2012 Q3 III Fund Ltd Investor Letter

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS Securities and futures trading involve substantial risk. Please see the last page for important risk factors

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777 YAMATO ROAD, SUITE 300 BOCA RATON, FL 33431 PHONE: 561-544-4600

www.iiioffshore.com

III Fund Ltd.

Third Quarter 2012 Investor Letter

Series 1 Shares: 3Q12: +5.08% 2012: +9.49% 2011: +9.03% Series 2 Shares: 3Q12: +3.80% 2012: +7.16% 2011: +6.61% Performance for 3Q12 and YTD is based upon a September 2012 estimate.

Summary: We are pleased to report that III Fund Ltd. (the “Fund”) continued to generate positive performance in the quarter ending September 30, 2012. Trade strategies in the U.S., Europe and Japan all contributed to that performance. During the quarter, the largest contributors to return were yield curve arbitrage strategies in Europe and cross-currency basis swap trading. Trade strategies in Europe contributed approximately 47% of return, Asia-Pacific approximately 35% and the U.S. and Canada contributed approximately 18%. Returns were well distributed across multiple fixed income market segments as the continued uncertainty about market direction and the conflicting effects of multiple central bank initiatives seeking to foster economic growth, occurring at the same time that national governments were embracing austerity as a way out, provided many relative value trading opportunities for the Fund. Specific trade strategies that contributed to return in the quarter included conditional yield curve steepeners in Europe, Euro/Yen cross currency basis swaps and various volatility and convexity strategies.


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Firm Update: After spending 16 years at III as a trading Principal and head of options trading in our rates business, our partner Sanjiv Sharma has decided to resign from the firm to pursue other interests and plan the next phase of his life. Over the last two years, Sanjiv has institutionalized his knowledge base and leaves behind a strong “handpicked” team to assist Cliff Viner, our Co-Founder, Co-CIO and rates portfolio manager, in the management of the rates funds. We will all miss Sanjiv but we are confident that the rates investment team, which has been built over many years, will continue to provide solid expertise and experience across the various fixed income market segments that has been so important to the success of our rates business. During the quarter, a decision was also taken concerning certain operational enhancements in support of III-managed funds. After seeking out and listening to feedback from consultants, existing investors and prospective investors, III is in the process of implementing a number of changes that we believe will enable us to continue to provide best-in-class service to our investors. First, a decision was made to implement full and independent administration for all of the III-managed funds. We expect to complete this process over the balance of this year. Second, all III-managed Funds will be governed by boards comprised of a majority of independent directors. This change should also be implemented by year end. And finally, as part of moving to multi-clearing custody arrangements, we are implementing a multiple prime broker model and have named Citibank and Credit Suisse as prime brokers for III-managed funds. We will continue to also use JP Morgan as a custodian as we have done for many years. Market Environment: The continued high level of global uncertainty was again a major theme in the third quarter. Distinguishing between market developments that are factual versus market events that contain various degrees of speculation, i.e., answering the question “What we know?” continues to be problematic. The conflicting forces of global austerity as a means to balance national government budgets and reduce deficits, and very active central banks in pursuit of economic growth have made asset allocation decisions very difficult for investors and have impacted the flow of funds in our market. At the same time, there have been some very significant developments that have occurred over the past six months in Europe, which we believe have significantly reduced tail risk emanating from the European sovereign crisis. This removal of the tail risk associated with a Eurozone breakup has been one of the driving forces in the recent run-up in asset prices. However, growing evidence that the growth in corporate profits is showing signs of fatigue and that the peak of the profit cycle may be upon us will have very large implications for the global economy.


