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Posted by Bess Levin, Oct 06, 2008, 3:22pm

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Atticus European Fund's September performance letter to investors:

Positioning and Performance

After the US mortgage crisis started about one year ago, I was of the opinion that while the
housing correction would result in a slowdown in US growth, global GDP growth would show the same resilience as in previous financial crises. I therefore positioned the fund for exposure to global growth, with thematic exposure to metals, mining, and energy sectors,
among others. The European Fund started the year at exposure levels of 178% gross long
and 95% net long. We consistently communicated this opinion and positioning to our investors.


This judgment (of a mild, mid-cycle US slowdown) has now obviously proven to be incorrect, resulting in significant losses for our fund. The European fund is down 43.5% year to date. I regret and am intensely disappointed by this performance.


As the crisis worsened and investor confidence in global growth deteriorated significantly, our investments in mining, energy, exchanges, emerging markets banks, luxury goods and real estate all contributed to negative performance. Resource stocks which appeared cheap to us at 7 or 8x trailing p/e are now trading as low as 3.5x trailing p/e in anticipation of a potential slowdown in demand and earnings. The valuation arbitrage has completely broken down, with many attractively valued stocks now trading on speculation about liquidity flows from hedge-funds and other institutional investors, and without any correlation to their more expensive peer companies.


What We Have Done

While I was late to perceive the magnitude of this crisis, I have taken several steps to protect the interests of all investors by reducing exposures in the portfolio. Through July, even as I believed in the "correction" scenario and maintained net exposure in excess of 80%, I nonetheless reduced gross exposure. In late August, I initiated further reductions in both gross and net exposure, which were substantially accelerated in September.

Today, the European Fund stands at 55% long and 58% short, for net exposure of -3%. Selected positions have been substantially or entirely sold, with a particular focus on our less liquid positions.

Some of our selling took place in difficult market conditions. While therefore "booking" certain losses, the collective selling has allowed us to regroup amidst this clearly extraordinary time. While in hindsight I wish I had made the decision to sell sooner, I am glad that it is now done. The values of many of the names we sold have continued to deteriorate materially following our reductions.

In the past, several factors including exceptionally high conviction in certain themes have
generated common positions between the European Fund and the Atticus Global Fund. However, for most of 2008, the only significant overlap between the two funds has been the long-term investment in Deutsche Boerse AG. As you know, due to our activist stance this position has been designated (side-pocketed) as a long-term core holding that we have no plans to sell for the foreseeable future.

Capital and Operational Stability

We have the liquidity and capital structure to weather the current storm. Based on long-term planning and proactive management, our capital and counterparty arrangements have provided stability in this challenging environment. At all times we strive to maintain our ability to meet maximum possible fund liquidity needs, including redemptions, for upcoming quarters. As communicated in last month's data report, it would take fewer than five trading days to meet maximum possible redemptions through year end. Such a hypothetical scenario would - by definition - eliminate all quarterly capital from the fund, extending the average duration of the remaining capital and further enhancing capital stability in subsequent quarters.

Today, more than 50% of our NAV is in U.S. Treasuries and cash held at J.P. Morgan and Bank of America, or in securities held at State Street Bank in a segregated custody account. Less than 1.5% of our assets are with independent broker/dealers.

Our Plans Going Forward

We retain our research-driven, value-focused investment style, and are working diligently to identify future investment opportunities. However, in the immediate current environment, I believe it is prudent to maintain our critical focus on capital preservation and liquidity. If we see a climactic sell-off in the market or a stabilization of credit conditions and growth prospects, then I will be inclined to raise our risk appetite once more.

I am optimistic that we have both the skill-set and the mind-set to identify opportunities from here. We also have a configuration and capital structure that will allow us to move
quickly as opportunities arise. Collectively, I and my team are the largest investors in the European Fund. I understand personally the frustration that our year-to-date results generate and I share your disappointment. But I will continue to execute our strategy, apply what we have learned, and make the judgments I believe are necessary to generate value for the fund.


Thank you for your continued support,

David Slager

Vice Chairman

Portfolio Manager - Atticus European Fund

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