Q4 2008 Letter

Eaton Center 1111 Superior Avenue, Suite 970 Cleveland, Ohio 44114-2529 tel: 216.781.3233 fax: 216.781.6670

Lakefront Partners

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Quarterly Update – Fourth Quarter 2008

Performance (net) 2005* 2006 2007 2008 Inception to Date

Lakefront

S&P 500

3.1% 11.3% -0.5% 3.7% 18.5%

4.7% 15.8% 5.5% -37.0% -19.4%

S&P 500 returns are provided to illustrate the overall market environment. Lakefront Partners often hedges against the risks inherent in the general market, and as a result, will often have little or no correlation to market returns.

For the fourth quarter of 2008, Lakefront Partners returned 11.2% net of fees and expenses versus a loss of 21.9% for the S&P 500. For 2008, Lakefront returned 3.7% versus a loss of 37.0% for the S&P 500. Virtually every year-end letter from investment managers we have received has gone through a detailed account of the events of 2008 followed by a short explanation of how those unexpected events negatively affected their fund. With this in mind, we believe that the readers of this letter are fully aware that 2008 was one of the worst years on record. The events that occurred in 2008 have been well documented. As such, we do not believe we will add value by itemizing those events in this communication. Rather, we will discuss some details of Lakefront Partners and our viewpoint of how it might fit into an investor’s overall asset allocation. In 2008, and particularly the fourth quarter of 2008, was an industry altering period for the investment management and hedge fund industries. Most asset allocation models and risk mitigation strategies failed. Many managers believed that their overall strategies were properly hedged or properly diversified, and as a result, would protect investors from significant losses in a bear market. Almost all of them were wrong. Going forward, we believe that investors will look back to 2008 as a way to differentiate funds. The few funds that were able to protect capital during the worst of times will garner assets; those who sustained major drawdowns will shrink or close.

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This document does not constitute an offer to sell interests in or an invitation to invest in the Partnership which will be made exclusively on a private placement basis, and only to qualified investors by means of the Partnership’s private placement memorandum, which contains detailed information concerning the investment terms and risks associated with an investment in the Partnership. Performance figures are calculated by a third party accounting firm. Other analysis is estimated and accurate to the best knowledge of the portfolio managers. 2005 represents a partial year starting 3/2/2005.

In one of the worst years ever for the market, Lakefront Partners was clearly differentiated in that the fund was able to avoid the carnage and actually create positive returns. In 2008, and since inception, Lakefront Partners has significantly outperformed the market and most other funds. At the same time, the fund has exhibited less risk and has been, on average, uncorrelated with the market and other funds.

Risk Diversification and Asset Allocation In 2008, not only were most funds down, but most wealth management and asset allocation strategies were down more than investors would have expected. In the past few years, it was becoming increasingly evident that various asset classes were becoming more correlated with each other. During the bull market, the increased risk inherent in holding these increasingly correlated assets was not identified by most. Many of the most sophisticated asset managers in the world had created portfolios of diversified assets. They did not, however, create portfolios of diversified risks. Their asset diverse portfolios were essentially one directional, correlated bets that did not protect investors from downside. The following is an illustration of how asset diversification and risk diversification differed.

"Smart" Endowment Allocation Domestic Equity Foreign Equity Private Equity Emerging Mkt Equity Commodities Real Estate Hedge Funds Bonds (Munis)

12%

15%

12% 18% 12% 13%

9% 9%

The above is the allocation a major university endowment held in mid 2008. During the recent market turmoil, this portfolio has lost approximately thirty percent. One can easily see that this portfolio is asset diverse. However, even the highly sophisticated endowment managers did not realize that this portfolio was not risk diverse. In fact, it is quite the opposite. Almost everything in this portfolio ended up being correlated. Looking at the allocation, one immediately notices that the first four categories are equities. Domestic, foreign, emerging and private equity all are correlated with each other. These direct equity invests comprise 45% of the portfolio. Then there are commodities, real estate and other hedge funds. All three of these asset classes have become correlated as well. If we think about this allocation in terms of risk exposure, the allocation looks more like the chart on the next page.

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Real Endowment Allocation 15%

85%

Economically Correlated Bonds

One question potential investors often have is “How does Lakefront fit into my overall allocation?” As we highlighted earlier, Lakefront has outperformed the market and has done so with lower volatility and no correlation over time. The following illustration will help to visualize how these attributes might affect ones allocation:

Lakefront in a Portfolio Allocation

S&P 500

65% Stocks 35% Bonds

Nov‐08

Aug‐08

May‐08

Feb‐08

Nov‐07

Aug‐07

May‐07

Feb‐07

Nov‐06

Aug‐06

May‐06

Feb‐06

Nov‐05

Aug‐05

May‐05

Feb‐05

$1,400,000  $1,300,000  $1,200,000  $1,100,000  $1,000,000  $900,000  $800,000  $700,000 

40% Stocks 35% Bonds 25% Lakefront

The chart above shows three scenarios since the inception of Lakefront: The market, a typical 65/35 allocation, and an allocation where equities were reduced and placed in Lakefront Partners. As we can see, for the first eighteen months, in a bull market, the Lakefront enhanced portfolio acted very similarly to the market. As speculation and valuations continued to increase in 2007, the Lakefront enhanced portfolio participated in the upside of the market, but to a slightly lesser extent. As the excess of the market dissipated and the bear market took hold, the Lakefront enhanced portfolio performed much better, and since inception has significantly outperformed the market and a typical 65/35 allocation.

