Hermitage Capital Management Limited

Hermitage Global Performance Growth of $100 Investment

(bid-to-bid, net of fees, unaudited) $150

December 20081 -3.32% $140

November -5.86%
$130
October -22.99%
September -14.77% $120

August -8.30% $110

July -1.73%
$100
2008 Year to Date -42.00%
2007 (from April 2) 31.13% $90

Inception to Date -23.95% $76.05

$80

Compounded -14.48%
Volatility 25.82% $70
Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
1
As at 31 December 2008; on a weighted-average bid basis

January 12, 2009

Dear Hermitage Global Investor,

In December 2008, Hermitage Global was down 3.32% (net of fees, on bid-to-bid basis).

It was a mixed month for emerging markets as we approached year-end. Unfortunately, the
markets of the Middle East were among those that went down in December, with the decline
driven by two main factors. First was the largest regional corporate default in recent memory. The
Kuwaiti investment bank, Global Investment House, defaulted on its $3 billion debt and entered
restructuring negotiations with local and foreign creditors, which cast a pall on the whole region
as investors wondered who would be next. Second, the price of oil fell 18% over the course of the
month. Even though historically there has not been a high long-term correlation between the oil
price and Middle Eastern equities, the markets are currently so driven by sentiment that the sharp
move down in oil pushed the Kuwaiti market lower by 13.2%, Abu Dhabi down 13.9% and
Dubai down 16.7%.

After waves of bad news in 2008, there have been some recent signs of muted optimism. Despite
the continued deterioration in the global economy, there are a few indications that the market
panic of late last year has started to subside. The VIX Index (a measure of volatility and “fear”
levels in the markets) has declined by 52% from mid-November through the first week of
January. The TED spread, the difference between the interest rate at which banks lend to each
other and the interest rate on 3-month US treasuries, has fallen from 4.64% to 1.26% (a 73%
decline) in the past two months, and the yields on a broad composite of US corporate debt have
fallen from a peak of 8.01% at the end of October to 6.29% by the end of December. Does this
mean that the market problems of 2008 are over? While it would be nice if that were the case, we
think there is still more trouble ahead. Persistent structural flaws in the banking system and the
extreme condition of government finances around the world both convince us that we will see
more value destruction in the markets before the world is on a path to real recovery.

Hermitage Capital Management Limited

Registered Office: St. Martin’s House, Le Bordage, St. Peter Port, Guernsey GY1 4AU, Channel Islands
Tel: +44 207 440 1777 / Fax: +44 207 440 1778
info@hermitagefund.com
January 12, 2009 Page 2

Our practice at this time of year is to share our thoughts on the big market trends that we see
materializing in the coming year. Last year we predicted four big events for 2008. First, we
thought a major US investment bank would fail. In fact, two failed outright (Bear Stearns and
Lehman Brothers), to say nothing of the sudden “disappearance” of the old investment banking
model as the surviving institutions of Goldman Sachs and Morgan Stanley were converted into
bank holding companies. Second, we believed that the Chinese stock market was overvalued and
would crash, taking the other BRIC markets along with it. Indeed, China fell 63.0% in 2008 and
was joined by Brazil, India and Russia which were down 55.3%, 61.0% and 72.4%, respectively
in US dollar terms (although the Chinese crash wasn’t the direct cause of the other countries’
declines). Our third prediction that equity returns in the oil-producing countries would be boosted
by the biggest wealth transfer in history as oil traded above $100 was only half right. This idea
worked well until August, when oil prices turned around and crashed to $33 per barrel. Finally,
we thought that a number of undervalued currencies, including the pegged currencies of the
Middle East, would revalue relative to the dollar. This looked like it was going to happen in the
Gulf region in particular in the spring of last year, but then the movement lost momentum and
failed to materialize when the oil price fell dramatically.

So what are our predictions for this year?

