1. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Fairfield Greenwich (Bermuda) Ltd.
12 Church Street, Suite 606
Hamilton, Bermuda HM 11
Main (441) 292-5401
Fax (441) 292-5413
www.fggbm.com
Fairfield Sentry Limited
Semi-Annual Update
February 20, 2008
Dear Investor:
Fairfield Greenwich (Bermuda) Ltd. (“FGBL”), the Investment Manager of Fairfield Sentry Limited (“Sentry,”
or the “Fund”), and a member company of Fairfield Greenwich Group (“FGG”), is pleased to provide you with
the following semi-annual update on the progress of the Fund.
Market Commentary
The second half of 2007 was, by most measures, a period of significant financial market unrest. A deteriorating
global economic environment defined by slowing GDP growth in the west, overheating capital markets in the east, a
weak U.S. dollar, declining consumer and producer confidence, and the first signs of U.S. recessionary pressures
characterized the last two quarters last year. Precipitated in part by a slowing U.S. residential housing market and
magnified by the melt-down in credit markets, the balance sheet damage to many financial institutions was severe;
many were forced to significantly write down the value of their non-performing mortgage and debt books. In this
environment of cross-market instability, the U.S. Fed boldly stepped in on five occasions since September 2007 to
inject monetary stimuli with a series of successive rate cuts – cutting the Fed Funds rate by 2.25% over a five month
period.
The parallels between the recent events and those of the early 1990’s are striking. Some readers may recall that the
U.S. Fed aggressively cut rates by 4.25% during the 1990 – 1991 period to stave off recessionary pressures; these
pressures arose from the concomitant slowdown in the Housing and Financial sectors. As with the current sub-prime
crisis, lax credit standards and the extension of questionable loans in the late eighties and early nineties by several
Savings & Loans associations led to a “mini-recession.”
Although the recent cuts had the effect of providing U.S. equity markets with temporary relief, these various pressures
culminated in January 2008 with global equity markets deflating between 10% to 20% and volatility peaking at 38%
intra-day, its highest levels since 2003.
Overall Fund Performance
Despite the turbulent environment of the second half of 2007, Sentry has performed well, delivering a net return of
3.21% for the six-month period ending December 31, 2007 and another 0.63% in January 2008. This performance is
all the more noteworthy in the context of the movement of large cap U.S. equities over this same period. The S&P
100 Index (the “Index”), a market cap weighted index of the top 100 equities in the U.S., returned 0.08% during the
last half of the year. This market weakness intensified in January 2008 and at one point the S&P 100 DRI Index had
fallen -10.52% intra-month before recovering somewhat following the surprise interest rate cut on January 22 to close
the month down -6.06% (see Figure I).
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2. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Figure I.
Sentry Net Returns vs. Selected Indices (Unaudited)
Q1 2007 Q2 2007 Q3 2007 Q4 2007 2007 RISK*
Sentry 1.82% 2.14% 1.45% 1.74% 7.34% 1.64%
S&P 100 Index** -1.05% 7.16% 3.69% -3.48% 6.12% 10.07%
Lehman Agg. 1.50% -0.52% 2.85% 3.00% 6.96% 2.64%
Source: FGG, Bloomberg. S&P 100 Index with dividends reinvested.
* Risk is measured by trailing 12 month standard deviation.
** Calculated with net dividends reinvested.
As many of our investors know, Sentry applies a synthetic index replicator and options trading strategy known as the
split strike conversion (“SSC”) and alternates between periods of time invested in this combined stock/options
position and time invested in a cash stance consisting of short-dated U.S. Treasury Bills. As such, the Fund typically
spends more than half of the trading days in each year exposed to movements in the S&P 100 Index, albeit on a
hedged basis. For the rest of the year, the Fund assumes a “risk-free” Treasury position and earns short-term money
market rates of return as it seeks to protect capital during unfavorable market conditions for the SSC.
The key to switching between these stances boils down to a question of timing – and timing, in its various forms, is
the principal source of alpha in this strategy. Despite softening equity market conditions and a declining interest rate
environment during the latter part of 2007, the Fund delivered a net return that exceeded both of its key market
exposures.
