2006-06-30

Dear Fellow Partners and prospective investors:

After a continuation of / the strength in the 1st quarter into April, the markets experienced turmoil in May and June as investors chose to focus on reducing their risk. The earlier market strength due to the optimistic views of a “Goldilocks economy” that is neither to hot nor to cold and a Fed pause gave way to the realization that although the markets began seeing some weak economic data in May and the moderation of the US economy the Fed believed that “some inflation risks remain” and rate hikes were likely to continue.

Fed comments and economic data points created more uncertainty in the markets and we witnessed the violent market swings as investors reacted to the “news dujour.”

We have highlighted in earlier market commentary both at the end of 2005 and in our 1st quarter review that Highpoint had begun to move into more defensive sectors such as healthcare and industrials. The healthcare sector in particular despite its defensive nature has greatly underperformed in 2006 and we believe is a testament to investors continued willingness to trade for that “Goldilocks" scenario of continued strong growth and low inflation.

Highpoint remains approximately 60% net long throughout the 2nd quarter and was thus not immune to the market upheaval during the quarter. In addition to some healthcare names we have mentioned before in earlier letters, we have become involved with a new healthcare name that is mainly involved with the safety and efficacy of new drugs entering the market. In addition to our earlier moves into the healthcare industry and into some larger capitalization, dividend paying equities, we have become interested and have been investing in a defense industry company that trades at 10x EPS and has excellent growth prospects inside and outside its main defense industry. We believe that geopolitical risk in places like Iraq, Iran, N. Korea far out weigh the risks of troop withdrawal from Iraq and cuts to defense budgets.

Our fundamentally driven longer-term approach and our value bias has insulated our investors from the violent swings that many equity participants have felt in the 2nd quarter as investors became interested in less risky investments. We are well positioned and excited for the second half of the year and thank you for your continued support.

Best Regards,
Neil A. Levy