1. Commercial banks will “gate” deposits. Just like the wave of hedge funds that are now
“gating” redemptions (i.e., not letting clients withdraw their money in full and on time), we
expect commercial banks will begin limiting depositor withdrawals sometime this year. As we
have written before, the health of western banks is dire. The ten largest banks in Western Europe
and North America had tangible equity of just 2.8% of total tangible assets at the end of
September 2008. That means that if their assets go down by more than 2.8%, they are effectively
insolvent. It is hard to imagine that this is not the case today. In the fourth quarter of last year, the
MSCI World Equity Index fell by 22.2%, the Credit Suisse Leveraged Loan Index was down
24.9%, the RJ/CRB Commodity Price Index declined 33.6%, and commercial real estate values
plummeted. At the same time, banks’ primary assets – loans to consumers and corporations – are
very likely about to face the highest loan default rates since the Great Depression. In this
environment, it seems like a safe assumption that many banks’ assets have fallen by far more than
the 2.8% that would wipe out their equity and render them insolvent.

If our analysis is correct and a large number of banks are effectively insolvent, it is just a matter
of time before depositors understand this and want to withdraw their money. Serious depositor
concern about banks first surfaced last September, and the only thing that prevented a full-scale
bank run was swift and overwhelming government intervention via capital injections and deposit
guarantees. Some may argue that government intervention has done the trick and the banking
problem is solved. We don’t think so. First of all, because of the decline in the value of all bank
assets since the recapitalizations were done, most banks are even more insolvent today than they
were in early October.

Second and more importantly, if one looks at the numbers, the deposit guarantees provided by a
number of governments just aren’t credible. Take Ireland for example. The total amount of
guaranteed bank deposits in Ireland is approximately €400 billion. At the same time, Ireland’s
annual tax receipts are €41 billion and the total government debt (domestic and international) is
€59 billion. If next week a journalist in Dublin were to write a convincing column questioning
whether Irish government bank guarantees were sufficient to protect all depositors, some readers
might feel worried enough to withdraw their money. If enough of them do so, it could turn into a
run, and if just 20% of the insured depositors (or accounts worth €80 billion) requested their
money back, the Irish government’s financial resources would be overwhelmed. In this particular
example, Ireland cannot unilaterally print money to meet their obligations because that ability
January 12, 2009 Page 3

rests exclusively with the European Central Bank in Frankfurt. For Ireland, it would have to
increase its debt burden by 136% to solve this particular problem, which is obviously unfeasible.
Moreover, the ECB couldn’t help because doing so would require increasing the Eurozone’s
overall debt burden by 19% in a single stroke – a step it would be unlikely to take for one
member of the currency union, particularly as Ireland is only one country among many with a
similar problem. Ultimately, Irish banks and the Irish government would have no choice but to
tell panicked depositors, “Your money is safe, but you just cannot have it all back right now.”

While this may sound extreme, this is exactly what happened in Latvia in December (shortly after
the Latvian government nationalized the second largest bank in the country) and Iceland in
October (again, following nationalization). Ukraine has also recently taken similar steps to limit
depositors’ access to the full funds in their accounts. It is also what happened in Russia (1998),
Ecuador (1999), Argentina (2001) and Uruguay (2002). This is what governments do if their
banking system doesn’t have the necessary liquidity to satisfy withdrawal requests. Central banks
have the capacity to bail out individual banks in trouble, but not an entire national banking
system.

The truly disturbing effect of “deposit gating” is that once it happens in one major country, it will
almost certainly jump borders and spread to other countries. If the scenario above plays out in
Ireland as we describe, it is entirely plausible to imagine a depositor in France saying to himself,
“That situation in Ireland is very unpleasant. I want to get all of my money back before the same
thing happens here.” Once one major country permits its banks to gate deposits, the credibility of
government deposit guarantees disappears nearly everywhere else – with the result that many
other countries will be forced to gate deposits as well.

