund with legal, compliance, transfer agency, and other investor related services at an additional cost. Per the administration agreement, the Master Fund will not be charged administration fees until January 1, 2012.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

(9) RELATED PARTY TRANSACTIONS

(a) INVESTMENT MANAGEMENT FEE

In consideration of the advisory and other services provided by the Adviser to the Master Fund, the Master Fund will pay the Adviser an investment management fee (the “Investment Management Fee”) of 0.75% on an annualized basis of the Master Fund’s net assets calculated based on the Master Fund’s net assets at the end of each month, accrued monthly and payable quarterly in arrears. For the year ended December 31, 2011, $993,998 was incurred for Investment Management Fees.

(10) INDEBTEDNESS OF THE FUND

As a fundamental policy, the Master Fund may borrow money or issue any senior security, to the extent permitted under the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time for the purpose of making investments, funding repurchases of Master Fund Shares and for other working capital and general Master Fund purposes.

For purposes of the Master Fund’s investment restrictions and certain investment limitations under the 1940 Act, including for example, the Master Fund’s leverage limitations, the Master Fund will not “look through” Portfolio Funds in which the Master Fund invests. Portfolio Funds may also use leverage, whether through borrowings, futures, or other derivative products and are not subject to the Master Fund’s investment restrictions. However, such borrowings by Portfolio Funds are without recourse to the Master Fund and the Master Fund’s risk of loss is limited to its investment in such Portfolio Funds. The Master Fund may be required to pledge assets when borrowing, which in the event of an uncured default, could affect the Master Fund’s operations, including preventing the Master Fund from conducting a repurchase of its shares. In addition, the terms of any borrowing may impose certain investment restrictions on the Master Fund. The rights of any lenders to the Master Fund to receive payments of interest or repayments of principal will be senior to those of the shareholders, and the terms of any borrowings may contain provisions that limit certain activities of the Master Fund.

The Master Fund maintains a line of credit agreement (the “Agreement”) with Deutsche Bank Aktiengesellschaft which provides a $40,000,000 credit facility, with available borrowing capacity subject to collateral allocation ratios as defined in the Agreement. Borrowings under the Agreement are secured by the Master Fund’s investments. The Agreement provides for interest accruing on any borrowed amounts at the three-month London Interbank Offered Rate plus a spread of 1.75% per annum, payable quarterly in arrears. The average amount of borrowings during the year ended December 31, 2011 was $19,791,670. The weighted average interest rate paid on the line of credit on borrowings during the year ended December 31, 2011 was 1.98%. The asset coverage ratio per unit, per one thousand dollars of indebtness, is $6,469. The current credit facility agreement expires on September 28, 2016.

SALIENT ABSOLUTE RETURN MASTER FUND

Notes to Financial Statements, continued

December 31, 2011

(11) FINANCIAL HIGHLIGHTS


	Year Ended December 31, 2011			For the period from February 1, 2010 through December 31, 2010 ¹
Per share operating performance:
Net asset value, beginning of period	$	997.18		$	1,000.00
Income (loss) from operations:
Net investment loss		(7.39	) ²		(12.51	)
Net realized and unrealized gain (loss) from investments		(13.60	) ²		24.16

Net increase (decrease) resulting from operations		(20.99	)		11.65
Distributions		(15.95	)		(14.47	)

Total		(36.94	)		(2.82	)

Net asset value, end of period	$	960.24		$	997.18

Net investment loss to average net assets ³		(0.74	)%		(1.32	)%

Total operating expenses to average net assets ^3,4		1.42	%		1.42	%

Portfolio turnover		54.92	%		57.50	%

Total return ⁵		(2.11	)%		1.16	%

Net assets, end of period (000’s)	$	125,916		$	99,974

1	The Master Fund commenced operations on February 1, 2010.

2	Calculated using average shares.

3	Ratios are calculated by dividing the indicated amount by average net assets measured at the end of each month during the period. Ratios have been annualized for periods less than twelve months.

4	Expense ratios do not include expenses of the acquired funds that are paid indirectly by the Master Fund as a result of its ownership of the Portfolio Funds.

5	Total return is calculated for the shareholders taken as a whole. Total return is not annualized for periods less than twelve months.