As can be seen in Figure II, over the past year Sentry has delivered a net return of 122 basis points above the S&P 100
Index with a fraction of the volatility. Similarly, the Fund has exceeded the 90-day Treasury Bill rate by 295 basis
points. These results are quite intuitive when one considers the bull spread profile of the SSC. The combination of a
synthetic index (composed of a basket of stocks designed to replicate the S&P 100 Index) and an options wrapper
(consisting of short out-of-the-money S&P 100 Index calls and long out-of-the-money S&P 100 Index puts) means
that Sentry is designed to provide large-cap U.S. equity exposure within a range, but with much less volatility. Since
inception of the Fund in 1990, Sentry’s volatility, as measured by rolling 36 month standard deviation, has ranged
between 1.34% to 3.23% and is currently 1.40%.
Figure II.
2007 Sentry Performance vs. 2007 Sentry Performance vs.
S&P 100 Index US 90 Day T-Bill Index
8% 8%
7% Fairfield Sentry Limited 7%
S&P 100 Index DRI Fairfield Sentry Limited
6% 6%
5% 5%
Net Return
Net Return
US 90 Day T-Bill Index
4% 4%
3% 3%
2% 2%
1% 1%
0% 0%
0% 2% 4% 6% 8% 10% 12% 0% 1% 2%
Standard Deviation Standard Deviation
Source: FGG, Bloomberg. S&P 100 Index with dividends reinvested.
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3. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Performance in Bull vs. Bear Markets
Another important characteristic of the bull-spread profile created by the SSC is that it is designed to outperform the
S&P 100 DRI Index on a net return basis during down equity markets (via the action of the protective put option)
and underperform the S&P 100 DRI Index during strong up markets (via the action of the covered call option).
Figure III presents the performance of Sentry during bull and bear markets for large cap U.S. equities and highlights
this effect during the bull market of the late-1990’s and the bear market of the early part of this decade induced by
the bursting of the technology bubble. Viewed over the longer term, the interaction of the stock basket and options
collar to reduce volatility and dampen delta-adjusted equity market exposure can be seen on Figure IV. The net return
of Sentry over the best and worst six month periods have been presented.
More recently, many equity market indices have suffered deep declines, in some cases dropping more than 20% off of
prior highs – a level that is often cited as the defining point of a technical bear market. Over the four month period
from October 2007 to January 2008, the S&P 100 Index dropped -9.34% (at its depth, it had posted an intra-month
peak to trough drawdown of -15.50% during this time). In keeping with its historic pattern of protecting capital
during weak markets, Sentry delivered 2.38% of net return to its clients during the same four month period.
Figure III.
Bull Market Performance Cumulative Return Bear Market Performance Cumulative Return
(Dec-94 to Apr-99) (Aug-00 to Sep-02)
300% 30% 20.58%
241.60% 20%
250%
10%
Cummulative Return
Cummulative Return
200% 0%
-10%
150% -20%
-30%
100% 67.29%
-40%
50% -50%
-49.37%
-60%
0%
Fairfield Sentry Limited S&P 100 Index DRI Fairfield Sentry Limited S&P 100 Index DRI
Source: FGG, Bloomberg. S&P 100 Index with dividends reinvested.
As one might expect, consistently delivering positive performance across different market environments requires
some adaptation. Bull markets of the sort seen in the late 1990’s (and even as recently as 2006) are ripe with entry and
exit opportunities conducive to bull-spread investing. Conversely, bear markets characterized by negative momentum,
skittish investor behavior, and poor liquidity pose additional timing and trading challenges. Over the 17 years it has
been in existence, Sentry has recognized and adapted to a number of these regime shifts.
