EFTA00803405.pdf

ITEM 1 Cover Page PART 2A OF FORM ADV: FIRM BROCHURE HONEYCOMB ASSET MANAGEMENT LP March 2018 Honeycomb Asset Management LP 645 Madison Avenue, 16'h Floor New York, NY 10022 Tel: 646.883-1105 This brochure provides information about the qualifications and business practices of Honeycomb Asset Management LP. If you have any questions about the contents ofthis brochure, please contact us at 646-883-1105 or compliance@honeycombaacom. The information in this brochure (the "Brochure") has not been approved or verified by the United States Securities and Exchange Commission (the "SEC") or by any state securities authority. Additional information about Honeycomb Asset Management LP also is available on the SEC's website at www.adviserinfo.sec.gov. Registration with the SEC does not imply a certain level of skill or training. EFTA00803405  ITEM 2 Material Changes Honeycomb Asset Management LP ("Honeycomb") is filing this annual amendment as of the date on this Brochure. No material changes have occurred since Honeycomb submitted its last annual amendment filing on March 30, 2017. In September 2017, Honeycomb filed an "other-than-annual" amendment to make certain non- material clarifying updates. ii March 2018 EFTA00803406  ITEM 3 Table of Contents Item 1 Cover Page Item 2 Material Changes ii Item 3 Table of Contents iii Item 4 Advisory Business 4 Item 5 Fees and Compensation 7 Item 6 Performance-Based Fees and Side-By-Side Management 9 Item 7 Types of Clients 10 Item 8 Methods of Analysis, Investment Strategies and Risk of Loss 11 Item 9 Disciplinary Information 28 Item 10 Other Financial Industry Activities and Affiliations 29 Item 11 Code of Ethics, Participation or Interest in Client Transactions and Personal Trading 30 Item 12 Brokerage Practices 35 Item 13 Review of Accounts 38 Item 14 Client Referrals and Other Compensation 39 Item 15 Custody 40 Item 16 Investment Discretion 41 Item 17 Voting Client Securities 42 Item 18 Financial Information 43 iii March 2018 EFTA00803407  ITEM 4 Advisory Business Advisory Firm Honeycomb Asset Management LP ("Honeycomb" or "Investment Manager") commenced investment management activities on June 1, 2016. Mr. David Fiszel, the Founder and Chief Investment Officer of Honeycomb, is the principal owner of Honeycomb. Investment Strategies and Types of Investments The investment objective of Honeycomb is to seek superior risk-adjusted returns with a focus on long and short positions in publicly traded equity and equity-related securities (including options, futures, swaps and other derivatives). Honeycomb invests globally across various industries and sectors, including, without limitation, in technology, media, telecommunications and consumer- related investments. While Honeycomb focuses the investment program on equity securities, it may take long or short positions in other assets and financial instruments (including, without limitation, corporate debt, loans, commodities and convertible and preferred securities) based on its assessment of the highest and best use of capital for investors and the availability of market opportunities across the public and private spectrum. Honeycomb has a one-team collaborative approach to conducting research and analysis for both public and private investments. This approach typically includes developing an investment thesis for potential investment opportunities, refining and challenging the underlying assumptions behind the thesis, and initiating and sizing investments in an effort to maximize risk-adjusted returns. As a primary avenue for idea generation, Honeycomb utilizes the investment experience of Mr. David Fiszel and the firm's team of analysts in seeking to identify market and company-specific trends. Honeycomb believes that many companies have a few key discrete drivers that could significantly impact future value. For long ideas, Honeycomb may seek to identify companies benefitting from value drivers such as, among other things, secular growth trends, best-in-class management teams, misunderstood earnings trajectories, strong industry positioning, recovering margin expansion, or accelerating growth profiles. For short ideas, Honeycomb may seek to identify companies that are hindered by, among other things, secularly declining cash flows, new technologies or products in the marketplace that threaten their businesses, little or no barriers to entry despite significant embedded growth, and inflated multiples due to excessive M&A or other corporate activity. For private investments, Honeycomb focuses on companies it believes offer value creation not generally available in the public markets. Honeycomb endeavors to evaluate the highest and best use of investor capital and to implement a disciplined, patient approach to private company investing. Honeycomb believes its rigorous analytical approach to evaluating public companies is critical in helping it assess the projected trajectory of potential private company investments. Similarly, Honeycomb believes knowledge about private companies and the technologies, products and services they produce better positions itself with respect to public market investing. 