Midway Market Neutral Fund returned an estimated 3.25% in December, net of fees and expenses. This brings our unaudited 2010 net return to 53.47%. This was a particularly successful year for Midway's investors. While we are indeed pleased with this absolute return, we are even more pleased knowing that it was produced with a low relative risk profile.

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As it turns out, Mortgage Arbitrage was the best performing hedge fund strategy in 2010. Midway ranked second among all funds in this category, according to data compiled by Bloomberg through November. Success was partially attributable to a favorable environment, where structural impediments generally caused prepayment speeds below market expectations. More importantly, however, the spoils went to those who exercised the ability to dig way beyond headline noise in chaotic markets to identify mispriced cash flows. Midway has a ten-year track record of doing this. We seek to find cheap cash flows and to buy them even cheaper while maintaining a disciplined risk management approach to preserve market neutrality.

This strategy has produced annualized net returns of 20% over ten years with a Sharpe Ratio in excess of 1.7 and with little correlation to broader markets, and or, to other asset classes. ]

We continued to reap solid carry from the portfolio. Our hedge book performed as expected during the month given the significant back-up in rates. The negative attribution from our hedge book largely offset the mark-to-market gains of our risk positions. This is consistent with managing a market neutral profile. We are pleased with our current positioning and with our outlook over the medium term.

As always, I am compelled to remind you that past performance is not a guarantee of future results. While the returns are robust they are not risk free.

Market Commentary

During the month we experienced a drastic Bear Steepener, an environment that is generally favorable to IO's. The short end of the swap curve, measured by the 2 year, increased by 5 bps and the long end, measured by the 10 year, increased by 44 bps. This was a continuation of the trend over the last four months.

Aggregate prepayment speeds (Fannie Mae) slowed 5% in December to 26 CPR. The slowdown was the result of a seasonal down tick, and the increase in mortgagerates. The biggest declines were in the most refinanceable cohorts - the lower coupon (4.5-5.0%), newer originations (2008 - 2009). The 2008 4.5 cohort declined 5 CPR to 44 CPR, and the 2008 5.0 cohort declined 1.6 CPR to 43.7 CPR. Speeds formany of the higher coupon cohorts increased slightly reflecting buyout activity and longer refinance processing time. For instance, speeds on the 2008 6.0 cohort increased 0.6 CPR to 31.3 CPR. Despite historically low mortgage rates, prepayments remained muted throughout 2010. Vastly tighter underwriting standards and high LTV's prevented many homeowners from refinancing. To date, homeowners have been reluctant to put additional money into their home (cash-in) to take advantage of the historically low mortgage rates.

The 30 year fixed mortgage rate finished 2010 at 4.86%. Weekly rates reported by Freddie Mac (PMMS) reached a low of 4.17% in the second week of November. The 30 year rate began the year at 5.01% and never exceeded 5.21%. The 15 year fixed rate ended 2010 at 4.20%, up 40 bps from the start of December. The 15 year rate began the year at 4.50% and reached a minimum (3.57%) in November. Despite historically low mortgage rates, prepayments remained muted throughout 2010.

The Case-Shiller Composite Index declined 1.0% (m/m) in October. The decline occurred in 18 of the 20 metropolitan areas. Six cites (Atlanta, Charlotte, Miami, Portland, Seattle and Tampa) hit their lowest levels since home prices started to decline in early 2006. This is the fourth consecutive report to show aggregate home prices declining, and it appears that housing prices are double dipping.

The temporary federal tax credit for first time homebuyers resulted in an increase in home prices in the first half of 2010 (+1.4%). The tax credit expired this past June, and prices resumed their decline. The Case-Shiller Composite Index declined 2.0% from January 2010 to December 2010. The consensus forecast for 2011 is a 5%-10% declined in home prices, which is consistent with annualizing the four most recent data points.

As of October 2010, the aggregate home price index was 31% below its peak (May 2006). An additional decline of 10% could have a significant impact on foreclosures. If prices were to fall an additional 10%, an average loan with an 80% LTV, originated between May 2006 and May 2008, would be under water at the end of 2011.

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