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The potential for negative real rates that has existed for a sustained period of time is also a powerful force that should not be underestimated. It drives investor behavior and has the potential to further disrupt normal asset allocation behavior. Given the existence and importance of the these forces and their impact upon the fixed income markets, we believe it would be useful to provide some high level perspectives about how we see the investment world; our perceptions and what we believe are widely held misperceptions; how these misperceptions are directly related to what we would call the ‘irresistible force and the immovable object’; and how, in our opinion, this has led to a very, very difficult situation from which to escape. Perceptions and Misperceptions: Let’s start with some perceptions. We see democracies (the U.S., UK, Japan and western Europe for example) as very socialistic institutions: they are elected by the populace, must satisfy the demands of the majority, find it difficult to halt any current spending programs and, in the age of instant communication, there is the unending call for governments to be responsive to the people and intervene to solve problems as they arise. A second important perception is that central backs are not independent. Central banks are indeed arms of national governments. They are usually appointed by those governments and subject to reappointment by those same governments at the end of their terms if they have done what the governments wanted. Democracies put just as much pressure on central banks as they do on other government officials as these central bank officers are routinely brought before their respective congresses, Diets or parliaments to explain what they are doing to help further the government’s goals. The general perception is that central banks didn’t do their part to avoid the 2008 financial crisis and that they had now better be part of the grand solution. A third perception is that democracies attempt redistribution of wealth through tax and spending policies. Tax rates are getting more progressive while social safety nets get broader. These safety nets over time become more inclusive and focused on areas such as employment benefits, food stamp programs and medical coverage. But there’s more to this democratic redistribution of wealth. The existence of near zero interest rates, with the accompanying risk of substantial inflation, will result in negative real interest rates. This creates a huge redistribution of wealth from savers to borrowers – an estimated $500 billion per year in the U.S. alone. Now let’s move to what we believe are absolute misconceptions about economics and the investment world. First, there is the misperception that fiat sovereign securities, such as those issued by the U.S., UK, Japan, Australia, Canada and Turkey, are real debt. This is a huge, supposedly irrefutable, simply-accepted-as-fact perception and it is the basis for policy making


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virtually everywhere. But it’s not correct. The issuance of securities by fiat sovereigns is simply a reserve drain to allow the non-governmental sector to have a security that might bear interest, instead of having a deposit at the central bank. There is actually no need for these government securities as central banks could simply pay whatever rate of interest they choose on whatever term they chose for these deposits. Furthermore, every US dollar supposedly added to the national debt actually appears correctly in the US National Accounts as an addition to non-government savings. Individuals alone cannot save dollars. If two of us each were to have a dollar, and if we were all the net dollar holders in the world, without the government adding to our dollars we would still have two dollars at the end of the year. Then there is the misperception that European sovereigns such as Greece, Spain, Italy or even Germany represent the same type of credit that the U.S., Japan or the UK does. True fiat sovereigns like the U.S. are the issuers of their currency and can credit accounts in an unlimited fashion. Funding is never an issue. The Maastricht Treaty and the creation of the European Central Bank caused European nation-states to become users, not issuers of the currency, in effect becoming municipalities who must first tax or borrow to be able to spend. This is a profound difference. Look at Turkey, which is a real fiat sovereign where funding is never an issue. In 2003, the Turkish budget deficit was 40 quadrillion lira. As they easily issued government securities to cover the deficit, either they were the either greatest borrowers in the history of the world or they were just draining excess reserves. A third misperception is that austerity can create prosperity. How can a government’s increasing taxes and/or cutting the employment and benefits of its citizens create prosperity? A fourth misperception is that central bank programs such as Quantitative Easing (“QE”) are creating money and could be wildly inflationary. The issue here is that the transmission mechanism for loans to the real economy is not operating yet. QE is simply a change in the composition of portfolio assets we all hold. Before, we had a Treasury security or a mortgage security. Today we have a deposit at the central bank. There is no money being tossed out of helicopters. And, there is the misperception that the size of central bank balance sheets matter and that losses incurred by central banks are problematic on a real basis. We can add to that the misperception that whatever a central bank does in adding to its balance sheet must be reversed in the future. Central banks are simply computers with double entry accounting systems. They do serve the very important function of making sure that if a bank has an asset, but the deposit that underlies that asset went to another bank and no one is willing to lend back that deposit money, the central bank will advance the money with the asset as collateral so the bank stays funded. Central banks can function without capital and will not suffer loss of functioning ability if they take losses. However, in Europe they insist on capitalizing the ECB, which greatly influences policy