(12) SUBSEQUENT EVENTS

Based on the net assets of the Master Fund, the Adviser recommended to the Board that a tender offer in an amount of up to $25,000,000 be made for the quarter ending March 31, 2012 to those shareholders who elect to tender their Shares prior to the expiration of the tender offer period. The Board approved such recommendation and shareholders in the Master Fund were notified of a tender offer with a February 21, 2012 expiration date. The oversubscribed tender in the Salient Absolute Return Fund and Salient Absolute Return Institutional Fund is not anticipated to result in an increase in the tender amount at the Master Fund.

PART C—OTHER INFORMATION

Salient Absolute Return Institutional Fund

Item 25: Financial Statements and Exhibits

1.	Financial Statements of the Fund are included in the Statement of Additional Information filed herewith.

Exhibits:


(a)(1)		Certificate of Trust of the Fund (1).

(a)(2)		First Amended and Restated Agreement and Declaration of Trust (1).

(b)		Not applicable.

(c)		Not applicable.

(d)		Refer to Exhibit (a)(2).

(e)		Dividend Reinvestment Plan (2).

(f)		None.

(g)		Investment Management Agreement (1).

(h)(1)		Distribution Agreement (1).

(h)(2)		Form of Selling Group Agreement (1).

(i)		Not applicable.

(j)		Custody Agreement (2).

(k)(1)		Administration Agreement (2).



(k)(2)		Amendment to Administration Agreement dated November 1, 2010 (3).

(k)(3)		Administrative Services Agreement (1).

(l)		Opinion of K&L Gates LLP (4).

(m)		Not applicable.

(n)		Consent of auditors (filed herewith).

(o)		Not applicable.

(p)		Agreement Regarding Provision of Initial Capital (1).

(q)		Not applicable.

(r)(1)		Code of Ethics of the Funds (3).

(r)(2)		Code of Ethics of Salient Advisors, L.P. (3)

(r)(3)		Code of Ethics of Salient Capital, L.P. (5)

(s)		Power of Attorney (6).

Notes:

(1)	Filed as an exhibit to the Institutional Fund’s registration statement on Form N-2 dated and filed with the SEC on February 5, 2010.

(2)	Filed as an exhibit to the Salient Absolute Return Master Fund’s (the “Master Fund”) registration statement on Form N-2 dated and filed with the SEC on February 2, 2010

(3)	Filed as an exhibit to the Master Fund’s registration statement on Form N-2 dated and filed with the SEC on March 11, 2011.

(4)	Filed as an exhibit to the Institutional Fund’s registration statement on Form N-2 dated and filed with the SEC on March 22, 2010.

(5)	Filed as an exhibit to the Master Fund’s registration statement on Form N-2 dated and filed with the SEC on March 15, 2012.

(6)	Filed as an exhibit to the SAR Fund’s registration statement on Form N-2 dated and filed with the SEC on April 28, 2011.

Item 26: Marketing Arrangements

Distribution Agreement is filed as exhibit (h)(1).

Item 27: Other Expenses of Issuance and Distribution


Securities and Exchange Commission fees	$	2,438
Financial Industry Regulatory Authority fees	$	0
Legal Fees	$	0
Accounting Fees	$	16,338


Total	$	18,776

Item 28: Persons Controlled by or under Common Control with Registrant

The following entities may be considered to be under common control with Registrant:

Salient Absolute Return Master Fund

Salient Absolute Return Fund

Item 29: Number of Holders of Securities

At December 31, 2011:


Title of Class		Number of Record Holders
Common Shares, $0.001 par value		102

Item 30: Indemnification

Sections 8.2 and 8.3 of the Fund’s First Amended and Restated Agreement and Declaration of Trust states as follows:

(a) To the fullest extent permitted by law, the Trust will, subject to Section 8.2(c) of this Trust Instrument, indemnify each investment adviser (including for this purpose each officer, director, member, partner, principal, employee or agent of, or any person who controls, is controlled by or is under common control with, an investment adviser or partner of the investment adviser, and their executors, heirs, assigns, successors or other legal representatives) and each Trustee (and his executors, heirs, assigns, successors or other legal representatives) (each such person being referred to as an “indemnitee”) against all losses, claims, damages, liabilities, costs and expenses arising by reason of being or having been an investment adviser or Trustee of the Trust, or the past or present performance of services to the Trust by the indemnitee, except to the extent that the loss, claim, damage, liability, cost or expense has been finally determined in a judicial decision on the merits from which no further right to appeal may be taken in any such action, suit, investigation or other proceeding to have been incurred or suffered by the indemnitee by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the indemnitee’s office. These losses, claims, damages, liabilities, costs and expenses include, but are not limited to, amounts paid in satisfaction of judgments, in compromise, or as fines or penalties, and counsel fees and expenses incurred in connection with the defense or disposition of any action, suit, investigation or other proceeding, whether civil or criminal, before any judicial, arbitral, administrative or legislative body, in which the indemnitee may be or may have been involved as a party or otherwise, or with which such indemnitee may be or may have been threatened, while in office or thereafter. The rights of indemnification provided under this Section 8.2 are not to be construed so as to provide for indemnification of an indemnitee for any liability (including liability under U.S. federal securities laws which, under certain circumstances, impose liability even on persons that act in good faith) to the extent (but only to the extent) that indemnification would be in violation of applicable law, but will be construed so as to effectuate the applicable provisions of this Section 8.2.