For example, in the momentum and liquidity rich equity markets of 2006, Sentry accurately identified four major
trend reversals during the year and implemented the SSC strategy around these periods of positive market
directionality. Each of these four implementations lasted more than two months (longer than its long-run average
holding of about four weeks). In contrast, weaker equity markets in 2007, characterized by relatively fewer periods of
sustained positive market directionality (especially during the latter half of the year), meant that trading had to be
more nimble and the SSC had to be constructed around shorter-term perceived trading opportunities. In fact, of the
seven implementation cycles in 2007, all but one lasted fewer than four weeks.
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4. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Figure IV.
Sentry’s Performance during best six month period of the S&P 100 DRI Index
35% 32.10%
30%
26.50%
25.05%
23.99% 23.75%
25%
20%
15%
10% 6.86%
6.11% 6.38% 6.35% 6.10%
5%
0%
Aug 98 - Feb 99 Jul 96 - Jan 97 Mar 97 - Sep 97 Jan 95 - Jul 95 Oct 97 - Apr 98
S&P 100 Index DRI Fairfield Sentry Limited
Sentry’s Performance during worst six month period of the S&P 100 DRI Index
10% 6.68%
4.30% 3.67% 3.91% 4.10%
5%
0%
-5%
-10% -7.13%
-15% -12.67%
-15.10%
-20%
-25% -22.15%
-30%
-28.92%
-35%
Mar 02 - Sep 02 Aug 00 - Feb 01 Apr 01 - Oct 01 Jun 00 - Dec 00 Jul 01 - Jan 02
S&P 100 Index DRI Fairfield Sentry Limited
Source: FGG, Bloomberg. S&P 100 Index with dividends reinvested.
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5. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Excess Return Over T-Bills
Many Sentry investors may be aware that the Fund has quite consistently delivered an annual net return that has
exceeded the risk free rate by around 400 to 600 basis points. In previous letters, we have discussed this association
and analyzed the consistency of the performance spread over one-month USD LIBOR across different market
environments. Although this pattern continued to hold true in 2007, it has softened somewhat. Sentry’s net return
spread to one-month LIBOR in 2007 was 200 basis points. During times when money markets are in equilibrium,
using LIBOR as a proxy for Sentry’s Treasury Bill holdings makes sense. As it turns out, there was considerable dis-
equilibrium in fixed income markets in 2007 and a significant de-coupling of Treasury Bill rates from Fed Funds and
LIBOR. As a result, it may be instructive to examine Sentry’s excess return relative to the 90-day Treasury Bill Index
as well.
By mid-summer, many market participants began to realize that the impact of the housing-loan crisis and resulting
economic slowdown would be more severe than originally thought. Equity market trading patterns turned less
directional and exhibited fewer periods of sustained positive market momentum. Investors fled riskier assets to seek
the shelter of government bonds (particularly shorter term treasury bills and notes) and by mid-August this flight to
quality, combined with the expectation that the U.S. Fed would be forced to ease rates, had led to a sharp drop in
yields.
Figure V plots these three measures of short term interest rates over the past 10 years – the Fed Funds Target Rate,
one-month LIBOR (the rate at which banks lend to each other) and 90-day Treasury Bill composite. Although these
three rates have tracked each other closely for most of this decade, they began to significantly diverge in the third
quarter of 2007 and by August 2007 the yield on the 90-day Treasury Bill composite was more than 2% lower than
Fed Funds – an indication that the market was pricing in imminent rate cuts.
Figure V.
Fed Target Rate and LIBOR vs. Yield for 90 Day T-Bills – 1997 to 2007
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0 `
2.5
2.0
1.5
1.0
0.5
0.0
Aug-97
Apr-98
Aug-98
Apr-99
Aug-99
Apr-00
Aug-00
Apr-01
Aug-01
Apr-02
Aug-02
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Apr-07
Aug-07
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Fed Funds 90 Day T-Bills 1 Month LIBOR
Source: Bloomberg
The SSC was implemented more selectively in this environment. Shorter cycle durations were accompanied by an
increased number of partial implementations where less than the full corpus of assets were deployed.
On an asset weighted basis, the SSC had been activated in 2007 slightly less than in previous years. Looked at another
way, about 30% of Sentry’s net return in 2007 was derived from its Treasury Bill holdings (see Figure VI). The long
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6. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
run average annual attribution to Treasuries has been closer to 10%. In fact, Sentry’s exposure to short-dated U.S.
