GAD PARTNERS FUNDs, L.P

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Silvester McCormick
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1 GAD PARTNERS FUNDs, L.P 1260 South Milledge Ave, Ste. C Athens, GA Telephone: Fax: sham@gadcapital.com Some Important Housekeeping Before getting to the actual quarterly letter, please take a moment to consider the following: Anchoring, the process by which individuals base decisions solely on the past is an easy habit to form in investing. Anchoring is what causes investors to hold on to laggard investments because they once traded at higher prices. Many investors are clearly anchoring again, waiting on the sidelines for the S&P 500 to reach March 2009 levels. Whether or not the S&P will hit bottom and settle at 900, 666, or 500 is always the unknown. Stock prices are known however, and if the price is right, very little can be gained by attempting to wait for a bottom. I will share a fact about Warren Buffett that even the most ardent followers of the Oracle of Omaha may be unaware. Warren Buffett shut down the Buffett Partnerships in and didn t come back to the stock market until But he came back with a vengeance or as he enthusiastically put it, like a sex-starved man in a harem. What very few people know is that when the market hit its lows in 1974, Buffett s holdings were down a full 50 percent. Unperturbed, Buffett kept making purchases and by 1980, Berkshire Hathaway shares had appreciated by 40% per year. Despite the nice market uptick the past several weeks, the market will likely continue to offer opportunities to make purchases at depressed valuations. These moments could come in the form of a decline just as rapid as the current advance or as a result of a more prolonged selloff. GPF stands ready to act when valuations dictate action. The above musing is a polite call to partners and potential partners to consider making capital contributions at this time. Aside from the most crucial reason - that opportunities could immediately emerge as a result of another panic sell-off - Gad Funds provides some uniquely inherent advantages to investors making an investment today: Since performance has not yet crossed our required hurdle rate threshold, all new capital contributions will enjoy a free ride to the upside, absent of any fees at all (In today s asset gathering hedge fund world, how often do you get an investment vehicle that is offering you upside with ZERO fees of any kind?)

2 The last time this partnership made a direct call for capital contributions--january of investors experienced a gain of over 60% within a year and nearly 70% year to date. The fund charges no asset management fees, period. I m not going to pocket a quick 1%-2% simply because assets are being added. Gad Funds only charges performance fees. As it now stands, our portfolio is significantly undervalued. The partnerships two largest positions are special situation event driven investments. Reliance on a favorable market, while always preferable, is unnecessary in unlocking the value. In the case of one of the businesses, I sit on the board and progress continues to be achieved. Interested investors can find more detail at the end of this letter or by reaching me directly via sham@gadcapital.com or the contact information above. The current minimum investment for new partners is $100,000 subject to a two-year lock up.

3 To: Limited Partners of the Gad Partners Fund From: Sham Gad, Managing Partner Date: October 20, 2011 Re: rd Quarter Results Dear Partners: The year-to-date performance numbers, as of 09/30/11, are: Dow Nasdaq S&P 500 GPF 10/1/07-12/31/07-3.9% -1.6% -3.3% -3.4% 1/1/08-12/31/ % -39.9% -37.0% -50.9% 1/1/09-12/31/ % +45.4% +26.5% +60.0% 1/1/10-12/31/ % +18.2% +15.1% +6.9% 1/1/11-9/30/11-3.9% -8.3% -8.7% -4.7% Annualized -3.1% -0.5% -4.3% -6.0% Index returns include reinvestment of dividends. GPF returns are net of fees and expenses. Dow Nasdaq S&P 500 GPF II 1/1/1/0-12/31/ % +45.4% +26.5% +41.0% 1/1/10-12/31/ % +18.2% +15.1% +4.1% 1/1/11-9/30/11-3.9% -8.3% -8.7% -8.1% Annualized % % % % Index returns include reinvestment of dividends. GPF returns are net of fees and expenses. General Comments Minimal volatility from our largest positions led to our outperformance for the first nine months of But until we exit positions, volatility will always be an investor s friend or foe depending on the time period under examination. We could have easily delivered far superior or inferior results with a little extra volatility. However, the fact that we own securities that are currently trading well below their intrinsic net worth was somewhat evident in the third quarter as they were not subject to the kamikaze type sell-off that ensued in September.

4 For investors in GPF 1, this letter marks the four year anniversary of the partnership s inception. What a ride it has been! Never one to time markets, I certainly timed the market top with near perfection. You can quickly get a visual from the below chart that our launch date of October 1, 2007 was just about near the absolute highest point ever reached for the S&P 500 index. In fact it was October 12, 2007 that the S&P touched its all time high of Even though I ve managed to stay at par with the performance of the S&P during those four years, this is not the result I would have envisioned four years after inception. As one of the first original investors of GPF1, I more than anyone am eager to see a ballooning quarterly statement. But I don t know even if the most seasoned investor could have predicted that over the course of the past four years the U.S economy would, in aggregate: witness the demise of Lehman Brothers, Bear Sterns, Washington Mutual, Wachovia, Merrill Lynch, and hundreds of other financial institutions; experience real estate price declines of over 50%; deliver an unemployment rate of over 9% (an understated figure if you look closer); observe the nationalization of Fannie and Freddie; and witness the first ever downgrade of U.S. credit. Of course when Warren Buffett laid forth his requirements for his eventual successors at Berkshire Hathaway, he was clear that he wanted individuals who could evaluate risks appropriately, even those never before contemplated. Clearly, the Great Recession was a 1 in 100 year storm, the worst U.S. economic calamity since Protection from risk should not be confused with risk prevention, however. Any investment entails varying degrees of risk that can not be 100% eliminated. The world s most sophisticated insurance companies spend enormous time and money contemplating and pricing risks accordingly. Yet when a catastrophe like Hurricane Andrew occurs, even the best underwriters incur losses. This risk mitigation model for Gad Partners Funds is simple in its construct, but not easy for most to implement: 1. Avoid leverage 2. Avoid over-diversification as that strategy dilutes returns 3. Avoid over-concentration as that strategy can wipe you out 4. Insist on a margin of safety