4 March 2018 EFTA00803408 From time to time, Honeycomb may acquire certain assets or securities which it believes either may not have a readily assessable market value or should be held until the resolution or occurrence of an event or circumstance and which it designates as a special investment in its sole discretion (each, a "Special Investment"). Upon admission to the Funds (as defined below), each investor may elect not to participate in Special Investments. Honeycomb reserves the right to alter or modify the investment strategies of the Funds in light of available investment opportunities or to take advantage of changing market conditions when it concludes that alterations or modifications are consistent with the Funds' investment objectives. Honeycomb has broad investment discretion and is not subject to limitations with respect to the level of leverage it uses or the portion of the Funds' portfolio that may be invested in any particular asset, financial instrument, investment, region, industry or sector (including various industries and sectors in addition to technology, media, telecom and consumer). All investments risk the loss of capital. Advisory Services Honeycomb provides discretionary investment advisory services to the following pooled investment vehicles (the "Funds"): Honeycomb Partners LP, a Delaware limited partnership (the "Onshore Feeder") that invests all or substantially all of its assets in Honeycomb Master Fund LP, an exempted limited partnership organized under the laws of the Cayman Islands (the "Master Fund"); and Honeycomb Offshore Fund Ltd., an exempted company incorporated under the laws of the Cayman Islands (the "Offshore Feeder") which invests its assets in Honeycomb Intermediate Fund LP (the "Intermediate Fund"), an exempted limited partnership organized under the laws of the Cayman Islands, which, in turn, also invests all or substantially all of its assets in the Master Fund. As used herein, the term "client" or "clients" refers to one or more of the Funds referenced above as well as associated co-investment vehicles. Honeycomb intends to manage each client based on the investment objectives and restrictions as set out in the relevant client's offering materials. In addition, for investment structuring, legal, tax, regulatory or other reasons, Honeycomb has created one or more special purpose vehicles through which it makes Fund investments and may create additional such vehicles in the future. Honeycomb Advisors, LLC (the "General Partner"), a limited liability company organized under the laws of the state of Delaware and controlled by Mr. David Fiszel, serves as the general partner of the Onshore Feeder and the co-investment vehicles, and Mr. David Fiszel serves as one of three directors for the Offshore Feeder. It should be noted that Honeycomb may in the future provide trading advisory or investment management services to separately managed accounts, investment funds, or other investment vehicles for investors interested in investment programs that differ from the ones used by the Funds or for investors that do not wish to invest in the pooled investment vehicles referenced above. The investment terms for each such other client would be negotiated by Honeycomb and the relevant parties and may differ from the terms of an investment in the Funds, including with respect to fees, liquidity, information rights, and other terms. As referenced above, Honeycomb managed two separate co-investment vehicles as of December 31, 2017 in addition to the Funds. The co- 5 March 2018 EFTA00803409 investment vehicles do not engage in a continuous offering of interests and are not accepting subscriptions as this time. Lastly, it should be noted that the Funds may issue classes of interests or enter into separate written agreements with certain investors ("Side Letters"), which grant rights that are more favorable or may otherwise differ from the rights attributable to other investors in terms of, among other things, incentive allocation, management fee, withdrawal rights (including different withdrawal dates and notice periods), minimum and additional subscription amounts, information rights, and other rights. The terms and the scope of the offering of such rights (including an offering limited to strategic or other specific categories of investors) will be determined by Honeycomb in its sole discretion. In addition to the foregoing, Honeycomb may also enter into Side Letters to address legal, regulatory, tax or policy issues impacting particular investors and their investment activities. Honeycomb has granted one or more of the rights referenced above (whether through Side Letters or otherwise) to a limited number of early investors in the Fund and may do so in the future without disclosure to or receiving consent from existing investors. Regulatory Assets Under Management At the time of this Brochure, Honeycomb has discretionary authority (i.e., the authority to decide which securities to purchase and sell) for all of its clients and has regulatory assets under management of $918,759,770. 