September 2011 You should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For a free copy of the most recent Prospectus, visit our website at www.kineticsfunds.com or call 1-800-930-3828. You should read the Prospectus before you invest. Performance data quoted represents past performance, which does not guarantee future results. Investment return and principal value of an investment may fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance data current to the most recent month-end, click on the link below. (Click here for most recent and complete performance information) (Click here for the most recent portfolio holdings) Dear Fellow Shareholders, The Kinetics Paradigm Fund (the “Fund”) (No-Load Class) completed the three months ending September 2011 by returning -19.92%, as compared to -13.87% for the S&P 500 Index and -17.42% for the MSCI AC World Cap Index, bringing year-to-date performance for the Fund to -18.75% compared to -8.68% and -13.56% for the S&P 500 index and MSCI AC World Cap Index, respectively. Bearing in mind that perceived risk misleads more investors than it helps, there is now a tool to measure risk, or at least the sense of risk. This is the CBOE Volatility Index, or the VIX, which has been in existence for only six years. In principle, the VIX, which is formulaically based upon S&P 500 options prices, represents the expected movement of the S&P 500 over the course of the next month. Accordingly, the VIX rises when anticipated market volatility rises, as manifested in index options prices, and vice versa. It is perhaps the most rapidly growing index, in terms of usage, in the world, becoming a preferred tool to assist in hedging against portfolio volatility. Many are aware that the VIX, the average level of which, since inception, has been about 23, spiked up to the extraordinary level of 80 during the 2008/2009 financial crisis. As of Friday, September 30, 2011, the VIX closed at 42.96. As an exercise in testing our own knowledge about market fear, and using our own personal historical experience, let’s contrast 2008 with today and employ the prism of the VIX as the method of comparison. On December 31, 2007, on the eve of the worst bear market in modern times, the VIX closed at 22.50. What was the level of the VIX during the flash point, the Bear Stearns funding crisis of March 2008? The highest closing level that month was 32.24. Given that data, how about on July 11, 2008, as the economy and the financial sector further deteriorated and a front page New York Times article reported that the United States government was considering placing Fannie Mae and Freddie Mac into receivership? The VIX closed at 27.49. Next, how about two months later, on September 8, 2008, when the government did actually place Fannie Mae and Freddie Mac into receivership? As of that date, failure was no longer a threat; it had actually occurred. The VIX level was 22.64. The following week: - On Sunday, September 14th, Merrill Lynch was sold to Bank of America; - On Monday, September 15th, Lehman Brothers filed for bankruptcy; - The next day, on the 16th, Moody’s and Standard & Poor’s downgraded American International Group’s credit rating; and - On Wednesday, September 17th, the Federal Reserve lent $85 billion to AIG, the share price of which fell to $1.25. What levels did the VIX reach as these events unfolded into a cascade? Did it breach 80? Here are those VIX levels: July 11th, Fannie Mae & Freddie Mac at risk of receivership: 27.49 Sept. 8th, government takeover of Fannie Mae & Freddie Mac: 22.64 Sept. 14th, Merrill Lynch sold to Bank of America: 31.70 Sept. 15th, Lehman bankruptcy: 31.70 Sept. 16th, AIG credit downgrade: 30.30 Sept. 17th, Federal Reserve supports AIG: 36.22 Here’s another: where did the VIX close on September 25th, when Washington Mutual was seized by the Office of Thrift Supervision, the largest bank failure in U.S. history? The answer: at 32.82. On December 31, 2008, the VIX closed at 40. That was clearly a period of crisis. It was during October and November that the VIX twice closed above 80, at 80.06 and 80.86, and it remained above 40 from October 2nd through December 30th. From a bit after the end of March 2009, the VIX trended from the 40s down to the mid teens by 2010. Yet, as of September 30, 2011, the VIX was 42.96. So, let us, if we can, compare and contrast then and now. Obviously, the remaining companies that were not merely in danger of insolvency but were actually insolvent have passed their crisis points. General Motors, the fourth largest bankruptcy in U.S. history after Lehman, Washington Mutual and WorldCom, is public again and has a stock market capitalization above $30 billion. Cash levels on corporate balance sheets are at record levels. Public companies have extended short-term debt maturities to reduce refinancing risk, they have paid down debt, and they have refinanced higher cost debt at lower rates. As compared with September 2007, the assets of U.S. commercial banks are 22% higher, or by $2.2 trillion, and their shareholders’ equity is 39% higher, at $1.48 trillion versus $0.98 trillion. And this is a very different circumstance