Treasury Bills in 2007 was the highest it had been in the last five years – a reflection in part of Sentry’s capital
preservation characteristics during a tumultuous period for global equities.
Overall, Sentry delivered a net return in excess of Treasury Bills of 295 basis points, slightly less than its five year
average spread of 454 basis points.
Non-Split-Strike Conversion Initiative
The Non-Split-Strike Conversion Initiative (“Non-SSC” or the “Initiative”) has been a feature of Sentry since
October 1, 2002. The allocations to the Non-SSC managers consist of investing a small portion of Sentry’s capital to
new investment vehicles managed by experienced management teams establishing themselves in new investment
businesses. Non-SSC investments may also include strategic allocations to experienced managers in established funds.
A key feature of this Initiative is that Sentry shareholders will not only participate in gains resulting from these
investments, but FGBL also provides a form of “principal protection” from any losses that may result from these
allocations at the end of a calendar year.
Overall, the Non-SSC investments have performed well, collectively contributing about 0.99% to Sentry’s return since
the inception of the Initiative in October 2002. The performance contribution of the Initiative to Sentry in 2007 has
also been positive, adding 0.15% to Sentry’s net 7.34% return this year..
We have provided information on these investments in previous letters. Please contact your FGG representative for
further information. As of December 31, 2007, the following investments were part of the Non-SSC Initiative:
Fairfield Parabolic Partners Fund Ltd. (“Fairfield Parabolic”): The Fund’s investment in March 2006 of USD $7.5
million in Fairfield Parabolic was valued at the end of December 31, 2007 at approximately USD $7.8 million, which
represents an allocation of 0.11% of Sentry’s assets. It has declined 5.32% in 2007. We expect to fully unwind this
position.
Fairfield Manhasset Offshore Fund Ltd. (“Fairfield Manhasset”): In July 2006, the Fund made an investment of USD
$25 million in Fairfield Manhasset, sub-advised by Manhasset Capital Partners (“Manhasset”). In 2007, Fairfield
Manhasset has returned 16.77%. At the end of December 31, 2007, the Fund’s holding was valued at approximately
USD $30.7 million, which represents an allocation of 0.43% of Sentry’s assets.
Fairfield Argenis Healthcare Fund Ltd. (“Fairfield Argenis”): In July and August 2006, Sentry made a combined USD $50
million allocation to Fairfield Argenis Healthcare Fund Ltd. (“Fairfield Argenis”) sub-advised by Argenis Capital Advisors,
LLC (“Argenis”). Fairfield Argenis has declined 22.02% year-to-date. The Fund redeemed $25 million from Argenis in July
2007 and $16 million in September 2007. At the end of December 31, 2007, Sentry’s investment in Fairfield Argenis was
valued at approximately USD $4.3 million, or 0.06% of assets. It is expected that this position will be fully unwound.
Fairfield Wilshire Portable Alpha(“Fairfield Wilshire”): Fairfield Wilshire Portable Alpha seeks to deliver S&P 500 Index
returns plus 3% net alpha (after all fees and costs) with a relatively high information ratio. The underlying alpha source is
FGG’s Irongate Global Strategy Fund Limited (“Irongate”). Irongate is a fund of hedge funds that seeks to achieve capital
preservation, long-term capital appreciation and superior risk-adjusted returns with low correlation to traditional equity and
fixed income markets. In February 2007, the Fund made an investment of US$25.5 million in Fairfield Wilshire. Fairfield
Wilshire has returned 13.90% in 2007. As of December 31, 2007, Sentry’s investment in Fairfield Wilshire was valued at
approximately $29.1 million, which represents an allocation of 0.40% of Sentry’s assets.
Fairfield Lion Japan Equity Fund Ltd (“Fairfield Lion”): In August 2007, the Fund made an investment of USD $5.2
million in Fairfield Lion. Fairfield Lion has declined 5.73% in 2007. At the end of December 31, 2007, the Fund’s
holding was valued at approximately USD $4.9 million, which represents an allocation of 0.07% of Sentry’s assets.