(b) Expenses, including counsel fees and expenses, incurred by any indemnitee (but excluding amounts paid in satisfaction of judgments, in compromise, or as fines or penalties) may be paid from time to time by the Trust in advance of the final disposition of any action, suit, investigation or other proceeding upon receipt of an undertaking by or on behalf of the indemnitee to repay to the Trust amounts paid if a determination is made that indemnification of the expenses is not authorized under Section 8.2(a) of this Trust Instrument, so long as (1) the indemnitee provides security for the undertaking, (2) the Trust is insured by or on behalf of the indemnitee against losses arising by reason of the indemnitee’s failure to fulfill his, her or its undertaking, or (3) a majority of the Independent Trustees (excluding any Trustee who is either seeking advancement of expenses under this Trust Instrument or is or has been a party to any other action, suit, investigation or other proceeding involving claims similar to those involved in the action, suit, investigation or proceeding giving rise to a claim for advancement of expenses under this Trust Instrument) or independent legal counsel in a written opinion determines, based on a review of readily available facts (as opposed to a full trial-type inquiry), that reason exists to believe that the indemnitee ultimately will be entitled to indemnification.

(c) As to the disposition of any action, suit, investigation or other proceeding (whether by a compromise payment, pursuant to a consent decree or otherwise) without an adjudication or a decision on the merits by a court, or by any other body before which the proceeding has been brought, that an indemnitee is liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the indemnitee’s office, indemnification will be provided in accordance with Section 8.2(a) of this Trust Instrument if (1) approved as in the best interests of the Trust by a majority of the Independent Trustees (excluding any Trustee who is either seeking indemnification under this Trust Instrument or is or has been a party to any other action, suit, investigation or proceeding involving claims similar to those involved in the action, suit, investigation or proceeding giving rise to a claim for indemnification under this Trust Instrument) upon a determination, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that the indemnitee acted in good faith and in the reasonable belief that the actions were in the best interests of the Trust and that the indemnitee is not liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the indemnitee’s office, or (2) the Trustees secure a written opinion of independent legal counsel, based upon a review of readily available facts (as opposed to a full trial-type inquiry), to the effect that indemnification would not protect the indemnitee against any liability to the Trust or its Shareholders to which the indemnitee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the indemnitee’s office.

(d) Any indemnification or advancement of expenses made in accordance with this Section 8.2 will not prevent the recovery from any indemnitee of any amount if the indemnitee subsequently is determined in a final judicial decision on the merits in any action, suit, investigation or proceeding involving the liability or expense that gave rise to the indemnification or advancement of expenses to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the indemnitee’s office. In any suit brought by an indemnitee to enforce a right to indemnification under this Section 8.2, it will be a defense that the indemnitee has not met the applicable standard of conduct described in this Section 8.2. In any suit in the name of the Trust to recover any indemnification or advancement of expenses made in accordance with this Section 8.2, the Trust will be entitled to recover the expenses upon a final adjudication from which no further right of appeal may be taken. In any suit brought to enforce a right to indemnification or to recover any indemnification or advancement of expenses made in accordance with this Section 8.2, the burden of proving that the indemnitee is not entitled to be indemnified, or to any indemnification or advancement of expenses, under this Section 8.2 will be on the Trust (or any Shareholder acting derivatively or otherwise on behalf of the Trust or its Shareholders).

(e) An indemnitee may not satisfy any right of indemnification or advancement of expenses granted in this Section 8.2 or to which he, she or it may otherwise be entitled except out of the assets of the Trust, and no Shareholders will be personally liable with respect to any such claim for indemnification or advancement of expenses.

