ITEM 7: TYPES OF CLIENTS
NS Advisors provides investment advisory services to the Funds and not individually to
the Investors in the Funds. The Funds require newly admitted Investors to be “accredited investors”
under Regulation D of the Securities Act and “qualified clients” under the Advisers Act or
“qualified purchasers” under the Investment Company Act, as applicable. Additionally, the Funds
have a minimum investment requirement of $1,000,000 for Investors, although this minimum may
be waived or reduced as provided in the Funds’ offering documents.
ITEM 8: METHOD OF ANALYSIS, INVESTMENT STRATEGIES AND RISK OF LOSS
All Investors receive a Confidential Private Offering Memorandum (“CPOM”) and other
offering documents for either of the Funds before being given the opportunity to invest in the
Funds. Each CPOM discusses in detail the investment objectives, investment strategy and risk
factors relating to an investment in the Funds. The Funds have virtually identical investment
objectives and portfolios except for variations due to assets under management of each Fund. The
following is a summary of the information that appears in more detail in the CPOMs, which should
be reviewed by all potential Investors.
Introduction
NS Advisors’ investment objective is to achieve superior long-term capital appreciation
while minimizing the risk of permanent capital loss. This objective is pursued by purchasing securities
at significant discounts to NS Advisors’ estimate of their true economic value. This approach to
investing is commonly referred to as “value investing.” NS Advisors believes that a diligent and
disciplined application of this investment approach will produce favorable returns to long-term
Investors. Regardless of the investment strategy, potential Investors should be aware that investing in
securities involves risk of loss that Investors must be prepared to bear.
INVESTMENT STRATEGY
The Funds trade in substantially parallel fashion and seek to attain their investment objectives
by utilizing a value-based strategy which they apply in an opportunistic manner. Value investing is
the discipline of buying securities that, in the opinion of NS Advisors, are selling at an appreciable
discount from their underlying value and holding them until some or all of their value is realized. NS
Advisors estimates what it believes to be the real economic value of a company by applying a
thorough fundamental business analysis. From this economic value, NS Advisors calculates what it
believes to be the appropriate valuation of a share of the company. When market conditions result in
a significant discount in the market price of a company’s shares, the shares are purchased and held
until the disparity in valuation is eliminated through a rise in the stock price.
By purchasing securities at significant discounts from their conservatively appraised
underlying value, NS Advisors hopes to provide a “margin of safety” that mitigates the possibility of
permanent capital loss. This margin is achieved by purchasing securities when they sell at a discount
to their intrinsic or economic values. Any specific security may not turn out to be a good investment,
due to changes in the company’s or industry’s prospects or an error in the initial evaluation, but a
portfolio of securities purchased with a margin of safety may guard against capital loss and ultimately
provide for capital appreciation.
NS Advisors also searches for attractive opportunities to sell “short” securities that it believes
are significantly overvalued, meaning that, in the opinion of NS Advisors, they are selling at an
appreciable premium to their fundamental value. The Funds do not seek to create an equal dollar
weight of long and short positions (i.e. market neutral) and historically have had a “net long” bias,
meaning that the majority of their portfolio holdings have consisted of “long” positions.
Although not a focus of its investment strategy, NS Advisors at times does use modest levels
of leverage afforded by margin borrowings. Leverage involves the use of borrowed funds to increase
the amount of invested capital in its long or short securities positions. The use of leverage magnifies
the investment results achieved, whether positive or negative, as compared to what would be achieved
if no leverage were employed.
NS Advisors also believes that the Funds are better served by concentrating on a smaller
number of securities which NS Advisors knows a great deal about rather than focusing on a broader
universe of less familiar securities. The Funds’ portfolios are not highly diversified and substantial
positions may be taken in the securities of one or a few select companies. However, NS Advisors
currently anticipates that no investment (at cost) will have a value of more than 20% of the Fund’s
total equity.
Identification of Investment Opportunities
NS Advisors concentrates its research efforts on smaller market capitalization companies
(typically under $2.5 billion). It is often the case that a depressed stock price will result in a company’s
market capitalization falling below the level where it makes economic sense for large institutional
investors to spend their resources doing research. Small companies may not provide an opportunity
for investment of sufficient funds to have a meaningful impact on the institutions’ overall investment
results, so these companies are often simply ignored. This lack of interest can lead to attractive stock
valuations. The relatively small size of the Funds allows them to pursue smaller market capitalization
companies and make meaningful investments in them when NS Advisors believes the valuation
parameters are appropriate. Smaller capitalization companies have historically offered attractive
investment opportunities for value investors. A substantial portion of the investments held by each
...