6 March 2018 EFTA00803410  ITEM 5 Fees and Compensation The fee schedules for the Funds are described in detail in each of the respective Fund's offering memorandum. As a general matter, with respect to each Fund and for each investor therein, Honeycomb or its affiliate deducts an asset-based fee (i.e., Management Fee) of up to 2% in advance on a quarterly basis, including the fair value, as determined by Honeycomb, of any Special Investments in which such investor has an interest. In addition, Honeycomb or its affiliates will be entitled to performance-based compensation (i.e., Incentive Allocation) at the end of each fiscal year in an amount up to 20% of the net capital appreciation of each investment in the Fund made by an investor (taking into account, as applicable, gains and losses realized or deemed realized with respect to Special Investments allocated during such fiscal year, and after reducing such amount by the amount of the Management Fee debited to such investor during such fiscal year). Any unrealized net capital appreciation upon which the calculation of the Incentive Allocation is based will be reduced to the extent of any unrecovered balance remaining in any loss recovery account maintained for each such investment (i.e., Incentive Allocation will be taken subject to a "high water mark", if any). If an investor in a Fund withdraws its interest in the Onshore Feeder or redeems its shares in the Offshore Feeder prior to the end of a calendar year, such investor's performance-based compensation, with respect to the portion withdrawn or redeemed, will be deducted at the time of such withdrawal or redemption. Co-investment vehicles managed by Honeycomb are subject to performance-based compensation of up to 20% solely on a realized rather than unrealized basis. The Management Fee will be prorated for any period that is less than a full quarter and will be adjusted for contributions and withdrawals/redemptions made during the quarter. Honeycomb reserves the right to elect to reduce, waive or calculate differently the Management Fee and/or Incentive Allocation with respect to any investor, including employees or partners of Honeycomb, the General Partner or their affiliates, or their respective family members or trusts or estate planning vehicles of such persons. Please refer to the disclosure regarding Side Letters in Item 4 for more details. Honeycomb deducts applicable fees from each investor's account. Investors do not have the ability to choose to be billed directly for fees incurred. Each Fund bears its own operating and other expenses and its pro raw share of the Master Fund's expenses, including, but not limited to, investment-related expenses (e.g., brokerage commissions and transaction costs, clearing and settlement charges, custodial fees, interest expense, and third party trading-related software (including trade order management software)); research-related expenses (e.g., third-party research, advisers and consultants, news and quotation equipment and services, and fees for providers of market and portfolio data and software); legal and compliance expenses (e.g., investment-related legal expenses (including document negotiation and review and legal advice), formal and informal inquiries, indemnification expenses, and expenses associated with regulatory filings relating to the Fund and/or the Master Fund and to their respective portfolios, including without limitation Schedules 13D, 13G, 13H, Form PF and all other investment or investor related filings,); insurance costs incurred in connection with each Fund's 7 March 2018 EFTA00803411 business (e.g., acquiring and maintaining D&O and/or E&O insurance for the Funds, Honeycomb, the General Partner and their respective employees and affiliates); third party valuation, accounting, audit and tax preparation and consulting expenses; legal and other expenses relating to the offer and sale of interests in the Funds (including, without limitation, negotiating terms with, reporting to, and developing offering and related materials for, investors or prospective investors); entity-level taxes; fees and expenses of the directors of the Offshore Feeder, advisory committee of the Master Fund, auditor and administrator; and expenses related to the maintenance of the Funds' registered office, corporate licensing, extraordinary expenses and other similar expenses. Expenses of the Funds, other than the Management Fee, certain investor-related taxes and any expenses which Honeycomb determines in its sole discretion should be allocated to a particular investor, generally will be shared by all investors pro rata provided, however, that any expense relating specifically to a Special Investment will be charged against the investors participating in such Special Investment in proportion to their respective participating percentage interests therein. Additionally, if any of the above expenses are incurred jointly for the account of a Fund (and/or the Master Fund) and any other investment funds (including any co-investment vehicle), client accounts and proprietary accounts sponsored by Honeycomb, such expenses will be allocated among the Fund (and/or the Master Fund) and such other accounts based on relative assets under management, pro raw based on participation in a particular transaction or in such other manner as Honeycomb considers fair and reasonable. The Funds and co-investment vehicles may also pay for research with "soft" or commission dollars if Honeycomb has determined such research is within the safe harbor of Section 28(e) of the Securities Exchange Act of 1934, as amended. Refer to Item 12 — Brokerage Practices for further information. It is critical that investors refer to the relevant confidential private offering memorandum and other governing documents for a complete understanding of how Honeycomb is compensated, a complete understanding of the Funds' expenses and their withdrawal/redemption rights. The information contained herein is a summary only and is qualified in its entirety by such documents. 