Fairfield Treeline Fund Ltd (“Fairfield Treeline”): In November 2007, the Fund made an investment of USD $25.1
million in Fairfield Treeline. Fairfield Treeline has returned 3.97% in 2007. At the end of December 31, 2007, the
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7. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Fund’s holding was valued at approximately USD $26 million, which represents an allocation of 0.36% of Sentry’s
assets.
Fairfield Icahn Fund Ltd (“Fairfield Icahn”): In December 2007, the Fund made an investment of USD $40 million in
Fairfield Icahn. Fairfield Icahn declined 1.17% in its first month in the Initiative. At the end of December 31, 2007,
the Fund’s holding was valued at approximately USD $39.5 million, which represents an allocation of 0.55% of
Sentry’s assets.
In addition to the above investments, Sentry has also made small allocations to a limited number of other strategic
opportunities. Sentry has also invested 0.82% of its assets in four structured products which provide leveraged
exposure to two of FGG’s multi-manager and fund of hedge fund products: Fairfield Investment Fund Ltd. (“FIF”);
Fairfield Greenwich Fund (Luxembourg) – Guardian II Fund (“Guardian II”). FIF is FGG’s global multi-manager,
multi-strategy fund that seeks to deliver superior risk-adjusted returns while maintaining a commitment to capital
preservation. The underlying portfolios are broadly diversified with allocations to hedged equity, long/short equity,
credit arbitrage, relative value, and event-driven managers. Similar to FIF, Guardian II is FGG’s Swiss-registered
multi-manager, multi-strategy fund that seeks to deliver superior risk-adjusted returns while maintaining a
commitment to capital preservation. These strategic investments have performed well, contributing 0.08% of the
0.15% year-to-date added to Sentry’s return by the Non-SSC Initiative.
In total, allocations across all 11 non-SSC investments amounted to USD $201 million and constituted approximately
2.80% of Sentry’s portfolio as of December 31, 2007.
The Fund expects to continue to opportunistically invest a small portion of its assets away from the SSC strategy. It
is anticipated that the Fund will invest in a combination of seed/incubation opportunities (with experienced
management teams seeking to establish new fund businesses) and strategic opportunities. Sentry’s allocation to any
single investment is not expected to be greater than USD $100 million and the aggregate value of these investments is
not expected to be greater than 5% of the Fund’s assets.
Figure VI.
Non-SSC Fund Returns (Unaudited)
Q3 2007 Q4 2007 2007 RISK*
Parabolic -3.69% -4.05% -5.32% 5.62
Manhasset 2.68% 4.53% 16.77% 7.28
Argenis -13.29% 0.00% -22.02% 16.11
Enhanced FIF 0.25% -1.58% 11.25% 13.58
Enhanced Guardian II 1.27% -4.10% 5.97% 10.35
Wilshire** 0.96% 0.69% 13.90% N/A
Boiro** 0.39% -1.39% 10.56% N/A
Lion *** -1.07% -4.70% -5.73% N/A
Boiro 2 *** 2.63% -1.52% 1.07% N/A
Treeline **** 3.97% 3.97% N/A
Icahn ***** -1.17% -1.17% N/A
Source: FGG
* Risk is measured by trailing 12 month standard deviation; investments with less than 12 months data not calculated.
** 2007 returns are from February 2007 onwards.
*** Q3 and 2007 returns are from August 2007 onwards.
**** Q4 and 2007 returns are from November 2007 onwards.
***** Q4 and 2007 returns are from December 2007 onwards.
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8. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
Figure VII.
2007 Approximate P&L Attribution by Instrument Type of Split-Strike Conversion Assets (Unaudited)
STOCK T-BILL NET OPTIONS NET
P&L INTEREST DIVIDENDS P&L PROFIT
Q1 2007 -1.11% 0.56% 0.10% 2.28% 1.82%
Q2 2007 3.38% 0.28% 0.23% -1.73% 2.14%
Q3 2007 2.09% 0.68% 0.06% -1.26% 1.45%
Q4 2007 -0.60% 0.64% 0.05% 1.72% 1.74%
2007 3.82% 2.18% 0.43% 0.91% 7.34%
Source: FGG
Note: Calculations reflect gross of fees P&L divided by average assets each month, scaled down to net of fees performance.
