Note the full document is embedded below in scribd for easier reading (and contains charts).

October 31st, 2011

Dear Passsport Global Investor:

For the thhird quarter, Passport Gloobal Fund Class A was down -8.1% neet versus -17..3% for the MMSCI
AC World Index andd -13.9% for the S&P 5500. Since inception in August 200, the Fund has compounded at +20.55% net on ann annualized basis. Over the same perriod, the MSSCI AC World has compounded at +1.0%% and the S&P 500 at -0.22%.

 

Q3 in Review

As has been the case for most of the prior four years, macro events were a key driver of liquidity and
prices in Q3. A quick review of the quarter’s major events:

Hang
DAX Seng Brent 10 Yr.
Date Event S&P (EUR) (HKD) Crude UST Gold DXY

30-Jun-11 Fed ends QE2 1321 7376 22398 113 52.7 1500 74.3
2-Aug-11 Debt ceiling debate deadline 1254 6797 22421 116 59.3 1661 74.5
4-Aug-11 China hard-landing fear 1200 6415 21885 107 60.9 1647 75.1
5-Aug-11 S&P U.S. debt downgrade 1199 6236 20946 109 59.0 1664 74.6
8-Aug-11 S&P August Bottom 1119 5923 20491 104 61.4 1720 74.8
26-Aug-11 Jackson Hole Fed Symposium 1177 5537 19583 111 63.3 1828 73.8
12-Sep-11 French bank solvency fears 1162 5072 19031 109 65.0 1815 77.6
20-Sep-11 FOMC Meeting 1202 5572 19014 109 65.1 1804 77.0
21-Sep-11 Operation Twist announced 1167 5434 18824 109 65.3 1782 77.3
30-Sep-11 End of Q3 1131 5502 17592 101 64.5 1624 78.6
Change from FOMC Meeting -6% -1% -7% -7% -1% -10% 2%

Q3 Performance -14% -25% -21% -9% 22% 8% 6%

In aggregate, action (and inaction) by central banks and governments had a negative impact on risk
assets. As the table above depicts, equity indices around the world and commodities like oil declined
while safe havens including U.S. Treasuries, gold, and the U.S. dollar rose. Notably, the Fed’s
announcement of “Operation Twist” did not provide a lift to risk assets and in our view was far too
modest to meaningfully impact a struggling U.S. economy, stubbornly high unemployment, and
collapsing consumer confidence.

As a result, the quarter proved quite challenging for the Fund’s commodity equity and emerging markets
exposure. Many of the sectors and regions in which the Fund invests sold off much more than the major
indices:

Q3
Sector (Fund Exposure) Relevant Index/ETF Performance
Basic Materials (20%) XME (Metals & Mining) -35%
XLB (Materials SPDR) -25%
Emerging Markets (17%) EEM (MSCI Emerging Markets) -26%
BOVESPA (Brazil) -19%
Tadawal (Saudi) -7%
Energy (11%) XLE (Energy Select SPDR) -22%
OIH (Oil Service Holders Trust) -32%
Internet/Tech (9%) NASDAQ -13%
Europe (6%) FTSE (London) -16%
CAC (France) -25%
DAX (Germany) -25%

Many of the Fund’s holdings suffered even greater markdowns. On average, the Fund’s top ten holdings
at quarter-end had been marked down nearly 25% during the quarter as shown below:

Top Ten Holdings

2011 Performance
(dividends
reinvested)

Company Q3 YTD
1. Walter Energy -48.1% -52.9%
2. Thoratec -0.5% 15.3%
3. Marathon Petroleum -34.3% -30.2%
4. Cytec Industries -38.4% -33.3%
5. Tarpon Investimentos 6.4% 20.4%
6. Crew Energy -38.1% -51.4%
7. Liberty Media -12.0% -6.4%
8. Labrador Iron Mines -52.7% -50.2%
9. Cie Financiere Richemont -24.9% -24.8%
10. Yanbu National Petroleum -4.4% -5.0%

Average -24.7% -21.9%

In our view, these markdowns do not reflect meaningful change in the underlying fundamentals of these
companies; more on this later. Rather, they represent investors’ flight from risk assets in the face of rising
global uncertainty.