8 March 2018 EFTA00803412  ITEM 6 Performance-Based Fees and Side-By-Side Management All clients are charged performance-based compensation in addition to asset-based fees. Honeycomb may face a conflict of interest to the extent that it receives different levels of performance-based compensation from different clients. In such cases, Honeycomb may have an incentive to favor a client, or take increased investment risk on behalf of a client, for which it receives greater performance-based compensation. Honeycomb is committed to allocating investment opportunities on a fair and equitable basis, and in a manner that is consistent with its fiduciary duties to its clients. In that connection, Honeycomb has adopted policies and procedures to address conflicts associated with contemporaneous trading among client accounts. Additionally, it should be noted that because performance-based compensation for the Funds is calculated on a basis that includes unrealized appreciation of the Funds' assets, the performance- based compensation may be greater than if it were based solely on realized gains. Investors are provided with additional disclosure in applicable Fund documents as to how the performance- based compensation is charged. 9 March 2018 EFTA00803413  ITEM 7 Types of Clients Honeycomb provides discretionary investment advisory services to clients that consist of Funds and their associated co-investment vehicles offered to investors on a private placement basis. In order to invest in the Funds, a prospective investor is required to make certain representations as to suitability and legal requirements of the respective Fund. Investors in the co-investment vehicles, Onshore Feeder and U.S. investors in the Offshore Feeder must be "accredited investors" as that term is defined in Rule 501 of Regulation D of the Securities Act of 1933 and "qualified purchasers" within the meaning of Section 2(a)(51) and Rule 2a51-1 under the Investment Company Act of 1940. The minimum initial capital contribution for the Onshore Feeder and Offshore Feeder is $5,000,000. Thereafter, the minimum additional capital contribution is $500,000. The minimum investment amounts are subject to waiver in the sole discretion of Honeycomb or its affiliates, but in the case of the Offshore Feeder, the minimum initial investment amount will not be reduced below $100,000. In addition, as noted in Item 4, Honeycomb may in the future provide trading advisory or investment management services to separately managed accounts, investment funds, or other investment vehicles for investors interested in investment programs that differ from the ones used by the Funds or for investors that do not wish to invest in the pooled investment vehicles referenced above. 10 March 2018 EFTA00803414  ITEM 8 Methods of Analysis, Investment Strategies and Risk of Loss Honeycomb's investment objective is to seek superior risk-adjusted returns with a focus on long and short positions in publicly traded equity and equity-related securities (including options, futures, swaps and other derivatives). Honeycomb invests globally across industries and sectors, including, without limitation, in technology, media, telecommunications and consumer-related investments. While Honeycomb focuses the investment program on equity securities, it may take long or short positions in other assets and financial instruments (including, without limitation, corporate debt, loans, commodities and convertible and preferred securities) based on its assessment of the highest and best use of capital for investors and the availability of market opportunities across the public and private spectrum. Honeycomb will employ leverage as part of its investment strategy, in accordance with the investment guidelines and restrictions, if any, applicable with respect to a particular client. Honeycomb's investment process is data-driven and process-oriented. It generally includes in- depth research and due diligence on potential investment opportunities along with ongoing monitoring of investments. Honeycomb's initial due diligence process generally includes gathering and assessing publicly available information on potential investment opportunities, including industry and company- specific data. This data may include regulatory filings, research reports, earnings information, discussions with management, and analyst commentary. After evaluating such information, Honeycomb will generally develop financial models to determine its estimate of the company's intrinsic value and key potential drivers that could impact future value. For core investment ideas, Honeycomb may also require a more formal research write-up. In addition to the analyses set forth above, Honeycomb also seeks to meet and maintain relationships with company management in order to develop a more informed investment perspective. Prior to initiating an investment, Honeycomb may establish investment targets for the investment, including price targets, investment horizon, and potential catalysts for generating positive performance. These targets will be reviewed and may be updated on a periodic basis. A core part of Honeycomb's investment process is ongoing monitoring of portfolio investments. This ongoing analysis may include, without limitation, the following: • an assessment of the extent to which a particular investment is correlated to other investments in the portfolio; • measuring the risk/reward potential