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decisions as we see the tremendous aversion to including the public sector or ECB in any restructuring losses. The prospect of losses is frightening as individual nations would have to find funds to contribute their share of “equity” capital. Plus, losses at the ECB are considered monetary financing of member states. The Irresistible Force and the Immovable Object: We see the irresistible force being that most people correctly understand that municipalities cannot continuously run large deficits. As we previously stated, because of Maastricht monetary union, European nation states have transformed themselves from true fiat sovereigns that issue their own currency (and therefore funding is NEVER an issue) to municipalities that must first tax or borrow to be able to spend, which makes running continuing fiscal deficits unsustainable. That’s the irresistible force. As a result, balanced budgets are seen as the ultimate resolution to Europe’s problems. In August, we wrote extensively about the investment implications of this budget issue in a research piece entitled “Tale of Two Straightjackets.” The immovable object is that most people don’t understand that nation-states must generally run significant deficits to be able to sustain sufficient aggregate demand in order to avoid periods of very weak economic activity. Why? Because of what we characterize as demand leakages that occur from the accumulation of savings in pensions, insurance contracts, savings accounts, etc. Lack of demand is caused by unspent income. If incomes get saved and not spent, inventories build up and new output tends to go down, making it difficult to sustain full employment. The only way to accommodate the desire for net savings is for some other agent to spend more than his income. In the aggregate, that has to emanate from a government’s deficit spending, which creates Treasury securities issuance, which adds to net financial savings. So how do we resolve the dilemma? How can the European nation states run the necessary and fairly sizable deficits required to avoid economic weakness when we just said that municipalities cannot run continuous deficits? The answer lies with an institution with the unlimited ability to credit accounts. It’s the ECB, which can ultimately purchase all government securities issued. Or maybe it’s another institution, such as the European Stability Mechanism if it is allowed to buy and finance bonds at the ECB. As far as we can discern, this is really the only mechanism, the only way for Europe to be able to solve its dilemma and function in its current form. But now we have another irresistible force: while the ECB’s government securities purchases are the solution, they are in direct conflict with the apparently immovable object of the prohibition against “monetary financing” of member states.


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On this point, ECB President Mario Draghi has said the ECB will do whatever it takes. The new Outright Monetary Transactions or “OMT” program has been justified based upon the argument that the ECB has the mandate to preserve the Euro. The ECB has promulgated the argument that government securities pricing in the Eurozone reflects a huge yield premium because of the possibility of certain countries exiting from the Euro and therefore, investors potentially may suffer from the large depreciation in the value of any new currencies that might be issued by departing nations. You may remember that the rationale for the earlier bond buying program, the Securities Markets Program, was originally to control disorderly markets; thereafter, even the SMP morphed into needing to correct the situation that government securities’ yields were not reflecting the monetary transmission function to get lower rates to all participants across the Eurozone. To quote Mr. Draghi: “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate.” “Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro.” “The Euro is irreversible.” As far as we can discern, Mr. Draghi has no choice. The ECB is only institution with the unlimited ability to credit accounts with Euros. He seems to have recognized this point. But this has been coming for some time. Earlier, we purposefully said the “apparently” immovable object of the prohibition on monetary finance. In July, we published a research piece titled “Eurosystem Solutions” that detailed many of the prior non-standard measures (that we really wanted to call transgressions) the Eurozone and ECB were using to fund and save the monetary union by using methods that we saw as violations of the principle of no monetary financing of member states. The transgressions go all the way back to the 2010 Irish bank recapitalization and the subsequent Greek bank recapitalization. So it appears, especially with his recent pronouncements, that Mr. Draghi has crossed the Rubicon into the land of the writing all checks. But writing all checks brings lots of conflicts. Why should one country get to spend and what are the implications for the other countries? And if the authorities are desperate to avoid collapse of the Euro monetary system, what happens when a particular member state says ‘no’ to centralized demands for reform or austerity? Do they let them default? It looks like the ECB blinked in late June with regard to Spain. Spanish yields soared to over 7.5%, Spain had no ability to go on alone, but a Spanish failure would have been disastrous for all EU goals. The individual states cannot be left to fail and take down the whole union. Thus, the EU and ECB may be forced to provide financial solvency and liquidity assistance whether they like it or not. So with all these perceptions and misperceptions, with all these seemingly unresolvable diametrically opposed forces, here is what we have coming: the greatest financial mess of all time. Why? Because the underlying notions -- that EMU financial support only comes with strict conditionality, that budgets must be balanced, that one nation should not pay for another, that