(f) The rights of indemnification provided in this Section 8.2 will not be exclusive of or affect any other rights to which any person may be entitled by contract or otherwise under law. Nothing contained in this Section 8.2 will affect the power of the Trust to purchase and maintain liability insurance on behalf of any Trustee, the investment adviser or other person.

Section 8.3 No Shareholder of the Trust or of any Series or Class shall be personally liable for the debts, liabilities, obligations and expenses incurred by, contracted for, or otherwise existing with respect to, the Trust or by or on behalf of any Series or Class. The Trustees shall have no power to bind any Shareholder personally or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay pursuant to terms hereof or by way of subscription for any Shares or otherwise.

In case any Shareholder or former Shareholder of any Series or Class shall be held to be personally liable solely by reason of his being or having been a Shareholder of such Series or Class and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors, administrators or other legal representatives, or, in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets belonging to the applicable Series or Class to be held harmless from and indemnified

against all loss and expense arising from such liability. The Trust, on behalf of the affected Series, shall, upon request by the Shareholder, assume the defense of any claim made against the Shareholder for any act or obligation of the Series or Class and satisfy any judgment thereon from the assets of the Series or Class. The indemnification and reimbursement required by the preceding sentence shall be made only out of assets of the one or more Series or Classes whose Shares were held by said Shareholder at the time the act or event occurred which gave rise to the claim against or liability of said Shareholder. The rights accruing to a Shareholder under this Section shall not impair any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust or any Series or Class thereof to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein.

Section 14 of the Investment Management Agreement between the Fund and Salient Advisors, L.P. states:

(a) Each Fund will indemnify the Adviser and any Adviser Affiliate, and each of their partners, members, directors, officers, and employees and any of their affiliated persons, executors, heirs, assigns, successors, or other legal representatives (each an “Indemnified Person”) against any and all costs, losses, claims, damages, or liabilities, joint or several, including, without limitation, reasonable attorneys’ fees and disbursements, resulting in any way from the performance or non-performance of any Indemnified Person’s duties in respect of the Fund, except those resulting from the willful misfeasance, bad faith or gross negligence of an Indemnified Person or the Indemnified Person’s reckless disregard of such duties and, in the case of criminal proceedings, unless such Indemnified Person had reasonable cause to believe its actions unlawful (collectively, “disabling conduct”). Indemnification shall be made following: (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the Indemnified Person was not liable by reason of disabling conduct; or (ii) a reasonable determination that the Indemnified Person is entitled to indemnification hereunder, provided that such determination is based upon a review of the facts and reached by (A) the vote of a majority of the Fund’s Directors who are not parties to the proceeding or (B) legal counsel selected by a vote of a majority of the Fund’s Board, further provided that such counsel’s determination be written and provided to the Board. A Fund shall advance to an Indemnified Person reasonable attorneys’ fees and other costs and expenses incurred with respect to the Fund in connection with defense of any action or proceeding arising out of such performance or non-performance. The Adviser agrees, and each other Indemnified Person will be required to agree as a condition to any such advance from a Fund, that if one of the foregoing parties receives any such advance, the party will reimburse the Fund for such fees, costs, and expenses to the extent that it shall be determined that the party was not entitled to indemnification under this paragraph. The rights of indemnification provided hereunder shall not be exclusive of or affect any other rights to which any person may be entitled by contract or otherwise under law.

(b) Notwithstanding any of the foregoing, the provisions of this section 14 shall not be construed so as to relieve the Indemnified Person of, or provide indemnification with respect to, any liability (including liability under federal securities laws, which, under certain circumstances, impose liability even on persons who act in good faith) to the extent (but only to the extent) that such liability may not be waived, limited, or modified under applicable law or that such indemnification would be in violation of applicable law, but shall be construed so as to effectuate the provisions of this paragraph to the fullest extent permitted by law. The provisions of this paragraph shall survive the termination or cancellation of this Agreement.

