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firm. We will forever be indebted to Ian Cumming and Joe Steinberg, t hen Chairman and CEO of Leucadia, who backed us when few others would. As a thank you gesture at the time, we offered Leucadia a substantial minority interest in the mana gement company for no additional consideration, but they asked for nothing but good investment results in exchange for their investment, and for that we are v ery grateful.

Returns Since Inception

Over the last ten and one -half years, we have generated n et returns to our investors of 626.7% or 7.3 times day-one investor capital. Over the same period, the S&P 500, our principal benchmark, as it has historically comprised most of our holdings, has returned 118.8% or about 2.2 times. Expressed as a compounded annual return, the f unds have returned 21% net per annum versus 8% for the S&P 500

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. In a world in whi ch investors are pleased to ear n returns that are one or two percentage points per annum above the S&P over 10-year periods, our approximate 13 percentage point annual net margin over the index is notable. We are proud of our r ecord and how that record has been achieved. While our returns have been strong, our downward volatility (the only kind of volatility investors really care about) has been minimal. We have had two negative years in our history, 2008 when the funds decli ned 12% to 13%, and 2011, when the funds declined approximately 2%. While the S&P index is by design a fully invested index, we have generated our returns with negative leverage, i.e., cash has averaged 14% of invested capital since inception. Some might therefore criticize us for the inefficient use of our balance sheet, for clearly the liquidity and nature of o ur holdings would have allowed us to be more i nvested over time. Indeed, we could have comfortably supported a modest amount of margin leverage without taking undue risk. Because we are an active, control and influence-oriented investor, we have avoided being fully invested because of the risk of investor redemptions. For example, during 2009, despite a relatively strong 2008 and a 41% net return in 2009, we had to keep a substantial portion of our assets in cash because of the large amount of investor r edemptions we received. We will hopefully begin to address this issue with the initial public offering of Pershing Square Holdings, Ltd. (PSH), targeted for later this year, which will increase the amount of our capital that is permanent. Our investment performance is particularly striking when one considers our compound annual gross return of 27.7% for the past 10 and one-half years. This is a pa rticularly large number in light of our investment universe which is comprised of the largest and most well-covered companies in the world

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large cap North American eq uities

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which according to the efficient market hypothesis should not off er investors above-market returns . Our returns also re flect a substantial drag from our historically large average cas h position since inception. These results beg the obvious question. Have our returns been a function of good investment analysis, or have

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