At the Poseidon Fund, we see the opportunity for sophisticated investors to profit handsomely from a chain of events that occur over and over. Participants in the world's major financial markets frequently overreact to political, economic, and financial news. When they do, they bid prices of some stocks and bonds below or above their economic values.

Other market participants— typically in a matter of weeks— recognize that these assets are under or over priced. They bid up the under-priced stocks and bonds and sell down those that are over-priced. Asset prices converge toward their economic values.

To profit from this chain of events, an investor needs to determine economic values for stocks and bonds traded in the major financial markets. He then can identify those assets whose market prices differ from their economic values. He can buy under-priced assets and sell short over-priced assets. When prices converge toward economic values, he can liquidate his positions and reap the profits.

This strategy seems clear and simple. However, it quickly runs into a formidable problem: How do you determine economic values for financial assets in the current day's market?

	Rate of growth of the economy as perceived by market participants
	Rate of inflation as perceived by market participants
	Future interest rates
	Each asset's expected cash flow, and
	Expected volatility of the cash flow

To calculate an economic value in a conventional way, an investor would need current information on all of these factors. Much of this information, however, is not directly available.

In theory, market prices embody what market participants believe about all of these factors. The hard part is to deduce this information from the prices. Few investors have attempted this task.

Poseidon has identified a strategy in which the Investment Manager uses powerful insights and sophisticated quantitative techniques to derive current-day information on fundamental factors. The Investment Manager then uses the derived information to determine economic values for stocks and bonds.

This is the Price Convergence Strategy. It allows investors to take advantage of prices diverging from and converging toward economic values over and over again in the most liquid financial markets in the world--those of the United States, the United Kingdom, and Japan.

The Investment Manager first uses an economic model to decipher historical correlations among rates of growth and inflation, market prices, and other fundamental factors. Then, using optimization techniques, he generates from current market prices a probability set of current rates of economic growth and inflation, as perceived by market participants. From the growth and inflation rates and the historical correlations, the Investment Manager derives an economic value for each asset in the current market environment.

The Investment Manager then can compare actual market prices with economic values. He can identify under-priced and over-priced assets.

To optimize the selection of assets for long and short positions, the Investment Manager uses information on how asset prices should change as participants' views of rates of growth and inflation change. He looks for combinations of positions that satisfy two criteria: They should produce attractive profits if perceptions of rates of growth and inflation remain the same or change in ways favorable to portfolio performance. They should minimize risk in the event that perceptions of rates of growth and inflation change in ways adverse to portfolio performance.

Once he identifies combinations that satisfy these criteria, the Investment Manager takes long positions in the under-priced stocks and bonds and short positions in the over-priced stocks and bonds. These optimal risk-return positions constitute the initial investment portfolio.

After taking the initial positions, the Investment Manager each day derives each asset's economic value for that day. He identifies assets whose economic values differ significantly from their market prices. He examines the profit potential of new combinations of long and short positions. He compares the profit potential of creating a new portfolio versus the ongoing profit potential of the existing portfolio.

At times he considers optimal, the Investment Manager liquidates existing positions and takes new combinations of long and short positions.

Whether the market as a whole rises, falls, or remains stable, prices should converge toward economic values at least in a relative sense. When prices of assets converge with or near economic values, the Investment Manager liquidates positions and realizes the gains.

We anticipate that market prices typically will converge toward economic values in two to six weeks from the time the Investment Manager takes his positions.

Your Investment Manager is Adam Quelquechose. Mr. Quelquechose has thirty years of experience in the international financial markets. He has served as a Managing Director of Poseidon, President and Chief Executive Officer of Salomon Brothers International, and as a Managing Director of Salomon, Inc. He began his career at the Federal Reserve Bank of New York where he worked for the Federal Open Market Committee trading desk.

Mr. Quelquechose knows both the power and the limitations of advanced quantitative techniques. He knows that quantitative techniques can decipher patterns in and correlations among world financial markets that humans alone cannot perceive. At the same time, he knows that models left to run on their own can drift away from marketplace realities.

Mr. Quelquechose has used his knowledge of market dynamics to evaluate the performance of the strategy's quantitative techniques. He has found the techniques to be both powerful and effective.

Mr. Quelquechose uses his experience and market savvy to ensure the integrity of the data that the strategy's models use. He reviews intermediate and final model projections against his knowledge of market realities and dynamics.

Mr. Quelquechose uses the models' analyses and projections to identify opportunities. He evaluates those opportunities in light of his own knowledge, intuition, and analysis. He personally decides which combinations of positions offer investors the greatest opportunity for success.

By teaming human wisdom with quantitative power, the Price Convergence Strategy executes an investment approach that neither man nor machine could effect independently.

He invests only in assets traded on the financial markets of the U.S., U.K., and Japan. The markets of these economically developed countries are highly liquid and have both breadth and depth. This restriction provides protection against country risk and liquidity risk.

The Investment Manager invests in baskets of stocks and bonds. Each basket is designed to capture the performance of a broad asset category, such as British pharmaceuticals, Japanese steel, or U.S. tobacco companies. By investing in baskets of assets, the Investment Manager greatly reduces or eliminates company-specific risks.

The Investment Manager invests only in cash products. He does not invest in puts, calls, futures or derivatives.

The Investment Manager invests only in sovereign bonds of economically developed countries and in highly-liquid common equities of highly-capitalized companies. This restriction greatly reduces credit risk.

In addition to the investment restrictions that constrain risks, the Price Convergence Strategy is generally non-market-directional. It does not rely on a rising, a falling, or a stable market.

	The instantaneous availability of market prices and political, economic, and financial news from around the world increases the propensity of market participants to overreact to events.
	In increasingly volatile markets, participants are more likely to push asset prices below or above their economic values.
	Financial engineering has brought about an increased interrelatedness among different assets worldwide.
	The increasingly free flow of capital among different markets increases the speed with which prices converge toward value.

To analyze these dynamics, the strategy combines insight with powerful quantitative tools. Within the world financial markets, the Investment Manager is able to recognize recurring patterns and correlations that others cannot detect. He takes advantage of linkages that others do not see.

By understanding how insight and quantitative prowess can overcome formidable problems, Poseidon makes it possible for you to participate in a strategy both elegant in its design and powerful in its execution.

With the Price Convergence Strategy, there is no reason to wait for market conditions to change. It is designed to work well in rising, falling, volatile, or stable markets. To succeed, the strategy requires that, over time, market prices converge in a relative sense toward economic values. It does not depend on the market moving in a particular direction.

The strategy's design eliminates the timing issue. It overcomes the reasons for hesitation inherent in many other investment strategies. With the Price Convergence Strategy, today is as good a day to begin your investment as any other.

At Poseidon we look at the world as a whole. We look for the patterns that emerge from market dynamics. We look for ways for our clients to profit from what we see.

We believe that the Price Convergence Strategy presents a substantial opportunity for sophisticated investors to profit from temporary mis-pricings in world financial markets.

If you find the Price Convergence Strategy consistent with your investment beliefs and objectives, read the Strategy Description which follows. If you have any questions, contact your Poseidon Relationship Manager.

If the Strategy Description satisfies all of your concerns, complete the Strategy Election Form on page twelve and return it to us with your initial investment amount.

We look forward to hearing from you.