PSQR-Q2-2010

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Dear PSQR Investor:

Second quarter performance was positive, as the markets began to acknowledge the weak underpinnings

to the US and global economy, yielding gains for our short position in the S&P 500.

PSQR Master Fund Ltd. Net RoR1 S&P 500 HFRI Macro CSFB/Tremont Macro

April-10 -0.66% 1.48% 0.81% 1.65%

May-10 1.05% -8.20% -1.61% -0.63%

June-10 1.51% -5.39% -0.23% n/a

2010-Q2 1.90% -11.86% -1.71% n/a

2010-Q1 -4.96% 4.87% 0.44% 2.57%

2010-H1 -3.16% -7.57% -1.28% n/a

The sharp drop in US equities the last week of June, and the similarly sharp rally early this month,

evidence two interrelated factors: Investors showed dwindling confidence in the rally engineered over the

past year and a half by massive fiscal and monetary stimulus, while at the same time could not ignore therecovery in corporate earnings that was largely the result of that monetary and fiscal stimulus, as well as

inventory restocking and margin expansion due to one-off expense cuts.

As governments may yet choose to intervene again in extraordinary ways in order to postpone further the

day of reckoning for unsustainable structural problems and flawed past policies, investors are caught

between risk to the upside as well as to the downside. Realizing that the positives are largelyunsustainable, though, they stay ready to bolt for the exits at any moment. The result is a particularly

treacherous and volatile market.

Although earnings may prop up the market for a short while longer, I remain convinced that the party has

come to an end and equities will retrace further.

I have concluded, however, that we need more flexibility in our trading strategy in order to improve

performance.

Since founding PSQR, Ive been operating under a guideline of putting on positions only where I saw

short term opportunity that matched my longer term view. This was intended to generate higher-

conviction trades. While it worked well for a time, it has meant ignoring sometimes significantopportunities when our research identified a shorter-term trend running counter to our longer term

expectation.

1The past performance of PSQR Master Fund Ltd. described herein, reflects performance net of management fees and expenses and should not

be construed as an indicator of future performance since, among other factors, there may be differences in economic conditions, investment style

and other important factors affecting the future operation of the Fund. Past performance is not necessarily a guide to future performance. The

index information is included merely to show the general trend in the relevant markets in the period indicated and is not intended to imply that the

Funds portfolio was similar to any index in composition or element of risk.

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PSQR Capital Management, 2010. Strictly Confidential.

So, for example, given my view that increasingly dismal US government finances will ultimatelyundermine Treasuries, I did not play the flight to safety rally occasioned by the European crisis, instead

mostly staying on the sidelines in that market.

Starting August 1st, consistent with the disclosures in our offering memorandums, we may now go long or

short regardless of our long-term view. In the context of our current views, this means that we will no

longer be limited to being only short US equities and government debt and being only long commoditiesand currencies other than the US dollar. We also may buy or sell options.

In addition, I have determined that our ongoing quantitative work has brought us to a point where we can

begin to deploy a systematic trading complement to our discretionary strategy. At this time, we anticipate

a maximum risk exposure from systematic trading of one-tenth of asset class gross exposure limits. Thecombined exposure from systematic and discretionary trading will be subject to the existing limits. Our

aim is to generate additional returns via mean-reverting strategies.

These changes do not reflect a shift in our core views (see below on the US economy). We still expect toprofit from major market breaks, while adapting and adding tools in order to be more nimble and

opportunistic.

Portfolio

-1.00% 0.00% 1.00% 2.00% 3.00% 4.00%

COMMODITY

EQUITY

FIXED INCOME

FX

PSQR Q2 2010 ASSET CLASS PROFIT

ATTRIBUTION

PSQR ASSET CLASS AVERAGE GROSS

EXPOSURE

0% 10% 20% 30% 40% 50%

COMMODITY

EQUITY

FIXED INCOME

FX

2010-Q1 2010-Q2

PSQR Q2 2010 VaR (1 DAY, 95% CONFIDENCE)

0.00%

0.50%

1.00%1.50%

2.00%

2.50%

1-Ap

r-10

8-Ap

r-10

15-Apr

-10

22-Apr

-10

29-Apr

-10

6-Ma

y-10

13-May

-10

20-May

-10

27-May

-10

3-Jun-10

10-Jun-10

17-Jun-10

24-Jun-10

The US Economy

In the July 9 issue of Goldman Sachss US Economics Analyst, Jan Hatzius, the firms chief US

economist, sums up the situation as follows:

[Why] have US growth and employment been so weak since 2007? At the simplest level, our

answer is that the different sectors of the economy are collectively trying to reduce their debt burden

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and to run a financial surplus. But as a matter of accounting, the private sector surplus must equal the

public sector deficit (at least globally). If government policymakers do not accept this and try to reduce

the budget deficit, the result is a shortfall of aggregate demand.