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monetary financing is still illegal under the Maastricht Treaty – are all at odds with the present stated course of action by the ECB to do whatever it takes. We now stand at a crossroads, and decisive and far-reaching reforms will be necessary to address the European sovereign debt crisis. We now have minimum requirements for national budgetary frameworks. At the European summit of 26/27 October 2011, governments announced further steps to enhance fiscal governance, notably a strengthened surveillance of countries under the excessive deficit procedure and the implementation of balanced budget rules in all Eurozone member states. A more fundamental deepening of fiscal and economic policy surveillance is necessary in the long run. This would involve a transfer of sovereignty from the member states to the EU, which would require much stronger powers, and would also mean stricter constraints on national budget policies. These kinds of reforms would require a comprehensive change to the EU Treaty. First, to ensure fiscal discipline, all planned deficits of more than 3% of GDP and those in excess of a country’s medium term objective would need to be approved by all EU governments. Second, past fiscal slippages would be automatically corrected in upcoming budgets without any room for discretion via the introduction of constitutional rules similar to the German “debt brake”. Third, all Member States would also agree to the implementation fines and sanctions in a quasi-automatic mode. Finally, with the introduction in 2013 of a permanent crisis resolution mechanism, the European Stability Mechanism (“ESM”), those countries slipping in the progress with their macroeconomic adjustment programs would temporarily lose financial autonomy. The institutional arrangements at both the national and supranational level would also have to be strengthened. At the national level, independent budget offices would ensure reliable forecasts, which is a prerequisite for sound planning and implementation of budgets. This could be called a European Budget Office or “EBO”, which could potentially form the nucleus of what might become over time, and in a gradual manner, a European Ministry of Finance. The “Euro Plus Pact” was adopted to strengthen policy coordination with the aim of improving competitiveness and convergence. Under this agreement participating EU governments commit to use a set of common indicators to regularly monitor each other’s progress in areas such as labor market reforms, reforms to wage-setting arrangements and reforms aimed at improving the sustainability of pension, health care and social benefit systems. Governments who signed the Euro Plus Pact also committed to translate the rules set out in the European Stability and Growth Pact into their national legislations. The reform of Article 135 of the Spanish constitution in August 2011, which for the first time introduced the principle of budgetary stability into the fundamental law of the country, is a positive example of recent progress made in this area. This is a mess. Seventeen countries, finance minister approvals, some national parliaments involved, possible referendums, treaty amendments, new councils and commissions, social


