January 27, 2009
Dear Stark Investor,
If necessity is the mother of invention, then distress must be the grandmother of necessity. For it is distress that begets the necessity for action which, in turn, begets an invention to address that necessity.
As we all know far too well, Grandmama Distress went nuts over the past year, leaving opportunity in her wake. Issues regarding liquidity, financing, and redemptions forced
many good organizations to suspend fund redemptions and consider strategic options. In the Tundra sections of the past few monthly commentaries we have alluded to such situations with increasing specificity. That is because for the past several months we have been in selective communication with a number of managers with the goal of determining if some action could be taken, some invention if you will, that could be mutually beneficial to both their and our investors. In particular, discussions with one fund took on increased seriousness over time.
As a result of those discussions, analysis and due diligence by both sides, we are pleased
to announce that we have reached an agreement with Deephaven Capital Management. Although there are certain closing conditions that must be satisfied, we currently expect that the transaction will close at the end of February.

Pursuant to this agreement, the investors of the Deephaven flagship funds, the Deephaven Global Multi-Strategy Funds (the “Deephaven Fund”), will be given the option to become investors in Stark Funds by contributing their proportionate share of the positions in the Deephaven Fund portfolio. Some of these positions, where appropriate, will go into the Stark Master Fund portfolio. The remaining positions, based primarily on their liquidity characteristics, will be put into a side pocket to which the current investors of Shepherd and Stark Investments LP (“SILP”) will not have exposure.
In a sense, we have “purchased” for Shepherd and SILP a part of the Deephaven Fund portfolio by taking on investors from the Deephaven Fund. The Stark organization will manage the orderly wind-up of those investments that will be placed into side pockets
and the resulting cash will be transferred to Stark Master Fund as new capital on behalf of
the former Deephaven Fund investors. In addition, Stark has offered to assist with the management of the wind-down of the remainder of Deephaven’s funds.
For those of you unfamiliar with Deephaven, its background is strikingly similar to our
own in several respects. Like Stark, Deephaven is a global multi-strategy, multi-asset
alternative investment manager. Founded 14 years ago, Deephaven has similar
midwestern roots, headquartered in Minneapolis, Minnesota, and has managed billions
for qualified institutional and individual investors. Also like Stark, Deephaven evolved
from its inception as a single strategy manager in convertible arbitrage, via the gradual
addition of further strategies and geographic exposures, to a diversified multi-strategy
approach. Indeed, it was the substantial degree of overlap, historically, culturally and
strategically, that made this transaction relatively easy to analyze by both parties.
Like all good agreements, we believe that this one is beneficial for both sides. The
primary benefit of the deal for our investors is that it allows Shepherd and SILP to
acquire a portfolio concentrated in areas that are a current focus of investment
opportunity for the Funds. Moreover, this acquisition is being made without having to
deplete the Funds’ existing store of excess liquidity.
Another benefit is the augmentation of the Funds’ NAV during a period of widespread
decline across other funds due to redemptions and performance issues. This is the
clearest possible signal to our financing and counterparty relationships that Stark will be
one of the survivors of the industry consolidation, and we believe will thereby further
significantly strengthen those critical relationships that have been a key source of our
success to date.
Finally, the deal should provide Stark with an opportunity to open the door to additional
opportunities in similar situations to acquire attractive portfolios and, potentially, investment talent.
For the Deephaven Fund investors, the deal provides them with the opportunity for
continued management of their assets in the context of a stronger entity. In addition, the
similarities between Stark and Deephaven permit them to replicate in many respects the
type of investment profile they had originally sought through Deephaven.
Of course, the Deephaven investors are likely unaware of what’s awaiting them in terms
of the monthly investor commentary. But nobody said this was going to be a free lunch.
The advantages we enjoy as a large, experienced firm have been magnified by the current
consolidation in the industry. Accordingly, we believe we have the tools and the team to
put us into a position to be successful in the current environment, and this deal
demonstrates the potential benefits that may accrue from our positioning. We believe
that the potential for other attractive situations exists, and we will continue to be on the
lookout for opportunities that complement our strategic plan. Be assured that we have taken this step prudently and with your best interests at theforefront. If you have any questions, please do not hesitate to contact us.
As always, it is a privilege to manage your capital.