Section 6 of the Distribution Agreement with Salient Capital, L.P. states:

(a) The Fund agrees to indemnify, defend and hold the Distributor and its affiliates and their respective officers, directors, employees, agents, representatives and controlling persons free and harmless from and against any and all claims, demands, liabilities and reasonable expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable expenses (including the cost of investigation or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Distributor and its affiliates and their respective officers, directors, employees, agents, representatives and/or any such controlling person may incur arising out of or based upon (i) any untrue statement of a material fact or omission to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading contained in the Registration Statement or other Offering Documents (except to the extent such untrue statement or omission was made in reliance on and in conformity with information provided in writing to the Fund, by the Distributor for inclusion in the Registration Statement or other Offering Documents); (ii) any material breach by the Fund of any provision of this Agreement including any representation, warranty, covenant or

agreement set forth herein; (iii) any material violation of any applicable law by the Fund or its officers, directors, employees, agents (other than the Distributor), or representatives; (iv) any actions of the Fund and its officers, directors, employees and agents (other than the Distributor) or representatives relating to the sale of Shares, including but not limited to any statements or representations, written or oral, concerning the Fund that such a party makes to the Distributor and its agents and representatives; (v) the action of the Fund and its employees and agents relating to the Fund’s processing of Subscription Agreements and the servicing of customer accounts; or (vi) any act or omission made in respect of its function as Distributor; provided, however, that, in no event shall anything herein be so construed as to protect the Distributor against any liability to which the Distributor would otherwise be subject by reason of its gross negligence, willful misfeasance or bad faith or reckless disregard of its obligations and duties under this Agreement, or violation of any applicable law by the Distributor in connection with the distribution of Shares. The Funds’ agreement to indemnify the Distributor, and other indemnities as aforesaid is expressly conditional upon the Fund being promptly notified of any action brought against the Distributor, such as notification to be given by letter or facsimile addressed to the Fund at the address set forth in this Agreement or other address communicated to the Distributor in writing (but only to the extent that the Fund is prejudiced by the failure to give prompt notice), and further conditional upon the Distributor reasonably cooperating with the Fund with respect to any claim or demand for which the Distributor seeks indemnity and promptly defending such claims if the Fund reasonably requests. In addition, any determination by the Fund under this Section 6(a) will be made in accordance with Section 17 of the 1940 Act. The Fund agrees to promptly notify the Distributor of the commencement of any litigation proceedings against the Fund, or any of its officers or directors in connection with the issue and sale of any Shares.

(c) If recovery is not available under the foregoing indemnification provisions of this Section 6 for any reason other than as specified therein, the parties entitled to indemnification by the terms thereof shall be entitled to contribution toward the amount paid or payable by such indemnified party as a result of the liabilities, claims, costs (including attorneys fees and expenses), damages and expenses referred to in Subsection (a) or (b) above. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative benefits received by each party from the offering of the Shares, the parties’ relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any untrue statement or omission, and any other equitable considerations appropriate under the circumstances.

(d) Promptly after receipt by either party of notice of any claim or the commencement of any action or proceeding with respect to which such party may be entitled to be indemnified hereunder, the party claiming indemnification (the “Indemnified Party”) will notify the other party (the “Indemnifying Party”) in writing of such a claim or the commencement of such action or proceedings, and the Indemnifying Party will assume the defense of such action or proceeding and will employ counsel satisfactory to the Indemnified Party and will pay the fees and expenses of such counsel as incurred. Notwithstanding the proceeding sentence, the Indemnified Party will be entitled to employ counsel separate from the Indemnifying Party’s counsel and from any other party in such action if the Indemnified Party determines that a conflict of interest exists which makes counsel chosen by the Indemnifying Party not advisable or if the Indemnified Party reasonably determines that the Indemnifying Party’s assumption of the defense does not adequately represent the Indemnified Party’s interest. In such event the Indemnifying Party will pay the fees and disbursements of such separate counsel, but in no event shall the Indemnifying Party be liable for the fees and expenses of more than one counsel (in addition to local counsel) for the Indemnified Party in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances.

(e) The Indemnifying Party agrees that it will not, without prior written consent of the Indemnified Party, settle any pending or threatened claim or proceeding related to or arising out of such engagement or transaction or conduct in connection therewith (whether or not the Indemnified Party is a party to such claim or proceeding) unless such settlement includes a provision unconditionally releasing the Indemnified Party from and holding the Indemnified Party harmless against all liability in respect of claims by any releasing party related to or arising out of such engagement or any transaction or conduct in connection therewith. The Indemnifying Party will also promptly reimburse the Indemnified Party for all reasonable expenses (including counsel fees) as they are incurred by the Indemnified Party in connection with investigating, preparing or defending, or providing evidence in, any pending or threatened claim or proceeding in respect of which indemnification may be sough hereunder (whether or not the Indemnified Party is a party to such claim or proceeding) or in enforcing this Agreement.

(f) The provisions of this Section 6 shall survive termination of this Agreement.