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unrest, political unrest, EU, EFSF ESM, IMF, individual national central banks, a proposed banking union, overt national interests, more pan–European budget institutions and rules, supervision and oversight, automatic triggers that act pro-cyclically (meaning negatively) in downturns, all combined with the ability to hold all your comrades at bay or hold them hostage to your possible failure. And, this mess starts from a profound misunderstanding of the real underlying problem of the irresistible force versus the immovable object. The situation in Europe is just one part, albeit a very important part, of the overall investment landscape in which we operate. In the environment we have described, where outcomes rest in the hands of politicians more than ever, separating fact from fiction is often very difficult. As a result, when we formulate our views about the various opportunities we see, we always have a healthy respect for the fact that we can get it wrong despite the large amount of analysis and thought that goes into the consideration of each opportunity. However, an environment such as we have described above, creates many opportunities for the Fund. Important themes that we have developed in these letters over time are the places to start to look for investment opportunities. For example, the “low for long” scenario for interest rates, given the current and expected economic climate, gives us confidence to take advantage of the upward slope of yield curves in the front end of yield curves, particularly in Europe, where the forwards are pricing in higher policy rates. As we have discussed, the combination of the expanded role of central banks together with the push towards global austerity is likely to prevent any meaningful economic growth that would move central banks off their ultra-low policy rate stance. While the trade structures employed in the portfolio have varied, we favor taking advantage of these very low rates through various option structures. In all of these trades the concept is the same: if central banks are really on hold and the global growth picture is going to remain the same or possibly get worse, then forward rates are too high and therefore create trade opportunities. And, as much as we see opportunity in the front end of yield curves, we also like getting short exposure to the ultra-long parts of curves. There are numerous forces that have the potential to pressure 30-year rates higher including adjustments in pension accounting rules, higher inflation expectations and the existence of unsustainable real rates and unattractive nominal rates. And, although yield curves have steepened significantly in the last few months and the Fund has profited from trade strategies constructed to take advantage of that steepening, we believe that that trend will continue. While tactically we have reduced our exposure to forward steepeners in some markets, we are looking to re-enter some of those structures opportunistically. In particular, we like forward yield curve steepening strategies on the EUR curve that are done conditionally through receiver options and that have very attractive risk reward characteristics. In such structures we use options to constrain the view to specific rate environments.


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Changes in regulation and central bank programs such as QE will continue to create yield curve distortions in the cash markets, which we expect to continue to provide a good source of both tactical and longer term relative value trade strategy opportunities for the Fund. And finally, we continue to look for good opportunities to add convexity to the Fund’s portfolio. The error bands around macroeconomic analysis are wider than ever with the cloud of government and political interference overshadowing the market. While it is our belief that we need to broadly position the portfolio according to our expected outcome, we also believe that it is necessary to hedge the portfolio for the unexpected. For example, despite having a bias towards favoring strategies that profit in the “low for long” scenario, we look to add trade structures to the portfolio that will benefit if our central case is wrong. The Fund’s long-end convexity, long forward volatility and municipal market strategies, that we have been active in for many years, are examples of these defensive type structures. Performance Drivers: In the third quarter, performance came from many different trade strategies, most notably from EUR yield curve steepening strategies and cross-currency basis swaps. The return attribution for the Fund in the quarter was as follows:

Note: Return attribution is at the III Finance Ltd level which is the hub fund for III Fund Ltd. Return attribution is provided gross of fees.


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Yield Curve Arbitrage: During the third quarter, the Fund continue to profit from conditional yield curve steepener structures in the Euro swaps curve, with the expectation that 5-year rates would outperform 30-year rates in a rally. This conditional steepener strategy worked well in the third quarter as continued weakness in the Eurozone economy and the ECB’s more dovish posture kept short rates low. At the same time, there has been a growing shift by European regulatory bodies to either consider or actually adopt, as the Dutch did during quarter, frameworks where long dated pension fund and insurance liabilities will be discounted at an above market rate set by the appropriate governing body rather than using a market rate. Consequently, the market began to price in expectations of a reduction in demand for long-end fixed income instruments such as government bonds and swaps, putting additional steepening pressure on the curve. These continued steepening moves led to our exiting our Euro swaps curve steepeners. We still believe that the economic and regulatory backdrops in Europe remain very favorable for bullish curve steepening trades and we are looking for attractive re-entry points into the strategy. Short-Term Interest Rate Trading and Basis Swap Trading: During the quarter, we took profits and reduced risk in the EUR/JPY basis swap book due to concerns about the potential for other market participants to unwind the Yen/USD payer positions, which they had entered to capture the strong carry. We believe that going into this year end there is a risk that accounts may unwind these payer positions in order to book profits, an outcome that could become exaggerated if renewed funding concerns about Europe re-emerge. Such moves would adversely impact the Fund’s EUR/JPY positions, so we chose to reduce them. Volatility Relative Value: During the third quarter, the Fund continued to take advantage of the market opportunities in forward volatility. As volatility decreased, we added to our position in U.S. dollar forward volatility strategies and took profits in GBP forward volatility strategies. Convexity trading was profitable during the quarter, particularly in strategies in the long end of the U.S. Treasury market, and we added to our exposure. With markets remaining range bound, implied volatilities declining and the volatility surface steepening during the quarter, returns in many of the Fund’s strategies were flat. However, looking ahead, the next few quarters are full of uncertainties and potential market moving events. Any of these, such as the outcome and aftermath of the U.S. election, the fiscal cliff and the events in Europe could cause a spike in volatility at any time. Even with these


