Quarterly Report – December 31, 2009

January 25, 2010

We attribute last year’s improved performance to situations that were available largely because of the unprecedented market anomalies that began in 2008 i.e.; historically low interest rates and prospects for an improving world economy. Accordingly, we moved aggressively to take advantage of opportunities before they gradually became recognized by investors as legitimate turnarounds. Examples were the energy Master Limited Partnerships (MLPs) following their widespread decline and the independent shale drilling producers. Early in 2009, MLPs, that for decades traded as conservative investments, often as alternatives to bonds, collapsed following the emergence of the sub-prime fiasco and the severe decline in oil and gas prices. Wall Street recognized that this asset class would suffer with their need to access capital and their ties to commodities including natural gas liquids (NGLs). We concluded that oil and gas prices were too low and that the government’s infusion of funds into the credit market would have a positive impact. Our initial strategy was to leverage and buy lower risk investment grade pipeline MLPs. Subsequently, we expanded into higher beta midstream companies by taking large positions in such companies as Williams Partners (WPZ), which is currently part of a recently announced Williams Companies (WMB) corporate restructuring, Targa Resources (NGLS), Copano Resources (CPNO), and Markwest Energy(MWE). These four positions aided the Fund’s performance significantly at the end of the year with average total returns of about 200%.

We believe that higher oil prices are here to stay, but with continued price volatility. As oil is priced in dollars, it has been used as a hedge against the weakening greenback. The reversal of this “carry trade” could ultimately be harmful to future oil prices. However, it is our opinion, that with the unemployment rate currently at 10%, it will probably be some time before we see sustained dollar strength. We also remain comfortable that China, and other emerging economies, including Brazil and India, will continue to grow at above normal rates that will have a positive impact on oil consumption. However, our concerns about natural gas prices continue. The EIA-914 (Energy Information Administration’s monthly Natural Gas Production Report) data showed that even a dramatic 50% reduction in the rig count basically had very little impact on gas production. In addition, it became evident that even with gas prices as low as $4/mcfe, producers still drilled aggressively, since most were still profitable. As mentioned in previous communications, the relative high oil and low gas prices have contributed to record high natural gas liquid (NGL) margins.

While ongoing dynamics point to a more challenging outlook for natural gas, we are beginning to see longer term positives on the horizon including Exxon’s proposed acquisition of XTO. Also, we continue to see more electric utilities retiring older coal plants and announcing plans to build natural gas base load plants (recent announcements were made by Progress Energy and Exelon). In addition, with low gas prices, it becomes economical for generators to switch from coal to gas. Additionally, we believe gas is gaining political traction.

With respect to 2010, we continue to emphasize the MLP space and we still have meaningful positions in the midstream MLPs, as these companies, on average, are generating above average total returns of approximately 10%-15% and are now experiencing a better macro environment as natural gas liquid (NGLs) margins remain high. More importantly, we now expect more discussion on companies increasing distributions (dividends) rather than the safety of distributions, which was the subject of much discussion in 2008, and the first half of 2009. In addition, we believe that investor appetite for MLPs could increase as the Bush’s tax cuts expire. With overall dividend tax rates possibly increasing 50% – 100%, the MLP tax-advantaged status could result in greater price premiums. MLP distributions are treated as a return of capital and therefore are only minimally impacted. As a hedge 2 against the possibility of higher future interest rates, we have been expanding our regulated utility shorts (i.e. Portland General Electric, DPL Inc, WGL Holdings) and ten-year treasury notes.

With respect to the E&P outlook for 2010, we believe the consensus is for capital budgets to increase about 15% - 20% as producers take advantage of strengthened balance sheets and higher oil prices. In our opinion, the improved macro environment will allow companies to continue to outspend their cash flows, which is also a positive for the drillers and oil service companies.

In summary, we remain optimistic in our positioning in 2010 but also continue to expect volatility and periodic corrections. As such, we utilize a number of hedging strategies as well as the purchase of puts to provide some overall stock market insurance.

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.