of a particular investment; • a reassessment of the investment targets discussed above and potential entry/exit points; II March 2018 EFTA00803415  ➢ an evaluation of position sizing based on Honeycomb's conviction regarding the investment thesis and to avoid potential "thesis drift"; ➢ any potential changes to hedging strategies; and ➢ a review of potential catalysts to drive value. The descriptions set forth in this Brochure of specific advisory services that Honeycomb offers or may offer to clients, and investment strategies pursued and investments made by Honeycomb on behalf of its clients, should not be understood to limit in any way Honeycomb's investment activities. Honeycomb may offer any advisory services, engage in any investment strategy and make any investment, including any not described in this Brochure, that Honeycomb considers appropriate, subject to each client's investment objectives and guidelines. The investment strategies Honeycomb pursues are speculative and entail substantial risks. Clients should be prepared to bear a substantial loss of capital. There can be no assurance that the investment objectives of any client will be achieved or that hedging strategies (if any) will be successful. Risk Factors Related to Investment Strategies and Particular Types of Securities The following risk factors do not purport to be a complete list or explanation of the risks involved in investments made by clients advised by Honeycomb. These risk factors include only those risks Honeycomb believes to be material, significant or unusual and relate to particular significant investment strategies or methods of analysis employed by or expected to be employed by Honeycomb on behalf of its clients. Risks of Investments Generally. An investment in any client involves significant risks, including the risk that the entire amount invested may be lost. Clients invest in and actively trade securities and other financial instruments using investment techniques with significant risk characteristics, including, without limitation, risks arising from the volatility of the equity markets and the potential illiquidity of securities and other financial instruments and the risk of loss from counterparty defaults. No guarantee or representation is made that a client's investment objective will be achieved. Risks of Illiquid Investments; Special Investments. Client investments will also include privately- held securities or other financial instruments which are generally less liquid than publicly-traded securities, including Special Investments for those investors who do not opt-out of such investments. Such investments may require a significant amount of time from the date of initial investment before disposition and any investments in such privately-held securities are not subject to redemption. To the extent valuations are obtained for privately-held securities, there can be no assurance that the valuations assigned to such securities will ever be realized. In addition, such privately-held securities may be of early stage companies with little or no profit or significant losses which create substantial uncertainties with regards to the performance of such securities. 12 March 2018 EFTA00803416 General Economic and Market Conditions. The success of a client's activities will be affected by general economic and market conditions, such as interest rates, availability of credit, credit defaults, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation of investments), trade bathers, currency exchange controls, and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of the prices and the liquidity of client investments. Volatility or illiquidity could impair profitability or result in losses. Clients may maintain substantial trading positions that can be adversely affected by the level of volatility in the financial markets. Investment and Due Diligence Process. Before making investments, Honeycomb will conduct due diligence that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, Honeycomb may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. When conducting due diligence and making an assessment regarding an investment, Honeycomb will rely on the resources reasonably available to it, which in some circumstances whether or not known to Honeycomb at the time, may not be sufficient, accurate, complete or reliable. Due diligence may not reveal or highlight matters that could have a material adverse effect on the value of an investment. Honeycomb may make investment decisions based on incomplete or limited information and based on assumptions that may not be accurate. Long/Short. The success of Honeycomb's long/short investment strategy depends upon Honeycomb's ability to identify and purchase securities that are undervalued and identify and sell short securities that are overvalued. The identification of investment opportunities in the implementation of a client's long/short investment strategies is a difficult task, and there are no assurances that such opportunities will be successfully recognized or acquired. In the event that the perceived opportunities underlying client positions were to fail to converge toward, or were to diverge further from values expected by Honeycomb, a client may incur a loss. In the event of market disruptions, significant losses can be incurred which may force a client to close out one or more positions. Furthermore, the financial and valuation