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macroeconomic events looming, implied volatilities have been declining as traders become more accustomed to a low yield environment and the fact that many market participants are looking to sell volatility as a way to enhance their yield pick-up. This combination of growing complacency in the volatility markets with continued macroeconomic uncertainty could generate attractive trading opportunities for the Fund in the coming months. U.S. Treasury Relative Value: Performance was more or less flat in U.S. Treasury RV during the third quarter. The third quarter was dominated by central bank liquidity provision and reduced flight-to-quality concerns. The Fed embarked on a widely expected third round of QE, choosing to focus on mortgages this time, and decided to let Operation Twist continue to its logical conclusion at the end of this year. The QE3 announcement had significant effect on swap spreads and volatility with the Fed now becoming a purchaser of around $40 billion of mortgages per month. In so doing, they are taking a significant amount of spread product out of the universe available to investors. As the Fed is an “inelastic” buyer of such product, the lack of the usual hedging activities of real money investors when buying these securities has significantly re-priced swap and volatility markets lower. As a result of these purchases yield investors are turning to other spread products, particularly corporate bonds. Corporations and financial institutions have found a healthy appetite for their bonds and in the case of financials, which tend to receive fixed on swaps against their fixed rate issuance, have put further pressure on swap rates to all other benchmarks. LIBOR has also experienced further downward pressure due to the impact of the LIBOR panel setting inquiry. Lastly, the Fed’s decision to continue selling 0-3 year paper and buy the longer end of the U.S. Treasury market has left dealers’ balance sheets bloated with U.S. collateral. The net result of all of this has been a significant compression in spread product, selling of volatility, a decline in swap spreads and very cheap U.S. Treasuries versus Fed Funds, LIBOR and virtually any other benchmark. As a result, the Fund’s flight-to-quality biased trades suffered losses during the quarter. Looking ahead, there is an end in sight to this central bank induced distortion. At the end of this year, the Fed will complete it maturity extension program and most likely replace it with outright unsterilized U.S. Treasury purchases. They will have very little left in inventory in the front end of the market to sell, which should provide scope for front end collateral to normalize versus other rates. In addition, the Fed’s purchases of mortgages will begin settling as soon as November, which will bring needed cash back into the money markets. Another program that expires at year end is the Dodd-Frank FDIC unlimited guarantee for non-interest bearing accounts, which was instituted in 2008 when the FDIC removed the $250,000 cap. With an estimated $1.4 trillion sitting in these currently fully guaranteed bank accounts, we could see cash redeployed. While these events create added demand for U.S. Treasury collateral, next year


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we will have the fiscal cliff, the aftermath of this year’s U.S. elections and the ever-evolving European crisis that should continue to create material volatility, event risk and flight-to-quality. To take advantage of expected collateral market conditions, we have positioned the portfolio to be long U.S. Treasuries in the front end versus Fed Funds to take advantage of improving general collateral markets and are currently adding to this position with TIPS fully hedged to Fed Funds. Current Positioning of the Portfolio: At September 30, 2012, Fund portfolio risk capital allocations by investment strategy were as follows:

Note: Fund portfolio risk allocations are for III Finance Ltd., the trading hub fund for III Fund Ltd. Summary and Conclusion: The investment landscape we have described, while riddled with conflicts and uncertainties, is an attractive one for relative value fixed income trading. The combination of economic uncertainty with the evolving sovereign credit crisis in Europe and the continuing accommodative posture by central banks in the context of a greater and greater push for austerity, impacts flows and creates opportunities for Fund. Thank you for your continued support. III Offshore Advisors