than that of 2008. There are very few analysts who believe that, even if there are a significant number of European sovereign defaults, many huge banks will become insolvent. They simply believe that those banks will be forced to raise more capital. And the amount of capital, of course, depends upon the severity of the crisis and its timing, since the banks, at the moment, are profitable and are generating capital internally. So, the difference between then and now: then, until the crisis was upon us, at least expressed in the world of options through the VIX, the market didn’t believe a crisis of such severity could actually occur. It only believed it when it did occur, which required some nine months of progressive deterioration. Having ‘learned’ that lesson (and the term learned is used with reservation) the current reaction to similar markers of a financial crisis occurs in weeks rather than months. Now, the market doesn’t really know whether a crisis of like severity will occur. It simply assumes that it is occurring, despite the fact that it has yet to occur and perhaps will never occur. It is a very salient difference and worth thinking about. It was Mark Twain who said that a cat that sits on a hot stove will never sit on a hot stove again; but neither will it sit on a cold stove. In contradistinction to the typical company, many owner-operator companies—those whose manager is also the primary owner and for whom that capital represents a major or the greater portion of their wealth—have been investing aggressively during this period rather than accumulating cash. Historically, owner-operators have a statistical likelihood of producing a far more favorable result than the average company. And it’s hypothesized, but could never be proven, that those favorable results are a function of the incentive of management having most of its wealth embedded in the company, so that the only pathway to increase that wealth is really the success of the enterprise. It is a little known fact, even within Horizon Kinetics, that Horizon Research once published something known as the Intangible Asset Report, which was a regular compendium of such individuals and their companies. This publication ran to well over 200 pages. On this month 12 years ago, we ceased distribution of this report, due to lack of interest among our clients. But not lack of interest on our part. Owner-Operators – A Demonstration of Valuation Analysis in Response to Perceived Risk In recent weeks and months, some of the following owner-operator transactions have been observed; consider, in each case, how cyclical or financially risky these businesses appear to be: - Wilbur Ross recently purchased in excess of 1.3 million shares of Assured Guaranty which, among other activities, provides mortgage guaranty insurance to institutional lenders. That represents a commitment of about $16 million. He already owned 16 million shares, or 8.7% of the company. This latest purchase was at approximately 52% of book value. - In July 2011, Wilbur Ross and Fairfax Financial, the property-casualty insurer ably led by owner-operator V. Prem Watsa (13.2% book value/share growth since 2001), each agreed to invest €300 million in the Bank of Ireland. Each will own 9.9%. - Google, under the leadership of Larry Page and Sergey Brin, recently agreed to buy Motorola Mobility for $12.5 billion, presumably for its patent portfolio. It also recently announced it is acquiring Zagat, the restaurant guide, for $125 million. - Carl Icahn recently purchased another 3% of the auto parts maker Federal Mogul. He had already owned about 75%. He had made those purchases at, more or less, book value. - Charlie Ergen’s DISH Network, some months ago bought Blockbuster Video out of bankruptcy for $320 million. And some months prior to that, through his other company, known as EchoStar, he paid $2 billion for Hughes Communications, a satellite manufacturer, presumably because in two or three years the United States will exhaust its available cellular spectrum and have to rely upon the bandwidth granted to satellite providers. There are a handful of individuals – owner-operators, not agent-operators – that have been purchasing the available satellite spectrum over the last several years. - BGC Partners, formerly known as Cantor Fitzgerald, the bond dealer, led by Howard Lutnick, recently bought Newmark Realty, a real estate broker, real estate being about as depressed as real estate has ever been. - Joseph Steinberg and Ian Cumming of Leucadia National recently acquired nearly 27% of Mueller Industries. Mueller Industries makes pipes and fittings for the housing and large-scale construction markets, which are clearly depressed. As of the most recent 13D filing, Leucadia owned 26.7% of the company. - Last month, in late September, the board of Berkshire Hathaway, a company that for 40 years has not repurchased any shares, announced that it would repurchase potentially billions of dollars of shares at prices up to 1.1x book value. The shares are the same price they were five years ago, although book value is about 45% higher. What can be said about the many such investments being