[Both] fiscal and monetary policy can help the economy in principle, but both are subject to significant

limits. At a time when many people are trying to cut back in their personal lives, it is difficult to persuade

the public that driving up the deficit is a good ideaeven though it actually is a good idea, in our view,especially if combined with a clearer plan for long-term consolidation .

Meanwhile, the effectiveness of monetary policy depends on its ability to persuade the private sector to

run a smaller financial surplus, which may be limited in the current environment. In addition, of course,

the options for the Fed to boost growth have narrowed sharply with the funds rate near the zero bound.

The upshot is that the forces weighing on aggregate demand growth look formidable. Policymakers can

provide some relief but, realistically, will find it hard to neutralize the headwinds altogether. Thus, the

risks to growth over the medium term tilt decidedly to the downside.

I agree with Jans assessment. Since the 70s, and most sharply since 2001, the US labor forces share of

the economic pie shrank dramatically. The combination of technological advances and free tradesuppressed the purchasing power of an ever increasing proportion of American workers. As the following

chart shows, compensation of employees as a percentage of GDP declined from approximately 58% in

2001 to approximately 53% in the first quarter of 2010. The increase in household borrowings, from a

range of 2.5%5% of GDP in the 90s to approximately 7.5%10% in 2002-2006, masked the economic

and social consequences of this shift in income distribution.

From an economic perspective, stagnant employee compensation would have resulted in stagnant demand

and stagnant GDP if not for the addedprivate borrowing.

Remember, consumer spending is

70% of the US economy.

Given quite significant multiplier

effects in a high-consumption

economy, the internet bubbles bust

would have resulted in zero or

negative growth for some time, had it

not been for the debt-bubble

solution engineered by the Fed.While this avoided widespread

personal hardships that would have

generated significant popular anger

and perhaps forced major political, if

not institutional changes, thisexpedient bought only a few years

respite before crashing to a halt in

2008, when not only compensation of

employees continued to decline but

household borrowings turnednegative. *+#,-./!0#,.1#!+2!3-+4+56-!741$%8689!:.;.,1$!

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The policy choices that helped spurthe debt bubble (primarily the Fed

keeping rates too low for too long,

as well as permitting irresponsible,

unbridled lending and securitization)

concealed the inconvenient twin

realities of uncompetitiveness andgaping distributional imbalances.

Postponing the political resolution

of the problem has only caused it to

get bigger. Unfortunately, the USgovernment is continuing to dig the

hole deeper, now with a coarser,

less-efficient version that uses

sovereign borrowing in place of

private debt to fill the demand

deficit created by the labor forces

ongoing income decline.

But four quarters into the recovery from

the worst economic downturn since the

Great Depression, workers pay still lags,

as you can see from this chart.

50.0%

52.5%

55.0%

57.5%

60.0%

62.5%

65.0%

67.5%

70.0%

1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

Comp & Borrowing (LHS) Fed Gov't Borrowing (RHS)

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Even taking into account the boost tospending power from private borrowing,

the decline continues.

So the government has stepped into the

gap, borrowing at extraordinary levels.

It may be true that, at least until the next election, ordinary people have no choice but to incur their share

of incremental government debt. However, while some feel that the economy has stabilized and can only

go up and all the faster because it is rebounding from such a low level the reality is that the

exceptional amount of government borrowing has failed to add up to final demand sufficient to spur

economic activity to anything approaching the cyclical upswings typical of post-war recoveries, as the

following chart shows.

0.90

0.95

1.00

1.05

1.10

1.15

1.20

(8) (4) - 4 8

Current RecessionAverage

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Current v. average of previous post-war recessions indexed level by quarter

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PSQR-Q2-2010