2. Crash of US government bonds. One of the only asset classes that performed well last
year were G-8 government bonds, particularly US government debt. The price of the US 30-year
bond (futures) rose 20.6% in 2008 and now yields 3.06%, not far from the lowest-ever yield of
2.52% reached on December 18, 2008. The US 10-year bond yields 2.39% (close to its all time
low of 2.05% reached in December). Three-month US treasuries now yield just 0.056%. As
investors everywhere seek a safe haven amid the market turmoil, yields on creditworthy
sovereign debt have fallen across the board. The conventional wisdom is that governments (and
particularly the US government) will always meet their debt obligations. Given the market
turmoil, this seems sensible until one considers the economics of owning these bonds. In our
view, the current buyers of government bonds are completely ignoring the very real hazards of
receiving only 2.39% (in the case of 10-year paper) as compensation for assuming both the credit
risk and inflation risk of owning a 10-year government bond.

Starting with credit risk, whenever a company dramatically increases its borrowing, the market
demands a higher rate of return to hold its debt in order to compensate for heightened default risk.
In the case of US government bonds, exactly the opposite has happened. The US government has
added $1.15 trillion to its debt burden over the last six months, but at the same time, the interest
rate it has to pay to borrow money (on 30-year bonds) has declined from 4.52% to 3.06% –
meaning it has become 32% cheaper for the US government to borrow. Meanwhile, the growing
list of announced and potential policy actions the US will take to try to avoid a full-scale
depression has become very long and very expensive: a $1.2 trillion expanded federal budget for
2009, a future $1 trillion stimulus plan, automaker bailouts, municipality bailouts, bank
nationalizations, pension fund bailouts and so on. This ultimately must raise the credit risk of
owning US government bonds. Already, the market for credit default swaps (CDS) (which reflect
the cost of insuring against issuer default) is reflecting the increased credit risk of the US
Treasury. Since December 2007, the 1-year CDS on US treasuries has risen 478%, from 9 to 52
basis points. It is still a low number, but the trend is worrying. The perception of sovereign risk is
January 12, 2009 Page 4

also growing elsewhere. Over the last year, the cost of insuring UK government debt has risen
881% (from 10.5 to 103 basis points) and the CDS for Austrian government bonds has risen
1,443% (from 7 to 108 basis points). At some point, investors will decide that government bonds
are not “risk free,” and they will make governments – even the US – “pay up” for their money.

In addition to credit risk, bondholders also face significant inflation risk. Last year, US money
supply (M2) increased by 8.8% as the Federal Reserve dramatically expanded its balance sheet. If
the Obama Administration acts on some of its campaign pledges, there will be $2 trillion of
deficit spending over the next two years, which will have to be financed by either borrowing or
printing money. If we assume that the capacity to borrow will be curtailed at some point for
reasons described above, then printing money will become the other viable option. Some argue
that we are in a deflationary world and this wouldn’t cause inflation, citing Japan as an example.
At the start of its “Lost Decade,” however, the Japanese government increased money supply by
only 10% over 3 years, while in the US – based on the current spending plans – it is possible that
money supply could increase up to 40% over the next 3 years. It is hard to ignore the likelihood
that so much extra currency in circulation with no corresponding change in wealth will debase the
US dollar and cause significant inflation.

In the end, with both credit and inflation risks rising, investors who own 10-year US paper
yielding 2.39% will likely find themselves in a very unprofitable trade.

3. Wave of sovereign defaults, including a European country. The credit markets are
already tight, and there is $7.6 trillion of domestic government debt and $249 billion of external
sovereign debt maturing globally by June 2009. Many borrowers that have to roll over existing
loans in an environment where credit supply has dried up, will find it very difficult or impossible
to refinance their debt. On a company level, the market is pricing in five-year default rates of
14.1% across investment grade issuers in North America and Europe (based on CDS prices) and
59.0% for “high yield” issuers. The same thing is happening with a number of weak sovereign
issuers as the flood of debt issued by creditworthy nations “crowds out” the rollover possibilities
of heavily indebted governments. If the credit risk of the US government rises significantly, who
would want to lend to Hungary or Ukraine? Given the enormous amount of debt issuance planned
by the developed world, some emerging markets will be unable to successfully roll over their
debt at any price and will ultimately be forced to default. We have already seen Ecuador
defaulting on its sovereign bonds in mid-December. We will see this happen more times this year.

