Quarterly Report - December 31, 2008

January 30, 2009

The Fund had its most difficult quarter and full year in 2008. A combination of events beginning with the decline of oil and gas prices, the credit crisis, the heavy sale of energy equities by over leveraged institutions, especially hedge funds, resulted in turning what had been a profitable year through the first six months to a significant decline for the twelve month period. During the fourth quarter, there was heavy pressure on the energy space as institutions were forced to shed positions in companies where the fundamentals were positive; for example in many Master Limited Partnerships (MLPs) where market capitalizations were modest in relation to the volumes that had to be liquidated.

We were cautious going into the final quarter and reduced our overall net equity exposure. In our opinion, energy will be one of the most important areas for future investment, particularly with the new Democratic Administration. Job creation and energy independence will require a significant increase in infrastructure and more oil, natural gas, and renewables. Rising employment and U.S. energy independence will require trillions in investments to increase domestic supplies of relatively clean alternatives to replace environmentally challenged fuels, particularly coal. Accordingly, while 2008 was the most challenging year since the Fund was initiated, we are bullish on the longer-term outlook and more comfortable with valuations than in the past.

Looking ahead to the first half of 2009, we are beginning to see unprecedented values in the energy space. However, because of ongoing commodity and stock market volatility we have become more proactive in seeking out yield opportunities (either writing covered calls or increasing our pipeline MLP exposure). As such, we take advantage of rallies to write calls on many of our E&P and oil service holdings.

In terms of MLPs, we believe we are seeing "once in a lifetime" yields. We have upgraded our MLP portfolio by increasing exposures in pipeline companies where we are confident that their dividends (distributions) are safe and midstream companies that have become so overly depressed that they are yielding above 20% annually. Announcements of declared distributions are acting as catalysts for this sector. As examples, we increased our investment in pipeline MLPs yielding as high as 15% annually. In the non-pipeline sector, we raised the exposure of selected companies yielding above 20% annually, but with significant hedges that that we believe make their distributions secure.

In terms of the overall macro environment, oil prices reached a historically large contango. (higher longer term price versus the current price) in the fourth quarter and January, 2009. Given the significant cut in crude supply, we believe we may be nearing a bottom, particularly if there are indications of an economic recovery beginning in the second half of 2009. However, we are not yet at that inflection point. In fact, there is hope that the OPEC cuts, coupled with supply shortfalls in non OPEC countries such as Norway, Mexico, and Russia, will start to have effect. The wildcard is Chinese demand. Some economists now believe that we will see some sort of positive demand increase in China in the second half of 2009. Any signs of an oil price bottoming would provide significant support to our holdings

While the energy space is significantly oversold, it is difficult to quantify the timing of when the oil price will move up to $50-$60/bbl, a level that we believe would be the necessary positive catalyst for the energy space to once again show strong performance. In the meantime, we continue to upgrade the portfolio in various sub sectors while maintaining a reasonable long/short relationship.

In summary, it is our opinion that although the United States and other countries remain caught in a long and very difficult recession, there are signs that may suggest that the long bear market may be approaching its bottom, if it has not already done so, because major moves in the stock market historically precede changes in the economy by around six months. For example, during recent weeks, equities have absorbed bad news more calmly than in 2008, and there is a determined effort by the new Obama Administration and the Federal Reserve to restructure the banking system and stimulate the economy by significantly increasing the money supply and providing over $1 trillion in various fiscal spending and tax relief programs. Therefore, we and other investors are cautiously beginning to take advantage of the attractive opportunities we see in the wake of last year's decline

Certain statements contained herein may contain "forward-looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among others, risks and uncertainties associated with the timing and costs of energy sector production, the demand for and prices of oil/gas products, the timing and amount of capital spending in the nation and world wide, and general economic factors. This report is not a recommendation to either buy or sell any securities mentioned.

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About ELCO Management, LLC
Established in 1995 and based in New York, ELCO Management (www.elcomanagement.com) offers investment solutions to high net worth individuals and institutions. ELCO also manages two highly specialized energy funds: the ELCO Energy Fund, L.P. and the ELCO Select Fund L.P.