Michael Durante Western Reserve

1. First Quarter 2004 May 6, 2004
Jan Feb Mar 1Q04
Long 1.8% 2.7% 1.9% 6.4%
Short 0.2% -0.5% -0.7% -1.0%
Total 2.0% 2.1% 1.2% 5.4%
S&P 500 1.7% 1.2% -1.6% 1.3%
NASDAQ Composite 3.1% -1.6% -1.7% -0.5%
Russell 2000 4.3% 0.8% 0.8% 5.9%
Dow 0.3% 0.9% -2.1% -0.9%
* Returns are gross of all fees and expenses.
“The will to succeed is important, but what is more important is the will to prepare.”
- Bobby Knight
Dear Partners:
We are pleased to be able to share with you results for the first quarter 2004 (and our first
quarter since inception). Western Reserve Hedged Equity, LP (“WRHE” or the “Fund”)
returned 5.4% gross and 4.0% net of all fees for the period. Attached to the commentary,
please find WRHE’s summary attribution for the quarter.
During the first quarter, long positions dominated performance with the majority of the
Fund’s gains coming on days when the overall market was either quiet or down. The
largest gains for the quarter came from long positions in Metris Companies (MXT),
Capital One Financial (COF) and Alliance Data Systems (ADS). Winners on the short
side included Integrated Circuit (ICST), Investment Technology Group (ITG) and
National Processing (NAP).
MXT increased 81% in the first quarter amid a steady stream of positive news regarding
the company’s turnaround. MXT is a non-standard credit card issuer which in 2002 and
2003 was plagued by rising credit losses and over-zealous banking regulators (the theme
of overreaching banking regulators has and will continue to manifest itself repeatedly in
the Fund’s portfolio). Western Reserve was able to identify significant fundamental
improvements regarding the turnaround at MXT by closely monitoring the firm’s
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2. May 6, 2004
monthly credit performance throughout the fall of 2003 (ahead of the Fund’s launch) as
well as in early 2004. Each month MXT’s credit performance was stronger than the
prior, thus building the case for stability and eventual recovery. WRHE first acquired the
stock in early January when MXT was trading in the range of $4.50 (versus a book value
of roughly $9). MXT shocked Wall Street analysts, many of whom had remained
bearish, by beating their estimates by 88% in the first quarter and returning to
profitability several quarters ahead of the most aggressive estimates. Based on our
detailed monthly credit quality analysis, we began to believe MXT would be profitable
for the quarter as early as February. Although the Fund recently exited the position (at
close to book value), we are again gaining interest in the name as a result of a recent
sharp sell-off in financial stocks which has lowered MXT to the $7 range.
COF, the nation’s second largest independent issuer of credit cards, advanced 23%
during the first quarter and is among the Fund’s largest holdings. The company benefited
from a substantial improvement in operating fundamentals during the quarter and
reported earnings that exceeded analyst estimates by 20%. COF currently trades at only
9x Western Reserve’s 2005 earnings estimate, which is materially higher than Wall
Street. The current, deeply discounted valuation is typical of pre-rate-hike periods and
similar to the trough valuations experienced during 1994 for such companies. COF has
never reported a year of less than 20% earnings growth in its ten year history as a public
company. WRHE believes declining credit costs and an acceleration in top line growth,
caused by the expected abatement of competitive mortgage products (due to rising
interest rates), will drive earnings and the stock higher. Ironically, COF greatly benefits
from a stronger economy and higher interest rates, yet investors have sold the name
aggressively in April and we believe a multi-year opportunity to own the stock is rapidly
developing. We see significant opportunity throughout the balance of the next two years
with this stock, and investors will likely be hearing more about this name given its
distressed valuation relative to historical price performance in similar environments.
ADS, a facilitator and processor of electronic retail transactions that include air miles,
credit cards and other rewards programs, was among the Fund’s largest holdings and best
performers in the first quarter, climbing 21%. ADS has continued to greatly exceed
expectations and is a prime example of the process-oriented, high-recurring-revenue
business model the Fund seeks for long-term appreciation. We recently trimmed the
position as the shares had increased as much as 35% YTD by late April. The shares have
started to decline and we expect to maximize the position size once the valuation again
meets the strict disciplines necessary to warrant such positioning.
The Fund ended the quarter 87% long versus 46% short, but has recently tightened
exposure to manage through the broader market’s increased pre-rate-hike jitters. We do
not include ourselves in the camp that considers the first leg of this economic expansion
to have been a healthy stock picking environment, per se. From our vantage point,
investors have regressed back to the same old game of chasing stocks on price
momentum and again paying little heed to other less trivial (in our view) factors such as
100 Crescent Court, Suite 400 • Dallas, Texas 75201• (214)871-6720 • (214)871-6713 Fax