While emerging market sovereign defaults are relatively familiar events, very few people are
psychologically prepared to see developed countries defaulting. Given the stress in the credit
markets and the structure of the European Union, we think that it is entirely plausible for a
European country to join the list of defaulters this year. Because the European Central Bank is the
only body able to print money in Europe, as deficits balloon across the continent because of lower
tax revenues and increased government spending and bailout programs, some countries just will
not be able to issue debt to finance those deficits. Belgium needs to repay or refinance foreign
and domestic debt amounting to 29.0% of GDP by June 2009, while the Czech Republic (not a
current member of the Eurozone) faces debt repayments totaling 59.8% of GDP coming due, also
in the next six months. Will these countries and others like them be able to find buyers for debt
rollovers? Europe will certainly establish a sovereign bailout program, and selective bilateral
loans will alleviate some of the initial pressure and save some countries, but ultimately the
problem is so large that the weakest hands will be forced to fold. We expect there will be one or
more European countries that won’t be able to service their government debt at some point this
year.
January 12, 2009 Page 5

4. Gold emerges as the ultimate store of value. The bursting of the US government bond
bubble and a wave of sovereign defaults is the final stage of the evolving crisis. First, equities and
real estate weren’t safe stores of value so investors sold those assets and moved their money to
banks. Then the fundamental weaknesses of banks were exposed, so there has been a rush to the
“safety” of government bonds. This year, it will become clear that government bonds are not as
safe as most believe, and investors will have to find some other store of value. What is the
ultimate store of value, particularly if the future debasement of fiat currencies requires an
inflation hedge? The short answer is that gold and other precious metals will be the ultimate place
to store value as the crisis unfolds. In the past, real estate has been among the best hedges against
inflation and debased currencies, but because there are so many leveraged and distressed sellers
of real estate (and getting exposure to the sector often requires financing, which is unavailable)
there are very few real stores of value left apart from gold (and other precious metals).

Unlike other commodities, gold is mined for accumulation, not for current consumption. The
annual output is stable and it amounts to just 1.5% of global inventory (in contrast to oil, for
example, where annual production is roughly eight times global inventory). As a result, the gold
price is not only inflation-resilient but also particularly sensitive to the amount of excess money
flowing into the financial system, making it a leading indicator of future inflationary pressures. If
we are right in our analysis, we are likely to see gold price moving much higher this year. Over
the last century, the US dollar has lost nearly 95% of its purchasing power while gold has
preserved its value and has even outpaced consumer price inflation. In a world where politicians
are recklessly growing money supply by decree – and where the risk of severe social dislocations
and geopolitical unrest due to economic turmoil has grown – the appeal of gold as a safe haven
will grow. Moreover, collapsing interest rates have removed the one advantage cash sitting in a
bank account has traditionally held over gold. The choice between zero-interest cash in a bank
account and zero-interest gold is an easy one.

The Fund’s future investments will be driven in large part by this worldview, and we look
forward to describing our new positions in forthcoming newsletters. In the meantime, there are
some very simple investment implications one can draw from these predictions. The first is not to
keep your cash in banks. It doesn’t make sense to lend to insolvent institutions for a 0.5% yield
when there is a reasonable chance you won’t get your money back – or won’t get it all back when
you want it back. As we have written many times before, our cash position (currently 60% of the
Fund) is held entirely outside the banking system in short-term commercial paper issued by
high-quality non-financial issuers. Second, one should get out of (or sell short) US treasuries and
other “expensive” government bonds. There is almost no upside and considerable downside of
owning 10-year bonds that yield less than 2.5%. Furthermore, one should sell (or sell short)
companies where a significant part of the balance sheet is invested in highly-rated government
bonds, like commercial banks, insurance companies, and companies with large pension plans.
Third, one should avoid highly indebted countries regardless of the underlying economics of a
particular company because the wave of sovereign defaults that will start this year will destroy
the value of assets in those defaulting countries. Finally, one should get exposure to precious
metals and particularly gold – and the companies that produce them.