undertaken by individuals who have demonstrated dramatic serial success over decades of managing their companies? They are expending, while the average company is husbanding, cash. They are buying cyclical or risky assets that others are selling. They are doing so with their own balance sheet capital—that is, they are not issuing shares to do so. They have not, surely, all become foolhardy simultaneously. The Owner-Operators as Harbingers of a Bubble Reversal They also, as a class, trade at remarkable, perhaps record discounts: near or below book value, or deeply below net asset value, or near or at single-digit earnings multiples. Over the past few years, they have sold at ever cheaper prices, even as their financial progress continues. This circumstance feels much like our experience in the 1999-2000 bubble period, when the bluest of blue-chip holdings were – literally, as they now say – discarded in favor of technology, internet and telecommunications stocks. Here is the current version of that phenomenon. In the new world of portfolio variability control and asset allocation via indexation, equity investing is increasingly done via batches of stocks rather than individual stock selection. The goal, in part, is to avoid idiosyncratic security risk. The associated flow of funds is, accordingly, into stocks that are constituents of popular indexes and ETFs. This is evidenced by the percentage of the $4 trillion of domestic equity mutual fund assets that is invested in equity index funds: while virtually flat between 2004 and 2007, this measure rose by one-quarter, from 11.5% to 14.5%, between 2007 and 2010. These index funds received new assets, on a net basis, even in 2008 and 2009, when the equity markets were in decline . As part of this trend and in order to accommodate larger fund flows, the various index providers began to adopt float-adjusted market capitalization methodologies several years ago. Under this system, inclusion or exclusion from an index is not based on the total stock market value of a company but rather, on the market value after excluding shares held by insiders. Accordingly, many owner-operator companies find themselves increasingly outside of the flow of funds. Other owner-operators that have sufficient float, yet which are multi-industry or portfolio-type owner-operators, such as Leucadia National or Brookfield Asset Management, have found themselves excluded due to the necessity, in the index-driven, ETF mode of investing, of conforming to a clearly defined industry sector. Paradoxically, as many of these owner-operator companies repurchase shares, their float decreases, which means that their index weights are reduced, if they are in an index, which in turn requires share sales by any index-based holders. Contrarily, companies that issue more shares may well increase their index weighting. This, then, is a form of bubble, if one definition is the flow of funds into a sector or securities irrespective of fundamental merit or valuation. The value investors listed above all share the failing that they tend to purchase securities with idiosyncratic features, which tend to be excluded from indices. Like all bubbles, this one will reverse. Some of the catalysts for such a reversal are already in development. We will be commenting on them. In the meantime, just as a picture is sometimes worth a thousand words, a thumbnail survey of just a few owner-operators in our equity strategies should illustrate just how remarkably attractive some of these companies are; that their share prices are, for a time, not synchronous with the broad stock market should, eventually, be an irrelevancy. Liberty Starz Liberty Starz group, a tracking stock of Liberty Media Corporation, is a major producer, developer and distributor of television and movie programming, operating 16 premium subscription channels, such as the Starz and Encore channels; these aggregate 51.9 million subscribers and continued the recent subscriber growth into 2011. At the helm is owner-operator John Malone, who controls 4.9% of the shares and 31.2% of the voting power. Mr. Malone has a track record of repurchasing shares at opportune moments and making shrewd, accretive deals. The current cash balance and cash flow levels will allow him to do both, while still providing a wide margin of safety for investors. Mr. Malone recently walked away from contract renewal negotiations with Netflix to exclusively stream Starz content via the Internet, despite an offer from Netflix that is likely to have been over 10 fold greater than the legacy contract from 2008. As evidenced by recent deals struck by other content owners, the Starz content is deeply undervalued in Liberty Starz’ current stock price. As of June 30, 2011, Liberty Starz had net cash of $1.2 billion, equal to about one-third of the market capitalization, and sustainable, stable operating cash flows of over $300 million, allowing Mr. Malone the flexibility to continue to act opportunistically to sustain high returns on capital. Yet the stock trades at not much above book value – which is to say that for some reason, little is being paid for the plentiful future earnings – and less than 9x estimated 2011 earnings (when adjusted for the cash balance). However, even this valuation is misrepresentative, as it is based upon trailing earnings that include roughly $25-$30 million per year from the soon to expire legacy Netflix contract, whereas the renewal price that Mr. Malone rejected some weeks ago was reportedly on the order of $300 million. Incorporating an allowance for the renewal value of this content, Liberty Starz shares trade at perhaps less than 6x earnings. Even the direst forecasts for consumer spending and cable subscriber growth can hardly justify the current valuation of Liberty Starz given the cash “safety net,” reliable cash flows, attractive contract renewal schedule and vested, long-term oriented owner-operator management. Leucadia National Leucadia National epitomizes the “owner-operated” business by focusing on long-term growth in book value and opportunistic asset purchases. Ian Cumming (Chairman) and Joseph Steinberg (President and CEO) collectively oversee the operations and investments and own slightly less than 20% of the shares outstanding (~$1 billion market value). Their curriculum vitae are best described by the history of Leucadia’s book value per share expansion: 13.6% per year for the 10.5 years since year-end 2000, and 14.6% per year for the 20.5 years since year-end 1990. Leucadia presently has a variety of associated companies and investments in multiple industries including investment banking, commercial mortgages, metals and mining and industrial manufacturing. This is an active portfolio and subject to change, although historically the investments have been long-term and met disciplined value criteria. A key principle of the investment methodology at Leucadia is consideration of purchase price (i.e., margin of safety). This is a different sense of safety (and opportunity), though, than that practiced by conventional agent-operator CEOs. For instance, a not insubstantial addition to earnings and book value was born of the purchase, in 2007 and 2008, well into the unfolding twinned crises of the auto industry and lending sector, of Americredit Financial for $418 million. Americredit is a sub-prime auto loan provider. Outcome? Leucadia sold Americredit to General Motors in July 2010, for $3.5 billion in cash, Leucadia’s share being $875 million. The previously mentioned agent-operator CEOs conversely view margin of safety as hoarding cash that ultimately returns negligible amounts to shareholders. As of June 30, 2011, the company had $9.2 billion in assets, $2.4 billion in liabilities and $6.8 billion of equity. During 2009 and 2010 (consistent with the past 20 or 30 years), Leucadia earned returns on equity of 15.6% and 34.3%, respectively, yet as of this writing trades at over a 10% discount to book value. In overly simplified terms, a multiple of book value can be interpreted as an expectation of return on equity. By this price measure, investors not only do not expect a high return on equity from Leucadia, they expect no return. Furthermore, the company has a conservatively positioned balance sheet with ample liquidity to weather any tumults associated with economic hardship, yet also maintains flexibility to initiate investments should the opportunity present itself. Of course, it is possible that Leucadia will trade at a further discount to book value. However, management might well take advantage of this, should it come to pass. The company has traded at a premium to book value for much of the past decade. Accordingly, we view the current valuation as an anomaly – one can acquire an interest in one of the most successful private investment portfolios of the past three decades, not only without fee or introduction, but at a material discount. If shares of Leucadia are to trade at book value – a valuation that we still consider a sizeable discount – the return as of the writing will be slightly less than 20%. Howard Hughes Corporation The Howard Hughes Corporation is a real estate holding company created by various firms that committed capital to facilitate the reorganization of General Growth Properties (“GGP”). GGP was forced into bankruptcy due to the inability to refinance debt obligations, despite remaining quite profitable throughout the credit crisis. As such, substantial equity value remained when it came time to restructure. The sponsor firms, including William Ackman, founder of Pershing Square Capital, and well-regarded Brookfield Asset Management chose not to include all of the assets previously held by GGP, and to spin off the properties that did not fit the cash flow and leasing parameters desired by conventional retail REIT investors, thus creating a second company: the Howard Hughes Corporation. Mr. Ackman elected to become Chairman and remains very active in the management decisions. As of this writing, the bankruptcy recapitalization leaders, Brookfield Asset Management and William Ackman, control 15.8% of the shares outstanding. This figure fails to incorporate the warrants also held by these companies, which when exercised will increase the ownership to over 26.9%. Mr. Ackman elected 3 executives to