5 A value investor accepts and appreciates market volatility for what it is: an opportunity to buy parts of a business at attractive prices or to sell them at dear prices. If volatility is the fuel that allows one to buy and sell at attractive prices, then leverage is the spark. Absent volatility, even an inexperienced investor can benefit from leverage: borrow at 2% and invest in a quality asset yielding 5%. But volatility is as unpredictable as the emotions of the individuals that create it. Why take on a risk take can easily be avoided? Is a 20% levered return that is subject to a total loss superior to that of a 15% unlevered return? Indeed there can be good leverage and bad leverage, but greed renders market participants incapable of differentiating between the two. Greed is not always good. Psychology is what makes any simple approach difficult to implement. I can think of no better illustration than to borrow the timeless words of 17th century French mathematician Blaise Pascal: all men's miseries derive from not being able to sit in a quiet room alone. The need for investment action, no doubt promoted by media headlines like Stocks Climb Higher Three Days in a Row, or Stocks That Are Poised to Soar in the Week Ahead, spurs many investors to act first and think later. Yet one has to also appreciate that when markets decide to sell-off, virtually all stocks seem perfectly correlated. The situation in Europe has investors on edge. I can not, nor do I wish to, predict what the final outcome will be and the ultimate effect it will have on equity prices. What I do know is that our portfolio, in aggregate, is like a 50 cent dollar. The last time markets experienced significant turmoil, the equities purchased for Gad Funds during that period of maximum pessimism appreciated by nearly over 60% in six months. I would welcome another such opportune moment to make purchases. Investing Activities As of October 15, 2011 the holdings of the partnerships include: Security Position Size Special Situations/Workouts Paragon Technologies 14% Premier Exhibitions 20% Undervalued Generals Potash Corp 6% Cresud 2% Advance Auto Parts 2% Bank of America 2% Goldman Sachs 2% Basket Investments Financials (Thrift Conversions) 10% Japan 10% 5 Unnamed Securities 17% Cash 15%

6 The sell off in financials provided the opportunity to invest in BofA and Goldman at attractive prices to their long-term intrinsic net worth. As is often the case, the prices fell after I purchased them. Our average cost basis for BofA and GS was approximately $8 and $118 per share, respectively. At the end of this letter, you will find our current Net Asset Value figures. Redemptions Please not that if any partner plans to redeem funds, we must have the request in writing by November 1, Funds will go out by January 20th based on the December 31 NAV. Your quarterly statements should arrive in your mailboxes shortly. If you have any questions, don t hesitate to contact me or Nenette Lee (nlee@liccar.com) at Liccar. Alignment of Interests Both funds are below their historic NAVs and hence no fees were earned. Gad Funds charges no management fee, just performance fees - ¼ of the returns after a 6% annualized return subject to high water marks. I only get compensated when you make money. I win when you win. Our interests are completely aligned. Next Opening - January 1, 2012 The minimum investment for the Gad Partners Fund I is $100,000, and one needs to be a qualified investor as defined by the SEC. The subscription documents have details on who is considered a qualified investor. The next opening is January 1, Existing Partners can make additional investments in increments of $25,000 at each opening. Currently per the legal documents, all funds are subject to a two year lock up from date of investment. Thanks for your interest, referrals, and support. Feel free to call me at or me at sham@gadcapital.com with any questions or comments. Warm Regards, Sham Gad

7 Appendix A: Performance History GPF I Date Number of Units NAV 10/1/07 41,500 $ /31/07 46,500 $9.59 3/31/08 56,891 $8.84 6/30/08 71,028 $8.21 9/30/08 74,074 $ /31/08 82,397 $4.71 3/31/09 108,925 $4.48 6/30/09 120,837 $5.22 9/30/09 120,837 $ /31/09 120,837 $7.46 3/31/10 120,837 $7.65 6/30/10 140,328 $6.64 9/30/10 153,213 $ /31/10 155,784 $8.04 3/31/11 180,668 $8.14 6/30/11 192,945 $8.03 9/30/11 192,945 $7.94 GPF II Date Number of Units NAV 1/1/09 7,500 $ /31/09 7,500 $ /30/09 7,500 $ /30/09 7,500 $ /31/09 7,500 $ /31/10 8,564 $ /30/10 8,565 $ /30/10 8,565 $ /31/10 8,565 $ /31/11 6,064 $ /30/11 6,064 $ /30/11 6,064 $14.11

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