Although, in the past, we have been exclusively long-only investors in equities in emerging
markets, given the enormous changes in the world this past year, we believe that limiting the
Fund to such a specific investment category may not be the best strategy for preserving and
enhancing the Fund’s capital. For example, throughout the fourth quarter, in a number of
instances, we saw debt offer a significantly greater yield than the returns implied by equity prices
in the same companies. If debt is a safer part of the capital structure and provides a higher return
than equity, it is irrational to own the equity and not the debt. Similarly, in many industries, we
have started to see companies in developed markets that are cheaper than their comparables in
January 12, 2009 Page 6

emerging markets. It makes little sense to pay a premium to invest in emerging markets if one can
get exposure to the same industry in a developed market without the problems of property rights,
rule of law and political risk that predominate in emerging markets. This isn’t to say that we plan
to suddenly change the focus of what we do, but rather that we will use the full scope of our
global mandate if the economics of a given investment justify it. To the extent that we start to
broaden our investment universe, we will keep you apprised of what we are doing in our future
newsletters so you can understand the logic of our investment process and what direction we are
heading in with the Fund.

We realize 2008 was painful for all of our clients, and we are extremely disappointed with the
Fund’s performance over the last six months. If it is any consolation, we have been through this
type of thing before. As we have written, our Russian fund fell 89% in 1998. Over the following
eight years (through the end of 2006), however, that fund appreciated 3,100%. It is in times of
extreme stress that the big money gets made. Of course, while we cannot guarantee any concrete
future performance, we can promise the vigilance and wherewithal to work diligently to preserve
your capital and to find the opportunities to grow it.

Sincerely,

Hermitage Capital Management

This document has been prepared by Hermitage Capital Management Limited solely for the information of the person to whom it has been delivered. The
information contained herein is strictly confidential and is only for the use of the person to whom it is sent. The information contained herein may not be
reproduced, distributed or published by any recipient for any purpose without the prior written consent of Hermitage Capital Management Limited.

The information contained in this notice is an estimated valuation provided at your request and as an accommodation to you in connection with your monitoring
of investment performance. The materials provided are based upon information included in our records as well as information received from third parties. We
do not represent that such information is accurate or complete, and it should not be relied on as such. In the event of any discrepancy between the information
contained herein and the information contained in your monthly account statements provided by the Fund’s administrator, the latter shall govern. Please notify
your investor representative of any discrepancies.

The information has been issued by sources believed to be reliable, although this is not guaranteed, and the information stated and opinions expressed constitute
best judgment at the time of publication, and are subject to change without prior notification. No reliance may be placed for any purpose on the information and
opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the
accuracy or completeness of the information or opinions contained in this document by any of Hermitage Capital Management Limited, its members,
employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions, and nothing contained
herein shall be relied upon as a promise or representation whether as to past or future performance. The price of shares can go down as well as up and may be
affected by changes in rates of exchange. An investor may not receive back the amount invested.

This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. Any subscription may only be made on the terms of
the offering memorandum and subject to completion of a subscription agreement. The Fund will not be registered under the Securities Act or the securities laws
of any of the states of the United States and interests therein may not be offered, sold or delivered directly or indirectly into the United States, or to or for the
account or benefit of any US person, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of such securities
laws. The securities will be subject to restrictions on transferability and resale. The Fund will not be registered under the Investment Company Act.