3. May 6, 2004
valuation. This is how the market found itself in trouble a few years ago (or was that
merely a dream sequence?).
On balance, we believe the market remains in a trading frenzy (and we do mean frenzy)
thus far in 2004. The quest for outsized returns has begun to collide with the rising fear
of unsustainable stimulus from the Federal Reserve (in the form of multi-generational
lows in interest rates) amid increasing signals that point to solid economic recovery.
However, we believe some of the best investment opportunities in quite some time are
being created as a result of investors’ top-down indecisiveness. We will capitalize on
those opportunities as they emerge during this highly inefficient transition into a
potentially higher rate, higher inflation environment.
The Western Reserve team wishes to thank each of our partners for their support and
belief in our investment program. We are getting more excited about the opportunities
currently developing in the market and believe the investing landscape will increasingly
favor our bottom-up stock selection approach.
While we never played for Coach Knight, we very much subscribe to his intense
preparation philosophy. We believe that much of the success in the end is owed to
showing-up to the game extremely well prepared. Our team has toiled in the past in the
research, investment banking and examination departments of firms like Salomon
Brothers, Goldman Sachs and the Federal Reserve. And it is our relentless focus on
research and valuation that we believe gives us an edge in long-term investing.
Regards,
Michael P. Durante
Managing Partner
100 Crescent Court, Suite 400 • Dallas, Texas 75201• (214)871-6720 • (214)871-6713 Fax

4. May 6, 2004
Western Reserve Hedged Equity, LP
1Q 2004 YTD
Positions Perf. Ending Exposure Perf.
Average
Exposure
Long 42 6.3% 87% 6.3% 79%
Short 22 -0.9% 46% -0.9% 37%
Total (Gross) 64 5.4% 133% 5.4% 116%
Total (Net) (1)
4.0% 41% 4.0% 42%
(1) Performance is net of expenses, management fee and prospective incentive allocation
Portfolio Composition
Composition by Sector (% of capital)
Sector Long Short Net
Business Services 8% -4% 4%
Consumer 5% -2% 3%
Financial Institutions 20% -16% 4%
Financial Services 24% -12% 12%
Healthcare 4% 0% 4%
Technology 3% -2% 1%
Technology Services 16% -8% 8%
Yield/Real Estate 7% -2% 5%
87% -46% 41%
Portfolio Concentration
% of Total Capital Top 3 Winners Overall YTD
Long Short Long Short
Top 5 21% 14% Metris Companies Integrated Circuit
Top 10 37% 24% Capital One Financial Investment Tech. Grp.
Alliance Data Services National Processing
Attribution Analysis--Contribution to Total Return (gross)
Jan Feb Mar 1Q04 YTD
Long 1.8% 2.7% 1.9% 6.4% 6.4%
Short 0.2% -0.5% -0.7% -1.0% -1.0%
Total 2.0% 2.1% 1.2% 5.4% 5.4%
S&P 500 1.7% 1.2% -1.6% 1.3% 1.3%
NASDAQ Composite 3.1% -1.6% -1.7% -0.5% -0.5%
Russell 2000 4.3% 0.8% 0.8% 5.9% 5.9%
Dow 0.3% 0.9% -2.1% -0.9% -0.9%
Summary for the Quarter Ended March 31, 2004
100 Crescent Court, Suite 400 • Dallas, Texas 75201• (214)871-6720 • (214)871-6713 Fax