models and assumptions used to determine whether a position presents an attractive opportunity consistent with Honeycomb's long/short strategies may become outdated and inaccurate as market conditions change. Diversification and Concentration. Honeycomb is not subject to any diversification or concentration limits with respect to its management of clients. As a result, Honeycomb may select investments that are highly concentrated in a very limited number or type of securities. In addition, a client's portfolio may become highly concentrated in securities related to a single or a limited number of issuers, industries, sectors, strategies, countries or geographic regions. This limited diversification may result in the concentration of risk, which, in turn, could expose a client to losses disproportionate to market movements in general if there are disproportionately greater adverse price movements in such securities. Investing in Emerging Growth Companies. Companies in rapidly changing fields face special risks. Neither Honeycomb nor the companies in which the clients invest have any significant 13 March 2018 EFTA00803417 control over the pace of developments. Among other things, a company may fail to acquire or develop necessary technology or products, it may acquire the rights to or develop a technology or product that is rendered obsolete by other developments or its product or service may not prove to be commercially successful. Some industries may be subject to greater governmental regulation than other areas and changes in governmental policies and the need for regulatory approvals may materially and adversely affect these industries. Investing in Technology Companies. Investing in securities and other instruments of technology companies involves substantial risks. These risks include: the fact that certain companies in a client's portfolio may have limited operating histories; rapidly changing technologies and products which may quickly become obsolete; cyclical patterns in information technology spending which may result in inventory write-offs, cancellation of orders and operating losses; scarcity of management, engineering and marketing personnel with appropriate technological training; the possibility of lawsuits related to technological patents; changing investors' sentiments and preferences with regard to technology sector investments (which are generally perceived as risky) with their resultant effect on the price of underlying securities; and volatility in the U.S. stock markets affecting the prices of technology company securities, which may cause the performance of clients to experience substantial volatility. Initial Public Offerings. Honeycomb will invest in initial public offerings as part of its investment strategy. Investments in initial public offerings (or shortly thereafter) may involve higher risks than investments issued in secondary public offerings or purchases on a secondary market due to a variety of factors, including, without limitation, the limited number of shares available for trading, unseasoned trading, lack of investor knowledge of the issuer and limited operating history of the issuer. In addition, some companies in initial public offerings are involved in relatively new industries or lines of business, which may not be widely understood by investors. Some of these companies may be undercapitalized or regarded as developmental stage companies, without revenues or operating income, or the near-term prospects of achieving them. These factors may contribute to substantial price volatility for such securities and, thus, for the value of client interests. Investing in Other Investment Vehicles. Honeycomb has invested, and may in the future invest, in other pooled investment vehicles, including to access Special Investments. A client will typically have limited rights pursuant to which it may withdraw, transfer or otherwise liquidate its investments in such investment vehicles including, but not limited to, other hedge funds. Investments in other investment vehicles are not themselves marketable and, therefore, clients may not be able to readily dispose of their interests in other investment vehicles. Under the terms of the governing documents of the other investment vehicles, the ability of a client to withdraw any amount invested therein may be subject to certain restrictions and conditions, including restrictions on the withdrawal of interests for an initial period, restrictions on the amount of withdrawals and the frequency with which withdrawals can be made (including permitting withdrawals only upon realization of investments), and investment minimums which must be maintained. Other 14 March 2018 EFTA00803418 investment vehicles typically charge management fees and/or incentive fees or allocations. As a result, an investor will indirectly bear multiple management fees, incentive fees or allocations and other expenses imposed by other investment vehicles, as well as directly bear the Management Fee, Incentive Allocation and expenses of the clients. Short Selling. Clients engage in short selling. Short selling involves selling securities which are not owned and borrowing them for delivery to the purchaser, with an obligation to replace the borrowed securities at a later date. Short selling allows the investor to profit from declines in market prices to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. The extent to which a client may engage in short sales will depend upon Honeycomb's ability to identify and sell short securities that are overvalued. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying security could theoretically increase without limit, thus increasing the cost to the client of buying those securities to cover the short position. There can be no assurance that a client will be able to maintain the ability to borrow securities sold short and the cost of borrowing securities sold short may be significant. In such cases, the client can be "bought in" (Le., forced to repurchase securities in the open market to return to the lender). There also can be no assurance that the securities necessary to cover a short position will be available for purchase at or near prices quoted in the market. Purchasing securities to close out a short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. Short strategies can also be implemented synthetically through various instruments and be used with respect to indices or in the over-the-counter market and with respect to futures and other instruments. In some cases of synthetic short sales, there is no floating supply of an underlying instrument with which to cover or close out a short position and the client may be entirely dependent on the willingness of over-the-counter market makers to quote prices at which the synthetic short position may be unwound. There can be no assurance that such market makers will be willing to make such quotes. Short strategies can also be implemented on a leveraged basis. Lastly, even though a client secures a "good borrow" of the securities sold short at the time of execution, the lending institution may recall the lent security at any time, thereby forcing the client to purchase the security at the then-prevailing market price, which may be higher than the price at which such security was originally sold short by the client. Leverage; Margin. The use of leverage has attendant risks and can substantially increase the adverse impact to which a client's investment portfolio may be subject. Honeycomb will use leverage as part of its investment strategy and the level of leverage could be substantial. The use of leverage will allow clients to make additional investments, thereby increasing exposure to assets, such that total assets may be greater than capital. However, leverage will also magnify the volatility of changes in the value of a client's portfolio. The effect of the use of leverage by a client in a market that moves adversely to its investments could result in substantial losses to the client, which would be greater than if the client were not leveraged. In addition, any leverage used by a client is subject to the risk that changes in the general level of interest rates may adversely affect expenses and operating results. 15 March 2018 EFTA00803419 In general, any use by a client of short-term margin borrowings results in certain additional risks. For example, should the securities pledged to brokers to secure the portfolio's margin accounts decline in value, the portfolio could be subject to a "margin call", pursuant to which the portfolio must either deposit additional funds with the broker, or suffer mandatory liquidation of the pledged securities to compensate for the decline in value. In the event of a sudden precipitous drop in the value of the portfolio's assets, the portfolio might not be able to liquidate assets quickly enough to pay off its margin debt. In the futures and forward markets, margin deposits are typically low relative to the value of the futures contracts purchased or sold. Such low margin deposits are indicative of the fact that any futures or forward contract trading is typically accompanied by a high degree of leverage. Low margin deposits mean that a relatively small price movement in a contract may result in immediate and substantial losses to the investor. To the extent a client purchases an option in the U.S., there is no margin requirement because the option premium is paid for in full. The premiums for certain options traded on non-U.S. exchanges may be paid for on margin. Whether any margin deposit will be required for over-the-counter options and other over-the-counter instruments, will depend on the credit determinations and specific agreements of the parties to the transaction, which are individually negotiated. Lending of Portfolio Securities. Clients may lend securities on a collateralized and an uncollateralized basis from their portfolios to creditworthy securities firms and financial institutions. While a securities loan is outstanding, a client will continue to receive the equivalent of the interest or dividends paid by the issuer on the securities, as well as interest on the investment of the collateral or a fee from the borrower. The risks in lending securities, as with other extensions of secured credit, if any, consist of possible delay in receiving additional collateral, if any, or in recovery of the securities or possible loss of rights in the collateral, if any, should the borrower fail financially. Lack of Control of Portfolio Companies. Clients invest in securities of companies that they do not control, which clients may acquire through market transactions or through purchases of securities directly from the issuer. Such securities will be subject to the risk that the issuer may make business, financial or management decisions with which