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THIS REPORT IS CONFIDENTIAL AND MAY ONLY BE REVIEWED BY THE PERSON OR ENTITY TO WHOM IT IS ADDRESSED AND SUCH PERSON’S OR ENTITY’S PROFESSIONAL ADVISORS. THIS REPORT IS QUALIFIED IN ITS ENTIRETY BY THE INFORMATION INCLUDED IN THE FUND’S CURRENT OFFERING MEMORANDUM. THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY INTEREST IN THE FUND WHICH CAN ONLY BE MADE BY THE OFFERING MEMORANDUM. THE OFFERING MEMORANDUM CONTAINS IMPORTANT INFORMATION CONCERNING RISK FACTORS, HISTORICAL PERFORMANCE, CONFLICTS OF INTEREST AND OTHER MATERIAL ASPECTS OF THE FUND AND MUST BE READ CAREFULLY BEFORE MAKING A DECISION TO INVEST. ANY PERSON SUBSCRIBING FOR AN INVESTMENT MUST BE ABLE TO BEAR THE RISKS INVOLVED AND MUST MEET THE FUND’S SUITABILITY REQUIREMENTS. SOME OR ALL ALTERNATIVE INVESTMENT PROGRAMS MAY NOT BE SUITABLE FOR CERTAIN INVESTORS. NO ASSURANCE CAN BE GIVEN THAT THE INVESTMENT OBJECTIVES OF THE FUND WILL BE ACHIEVED. AMONG THE RISKS WHICH JAMES RIVER CAPITAL CORP. AND III OFFSHORE ADVISORS WISH TO CALL TO THE PARTICULAR ATTENTION OF PROSPECTIVE INVESTORS ARE THE FOLLOWING: * THE FUND’S INVESTMENTS ARE SPECULATIVE AND INVOLVE A SUBSTANTIAL DEGREE OF RISK. * THE INVESTMENT STRATEGIES USED BY THE FUND REQUIRE THE SUBSTANTIAL USE OF LEVERAGE. * PAST RESULTS OF THE FUND ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE AND THE FUND’S

PERFORMANCE MAY BE VOLATILE. * AN INVESTOR COULD LOSE ALL OR A SUBSTANTIAL AMOUNT OF HIS OR HER INVESTMENT. * THERE IS NO SECONDARY MARKET FOR THE INVESTORS' INTEREST IN THE FUND AND NONE IS EXPECTED TO

DEVELOP. * THERE ARE RESTRICTIONS ON TRANSFERRING INTERESTS IN THE FUND. * THE FEES AND EXPENSES OF THE FUND MAY OFFSET THE TRADING PROFITS. * THE FUND IS NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS U.S. MUTUAL FUNDS. * A PORTION OF THE TRADES EXECUTED FOR THE FUND MAY TAKE PLACE ON FOREIGN MARKETS. * THE FUND IS SUBJECT TO CONFLICTS OF INTEREST. PLEASE REVIEW THE "RISK FACTORS" AND "CONFLICTS OF INTEREST" SECTIONS IN THE FUND’S OFFERING MEMORANDUM. CERTAIN OF THE INFORMATION CONTAINED HERE REPRESENTS OR IS BASED ON FORWARD-LOOKING STATEMENTS OR INFORMATION, INCLUDING DESCRIPTIONS OF ANTICIPATED MARKET CHANGES, PROJECTED RETURNS AND EXPECTATIONS OF FUTURE FUND ACTIVITY. III BELIEVES SUCH STATEMENTS AND INFORMATION ARE BASED ON REASONABLE ESTIMATES AND ASSUMPTIONS. HOWEVER, FORWARD-LOOKING STATEMENTS AND INFORMATION ARE INHERENTLY UNCERTAIN AND ACTUAL EVENTS OR RESULTS MAY DIFFER FROM THOSE PROJECTED. NO ONE SHOULD MAKE AN INVESTMENT DECISION REGARDING THE FUND SOLELY ON THE BASIS OF THE INFORMATION PROVIDED HEREIN.

Documents

2012 Q3 III Fund Ltd Investor Letter