It is a cape, and yes, your arms go out the sides where the dark strip is on the photo of the pitched shelter. The arm opening is overlapped and forms a kid of cuff. The zipper is down the front and has double sliders so you can open it for ventilation, or to see your pack straps --- or pee for that matter. That zipper is great when it's pitched-- you can open the door, wide, or open a crack on the top or bottom for air flow.
The long corners of the cape just tuck up under and there are two snaps inside that are on the back side of the reinforcing patches for the side pull-outs. You just just put the snap through the tie out and you're under way. It seems a little loose when you first put it on-- it's not a tight "ironed" kind of arrangement--- and that makes no practical difference at all-- the extra fabric is up out of harms way and three steps out you don't even know it's there. It's tucked under, so it doesn't add to snagging on things. The water runs off like it would with any poncho. Having your arms out the sleeve holes actually helps to keep it from blowing around and you could still add a waist cord if it was really windy. Remember, you are fully enclosed, so you don't have the big gap on either side like a poncho.
I did seam seal mine and I stayed good 'n' dry hiking in a rain shower. I loved the extra ventilation-- I make my own rain anyway!
The hood is good -- SMD got the distance from the eyebrows to the top right, so the thing isn't blinding you half the time. The face opening is large enough to fit round your neck to use the hood as a gasket and wear a brimmed hat instead.
The self stowing pocket is very cool. It is great for a map or glasses or a snack bar. It is large enough that it self-stows loosely, not a shoving contest to get it all in the pocket. When pitched, that pocket is over your head end and perfect for your flashlight, glasses, etc.
The cape does have compromises, much like ponchos do-- not as good in the wind (I'm comparing to a rain parka now), more prone to catching on brush, your lower arms are out in the weather if you are using poles, and there is the what-do-you-wear-when-pitching-in-the-rain question.
On the other hand, you get to toss your rain coat, and your pack cover, and the extra weight of a larger or more complex shelter-- 23oz in my case. It packs in a little more space than my ground cloth. With the loose pack in the self-stowing pocket, it just wraps around other stuff in my pack. I use a GoLite Trek and it can sit in the big mesh pocket to dry or be ready for the next shower.
To use my dollar per ounce look, I get $110/23=$4.78 per ounce saved. To save a near equivalent amount of weight on my sleeping bag, I would need to buy a $330 down bag (vs my 20F/48oz synthetic bag) and so $330/22=$15 an ounce--- three times the cost to get the same pack weight.