clients do not agree or that the majority stakeholders or the management of the issuer may take risks or otherwise act in a manner that does not serve client interests. Hedging Transactions. Honeycomb is not required to, and may not attempt to, hedge market risks or other risks inherent in client positions, and is not expected to hedge risks associated with Special Investments. In addition, Honeycomb may not anticipate a particular risk so as to hedge against it or successfully hedge against it even if such risk is anticipated. Clients, however, may utilize a variety of financial instruments (including options and derivatives), both for investment purposes and (to the extent desired) for risk management purposes in order to, 16 March 2018 EFTA00803420 among other things: (i) protect against possible changes in the market value of the investment portfolio resulting from fluctuations in the securities markets and changes in interest rates; (ii) protect the unrealized gains in the value of the investment portfolio; (iii) facilitate the sale of any such investments; (iv) enhance or preserve returns, spreads or gains on any investment in the portfolio; (v) hedge the interest rate or currency exchange rate on any of the liabilities or assets; (vi) protect against any increase in the price of any securities they anticipate purchasing at a later date; or (vii) for any other reason that Honeycomb deems appropriate. The success of Honeycomb's hedging is subject to its ability to correctly assess the degree of correlation between the performance of the instruments used to hedge and the performance of the investments in the portfolios being hedged. Since the characteristics of many securities change as markets change or time passes, the success of the instances when Honeycomb hedges portfolio positions is also subject to Honeycomb's ability to continually recalculate, readjust and execute hedges in an efficient and timely manner. While Honeycomb may enter into certain hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance than if they had not engaged in any such hedging transactions. For a variety of reasons, Honeycomb may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Such imperfect correlation may prevent clients from achieving the intended hedge or expose clients to risk of loss. Hedging and risk management transactions requires skills complementary to those needed in the selection of portfolio holdings and there can be no guarantee that Honeycomb's hedging transactions, if any, will be successful. Fundamental Analysis. Honeycomb's investment process is based on, among other things, fundamental analysis. Data on which fundamental analysis relies may be inaccurate or may be generally available to other market participants. To the extent that any such data are inaccurate or that other market participants have developed, based on such data, trading strategies similar to the clients' trading strategies, Honeycomb may not be able to realize its investment goals. In addition, fundamental market information and other data used by Honeycomb as part of its investment process is subject to interpretation. To the extent that Honeycomb misinterprets the meaning of data, a client may incur losses. Analytical and Financial Model Risks. Honeycomb employs certain strategies which depend upon the reliability, accuracy and analysis of its analytical models. To the extent such models (or the assumptions underlying them) do not prove to be correct substantial losses could result. All models ultimately depend upon the judgment of Honeycomb and the assumptions embedded in them. To the extent that with respect to any investment, the judgment or assumptions are incorrect, clients can suffer losses. Necessity for Counterparty Trading Relationships; Counterpart), Risk. Honeycomb expects to establish relationships to obtain financing, derivative intermediation and prime brokerage services that permit clients to trade in any variety of markets or asset classes over time; however, there can be no assurance that Honeycomb will be able to maintain such relationships or establish such relationships. An inability to establish or maintain such relationships would limit client trading 17 March 2018 EFTA00803421 activities, and could create losses, preclude clients from engaging in certain transactions, financing, derivative intermediation and prime brokerage services and prevent clients from trading at optimal rates and terms. Moreover, a disruption in the financing, derivative intermediation and prime brokerage services provided by any such relationships before Honeycomb establishes additional relationships could have a significant impact on client business due to such client's reliance on such counterparties. Some of the markets in which clients may effect transactions are not "exchanged-based", including "over-the-counter" or "interdealer" markets. The participants in such markets are typically not subject to the credit evaluation and regulatory oversight to which members of "exchange-based" markets are subject. The lack of evaluation and oversight of over-the-counter markets exposes clients to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing clients to suffer a loss. Such "counterparty risk" is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where a client has concentrated its transactions with a single or small group of counterparties. Generally, clients are not restricted f