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Stocks Bonds Lakefront Initial Investment Current Value Largest Drawdown Annualized Volatilily

S&P 500 Allocation 1 Allocation 2 100% 65% 40% 0% 35% 35% 0% 0% 25%   1,000,000       1,000,000     1,000,000      805,958          945,034     1,040,860 ‐16.8% ‐11.4% ‐5.2% 14.1% 9.4% 5.2%

Importantly, as the table above illuminates, an allocation augmented with an investment in Lakefront has significantly reduced overall risk while creating better returns. Lakefront has significantly reduced volatility versus the typical alternatives. Further, the maximum monthly loss in a portfolio including Lakefront was dramatically lower than a market or 65/35 allocation.

Portfolio Exposure and Behavior During the fourth quarter 2008, the fund’s gross exposure averaged 104.5%, consisting of 68.8% gross long and 35.7% gross short, reflecting a 33.1% net long position. On a beta adjusted basis, Lakefront averaged 48.0% net long. During the fourth quarter, Lakefront shifted toward a longer net position. The fund’s bottom up strategy directed us toward a longer stance for several reasons, including: •

Short Targets Achieved: Many of the Fund’s short positions achieved or exceeded our price targets. The risk/reward of holding many of our short positions shifted away from favoring the short side.

•

Shift in Insider Activity: The insider profile of many stocks shifted. There are now few stocks where insider selling is heavy. Conversely, insider buying has increased in many names.

•

Valuations More Favorable: Valuations in many stocks have plummeted. Even when looking at stocks from a standpoint of tangible book value, many stocks are at all time lows and are reflecting Great Depression-like fundamental outlooks.

While Lakefront is currently net long, this position is not something that necessarily will be permanent or long term. As always, and particularly now, close attention is paid to fundamental, valuation and behavioral characteristics of the positions held in the portfolio. Our dynamic approach allows for flexibility. If any of our positions begin to breach their stop-loss limits or otherwise fail to meet our criteria, we will reduce them. This flexibility and willingness to reduce adversely moving positions has been a differentiating characteristic which has helped allow us to outperform the market and avoid major losses. From a sector standpoint, as of December 31, 2008, the fund held a net long position in basic materials, consumer non-cyclicals, energy and utilities. While we are long and short other areas, on a net basis, no other sector accounts for more than five percent of the overall portfolio.

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Sector Weightings (as of 12/31/08) Sector Basic Materials Communications Consumer Cyclical Cons. Non-Cyclical Energy Financial Industrial Technology Utilities

Long 9.3% 4.8% 4.4% 15.1% 12.5% 7.2% 10.4% 3.0% 8.1%

Short -1.3% -3.8% -1.8% -4.8% 0.0% -6.1% -6.1% -0.5% 0.0%

Net 8.0% 1.0% 2.6% 10.3% 12.5% 1.1% 4.3% 2.5% 8.1%

Total

74.8%

-24.4%

50.4%

Outlook and Strategy Since inception, Lakefront has created positive returns and has significantly outperformed the market and other alternatives in what has turned out to be one of the most difficult market environments in history. Over time, we have correctly identified potential areas of concern within the market and have positioned the portfolio accordingly. Our process of bottom up evaluation of individual stocks has resulted in the protection and growth of capital in the extreme market declines recently experienced along with participation in the upward moving market experienced in 2005 and 2006. Recent events have clearly changed the economic and financial landscape we face today. As always, we are looking for opportunities to profit in the current environment. Increasingly, our bottom-up approach to stock picking has revealed an increased number of attractive long opportunities from a valuation standpoint. We are wary, however, of falling into value traps in an economy which continues to deteriorate. In this environment, we are particularly sensitive to balance sheet criteria and have carefully added to the long side on an opportunistic basis. Additionally, many short positions have reached or exceeded our targets, resulting in a cautious reduction of the short side of the portfolio. In these tumultuous times, we believe Lakefront Partners has been clearly differentiated in its ability to outperform and create positive returns in all market environments. We believe that, unlike most alternatives, the fund performed as we told investors that it would. 2008 was not an easy year for anyone, and we appreciate the trust our investors have placed in us. With the uncertainty surrounding the economy and markets, 2009 promises to be another volatile year. While reviewing your portfolio holdings in 2009, we ask you to consider the benefits Lakefront can add to your portfolio and hope that you will consider an additional allocation to our strategy. We would be pleased to meet with you and/or your financial advisor to further discuss the fund and how it can benefit the risk profile of your portfolio.

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We thank you for your investment and will continue to treat your money like we treat our own. As always, please do not hesitate to call or email with any questions you may have. Sincerely,

Brenton K. Luce Senior Vice President/Portfolio Manager

Edward R. Matuszak Senior Vice President/Portfolio Manager

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