Figure VIII.
Cumulative Growth of Sentry vs. S&P 100 DRI
(From Inception to December 31, 2007)
700
600
500
400
300
200
100
Nov-90
Nov-93
Nov-96
Nov-99
Nov-02
Nov-05
May-
May-
May-
May-
May-
May-
Aug-
Feb-
Aug-
Feb-
Aug-
Feb-
Aug-
Feb-
Aug-
Feb-
Sentry S&P 100 Lehman Aug-
Source: FGG, Bloomberg. S&P 100 Index with dividends reinvested.
We look forward to providing you with further updates regarding Sentry and the Initiative as we progress with our
plans to continue to provide high value alternative asset management to the Fund’s shareholders. If you have any
questions regarding the foregoing, Sentry, or any other FGG funds, please contact your FGG representative.
Sincerely,
Amit Vijayvergiya
Partner
Fairfield Greenwich (Bermuda) Ltd.
Notes and Disclaimers
This information has been prepared and is intended exclusively for existing investors in Fairfield Sentry Limited (the “Fund”). The performance results
presented in this document are net of all fees and expenses and have been adjusted to reflect a 1% management fee and 20% performance fee. They do not,
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9. FAIRFIELD SENTRY LIMITED – SEMI-ANNUAL UPDATE
however, represent an official accounting of Fund activities. Investors should reference their normal monthly or quarterly statement for the official record of
the Fund’s valuation. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their
accuracy or completeness. Past performance is not a guarantee of future results.
This document does not constitute an offer to sell or the solicitation of an offer to buy shares of the Fund. Such offer or solicitation may only be made by
means of delivery of a Private Placement Memorandum that contains a description of the material terms, including risk factors, conflicts of interest, fees,
expenses, and regulatory and tax considerations, relating to an investment in the Fund. An investment in the Fund is speculative and involves a high
degree of risk. Investment results may vary substantially from year to year. An investor could lose all or substantially all of his or her investment.
Certain statements in this document may include forward looking statements and forecasts concerning the Fund and the Fund’s plans, intentions, strategies,
expectations, predictions and financial forecasts concerning the Fund’s future investment activities and results of operations and other future events or
conditions based upon the views and opinions of the Fund’s investment manager. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance or achievements of the funds to be materially different from any future
results, performance or achievements expressed or implied by such forward looking statements. The Fairfield Greenwich Group assumes no obligation to
update these forward-looking statements to reflect actual results, changes in assumption or changes in other factors affecting such forward-looking statements.
The index information included in this document is meant simply to provide a frame of reference indicating the general trends in applicable markets during
the specified time period. It is not intended to suggest that the Fund is comparable in any way with the index, either in composition, risk characteristics or
investment objectives. The index information provided should not be interpreted as a benchmark for the Fund. It is not possible to directly invest in an
index.
“Fairfield Greenwich Group” is the marketing name for the securities and investment advisory businesses of Fairfield Greenwich Limited and its
subsidiaries worldwide. In the United States securities are offered through Fairfield Heathcliff Capital LLC, a broker-dealer and member FINRA
(formerly NASD) and SIPC. Investment advisory services are offered by Fairfield Greenwich Advisors LLC. In the EU, securities and investment
advisory services are offered through Fairfield Greenwich (UK) Limited, 10 Cork Street, London W1S 3NP (Company Number 3440032), which is
authorized and regulated by the Financial Services Authority (FSA), and which has approved this document for publication in the UK. In Singapore,
securities and investment advisory services are offered through Lion Fairfield Capital Management Ltd., which holds a capital markets services license
issued by the Monetary Authority of Singapore under the provisions of the Securities and Futures Act (Cap 289).
9