Risk Commentary

For the last twelve months, the Fund had a daily annualized standard deviation of 10.2%. The MSCI
AC World Index had a daily annualized standard deviation of 17.9% and the S&P 500 had a daily
annualized standard deviation of 19.9%.

While the S&P 500 Index declined 13.9% in the third quarter, this beta source fails to capture our heavy
allocation to resource equities, which declined much more sharply. As described earlier, XME (SPDR
Metals & Mining ETF) declined 35% in the quarter and OIH (Oil Service HOLDRS Trust) declined
32% in the quarter—with the bulk of these declines coming in September.

As we discussed on our Q2 Global conference call, there were many risks we believed the market was
mispricing. We proactively positioned ourselves in June and July for a fall dislocation while maintaining
our core holdings. August was the easier dislocation to hedge as optionality was cheap, and during the
dislocation we rolled our puts down several times. Between August 9th and 11th we monetized the bulk
of the puts, allowing our net beta to rise while leaving puts in the tail to lean on. After a significant
bounce in mid-August we reinitiated many of our hedges—this time coming back primarily through
short ETFs, short currencies, and short physical commodities on swap. After the bounce, skew appeared
too expensive and it was not the appropriate time to add back equity optionality. Each environment may
suggest a different, proactive portfolio construction in order to hedge optimally.

September’s dislocation was far more difficult. The first half of September progressed generally as we
expected, but during the second half of the month, with volatility still expensive, we saw rather stunning
liquidations of idiosyncratic long positions. We only had one CVaR day in the month, suggesting that it
was a slow bleed of alpha rather than a binary event. While thematic hedges performed well, many of
our company-specific equities, particularly those in Basic Materials and Energy, declined sharply—even
more so than our commodity equity hedges and physical commodities we were short on swap. XME was
down 23.3% in September and OIH was down 22.9%. From our perspective the last two weeks of
September were the culmination of several events: 1) China growth scare speculation which coincided
with a large quantitative factor rotation away from growth securities; 2) de-risking and cash raising by
hedge fund and mutual fund managers in an increasingly illiquid period for company-specific securities;
and 3) the continual basis risk and crowding between being long idiosyncratic risks (alpha) and short
indices (beta).

Given the carnage in commodity equities, we believe we have likely taken the bulk of the basis risk pain
in our resource theme. We viewed this as an opportunity to continue to add to some very attractively
priced resource, consumer and technology names that we believe now have very attractively priced
expected returns on a 1–2 year basis. Given extremely high correlations, it is imperative to recognize that
short term price movements are more a function of macro variables than bottom up fundamentals. We
are using dislocations to think long duration and acquire companies with strong fundamentals. As the
average investment period of a hedge fund shortens, longer term opportunities become more attractively
priced. Liquid, short-duration hedges may be utilized in an effort to bridge the gap between long-
duration fundamentals and short-term beta and volatility management.

While it may sound counterintuitive, from a risk management perspective we are now as concerned
about the upside tail as we are about the downside tail. Institutional investors are broadly and presently

greatly concerned with risk. While there are some serious known risks, it is the unknown risks that
concern us most. Investing is a two-tailed distribution with risks to both sides. For several months, one
of the biggest risk factors has been the correlation between equities. We saw a substantive increase again
in equity correlations this past quarter such that the top 50 names in the S&P are exhibiting a realized
correlation above 90%, and the top 500 are exhibiting a realized correlation above 75%. This suggests
equity diversification is nearly impossible and beta is the driver of risk. Add to this the fact that many
managers are buying company-specific names and hedging them with short indices (rational behavior
with correlations this high) and you have a recipe for trouble. Our present concern is that in any rally
indices may greatly outperform stock-specific equities, as was the case last week.

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