run Howard Hughes on a day-to-day basis. Given the modest salaries they earn, their primary compensation will be through 7-year warrants that cannot be hedged for 6 years. The executives paid a combined $19 million for these warrants, which will be worthless if the common shares do not exceed the exercise price. It is both uncommon and remarkable for a management team to accept to expend cash as part of a compensation package. As of this writing, both warrants issues sold to the executives are well below the exercise price. This compensation structure ensures that every member of the management not only shares a long-term outlook, but also a vested interest aligned with shareholders. As of June 30, 2011, Howard Hughes had approximately $3 billion in assets, $894 million in liabilities and $2.1 billion in shareholders’ equity. As of this writing, the company was priced at $43.58 per share, which is less than .80 times book value. This can be interpreted as investors believing that Howard Hughes will sustain negative earnings and/or ultimately be unable to realize the balance sheet values of the assets in liquidation. The discount to stated book value does not even reflect the actual markdown. One should make allowance for the conservative valuation of the assets, as is typically the case with stated asset values post reorganization (bankruptcy courts commonly value assets conservatively to provide additional flexibility post-bankruptcy). For instance, consider the South Street Seaport property in lower Manhattan on Pier 17. This tourist destination is held at merely $3.1 million book value. This may be compared to operating income of over $5.0 million in 2010. Even this operating income figure is misleading due to the economic climate under which the legacy leases and tenants were negotiated. It certainly fails to reflect any redevelopment plans for the site, which could include hotels, residential units and the like. Further, many of the other properties are on the books at costs that were established decades ago. The land for the enormous Summerlin master planned community in Las Vegas, for instance, was acquired in the 1950s. The assets of Howard Hughes will take time to develop and monetize, however, management has been careful to limit asset sales at current depressed levels and to find strong strategic partners for the future property development. Due to the quality of assets, long-term vested management team and substantial discount to current market value, we believe that Howard Hughes Corporation represents an attractive long term opportunity with a more than adequate margin of safety. 12/32 – 12/35 = 124% 12/32 – 12/37 = 95.0% = 14.39%/yr 12/32 – 12/42 = 144.4% = 9.35%/yr 1http://www.federalreserve.gov/releases/h8/current/default.htm; http://www.federalreserve.gov/releases/h8/20070928/ 2www.ici.org/pfd/2011-factbook.pdf 3As of 6/30/11. 4Majority of Mr. Malone’s equity is through Cl. B shares entitled to 10 votes 5Initial warrants were issued to Mr. Weinreb and Mr. Herlitz upon their hire. Mr. Robinson was hired at a later date, thus the strike and price of his warrants are different from the previous issue. We thank you for your confidence and believe you will be rewarded for it. The Horizon Kinetics Investment Team Disclosure The opinions expressed are not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Additionally, the views expressed herein may change at any time subsequent to the date of issue hereof. Because the Funds [other than The Paradigm Fund and The Small Cap Opportunities Fund] invest in a single industry, their shares do not represent a complete investment program. Internet and biotechnology stocks are subject to a rate of change in technology, obsolescence and competition that is generally higher than that of other industries, and have experienced extreme price and volume fluctuations. International investing presents special risks including currency exchange fluctuation, government regulations, and the potential for political and economic instability. Because smaller companies [for The Global and Small Cap Opportunities Fund] often have narrower markets and limited financial resources, they present more risk than larger, more well established companies. Non-investment grade debt securities (i.e., junk bonds) are subject to greater credit risk, price volatility and risk of loss than investment grade securities. Further, options contain special risks including the imperfect correlation between the value of the option and the value of the underlying asset. Unlike other investment companies that directly acquire and manage their own portfolios of securities, the Funds pursue their investment objectives by investing all of their investable assets in a corresponding portfolio series of Kinetics Portfolios Trust. You will be charged a redemption fee of 2.0% of the net amount of the redemption if you redeem or exchange your shares 30 days or less after you purchase them. Distributor: Kinetics Funds Distributor LLC is an affiliate of Kinetics Asset Management LLC, and is not an affiliate of Kinetics Mutual Funds, Inc.

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