Item 31: Business and Other Connections of Investment Adviser

Information regarding the directors and officers of Salient Advisors, L.P., the Registrant’s investment adviser, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the officers and directors of the Adviser in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-61449) filed under the Investment Advisers Act of 1940, as amended, and is incorporated by reference herein.

Item 32: Location of Accounts and Records

All applicable accounts, books and documents required to be maintained by the Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are in the possession and custody of the Registrant’s administrator, Citi Fund Services Ohio, Inc., located at 3435 Stelzer Road, Columbus, Ohio 43219, and Salient Absolute Return Master Fund’s custodian, JPMorgan Chase Bank, National Association, located at One American Lane, Floor 1, Greenwich, Connecticut 06831, with the exception of certain corporate documents and portfolio trading documents which are in the possession and custody of the Adviser located at 4265 San Felipe Road, 8th Floor, Houston, Texas 77027. Registrant is informed that all applicable accounts, books and documents required to be maintained by registered investment advisers are in the custody and possession of the Adviser.

Item 33: Management Services

Not applicable.

Item 34: Undertakings

1. Not applicable.

2. Not applicable.

3. Not applicable.

4. The Registrant undertakes:

a. To file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement:

(1) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(2) to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and

(3) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

b. That, for purposes of determining liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof; and

c. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

5. Not applicable.

6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.

SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment Company Act of 1940, as amended, the Registrant has duly caused this amended Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in this City of Houston, and State of Texas, on the 15 ^th day of March, 2012.

Salient Absolute Return Institutional Fund

/s/ John A. Blaisdell

John A. Blaisdell, Trustee and Principal

Executive Officer

Pursuant to the requirements of the Securities Act, this amended Registration Statement has been signed below by the following persons in the capacities and on the date indicated.


Signature	Title	Date

/s/ Jonathan P. Carroll* Jonathan P. Carroll	Trustee	March 15, 2012

/s/ Dr. Bernard A. Harris* Dr. Bernard A. Harris	Trustee	March 15, 2012

/s/ Richard C. Johnson* Richard C. Johnson	Trustee	March 15, 2012

/s/ G. Edward Powell* G. Edward Powell	Trustee	March 15, 2012

/s/ Scott E. Schwinger* Scott E. Schwinger	Trustee	March 15, 2012

/s/ A. Haag Sherman* A. Haag Sherman	Trustee	March 15, 2012

/s/ Andrew B. Linbeck* Andrew B. Linbeck	Trustee	March 15, 2012

/s/ Jeremy L. Radcliffe* Jeremy L. Radcliffe	Trustee	March 15, 2012

/s/ John A. Blaisdell John A. Blaisdell	Trustee, Principal Executive Officer	March 15, 2012

/s/ John E. Price John Price	Principal Financial Officer	March 15, 2012

*	Power of Attorney


By:		/s/ John E. Price
		Attorney in Fact

SIGNATURES

Salient Absolute Return Master Fund has duly caused this amended Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized in the city of Houston and the State of Texas on the 15 ^th day of March, 2012.

Salient Absolute Return Master Fund

/s/ John A. Blaisdell

John A. Blaisdell, Trustee and Principal

Executive Officer

Pursuant to the requirements of the Securities Act, this amended Registration Statement has been signed below by the following persons in the capacities and on the date indicated.


Signature	Title	Date

/s/ Jonathan P. Carroll* Jonathan P. Carroll	Trustee	March 15, 2012

/s/ Dr. Bernard A. Harris* Dr. Bernard A. Harris	Trustee	March 15, 2012

/s/ Richard C. Johnson* Richard C. Johnson	Trustee	March 15, 2012

/s/ G. Edward Powell* G. Edward Powell	Trustee	March 15, 2012

/s/ Scott E. Schwinger* Scott E. Schwinger	Trustee	March 15, 2012

/s/ A. Haag Sherman* A. Haag Sherman	Trustee	March 15, 2012

/s/ Andrew B. Linbeck* Andrew B. Linbeck	Trustee	March 15, 2012

/s/ Jeremy L. Radcliffe* Jeremy L. Radcliffe	Trustee	March 15, 2012

/s/ John A. Blaisdell John A. Blaisdell	Trustee, Principal Executive Officer	March 15, 2012

/s/ John E. Price John Price	Principal Financial Officer	March 15, 2012

*	Power of Attorney


By:		/s/ John E. Price
		Attorney in Fact

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