Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended: September 30, 2009

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-26004

 

 

DIVERSIFIED FUTURES TRUST I

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		13-3780260
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

900 King Street, Suite 100, Rye Brook, New York		10573
(Address of principal executive offices)		(Zip Code)

(914) 307-7000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller Reporting Company		x

Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 

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DIVERSIFIED FUTURES TRUST I

INDEX TO QUARTERLY REPORT ON FORM 10-Q

SEPTEMBER 30, 2009

 

				Page
PART I – FINANCIAL INFORMATION				3
Item 1.		Financial Statements		3
		Diversified Futures Trust I:
		Condensed Statements of Financial Condition as of September 30, 2009 (Unaudited) and December 31, 2008		5
		Condensed Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2009 and 2008		6
		Condensed Statements of Changes in Trust Capital (Unaudited) for the Nine Months Ended September 30, 2009 and 2008		7
		Notes to Condensed Financial Statements (Unaudited)		8
		KMP Futures Fund I LLC (formerly known as WCM Pool LLC):
		Condensed Statements of Financial Condition as of September 30, 2009 (Unaudited) and December 31, 2008		21
		Condensed Schedules of Investments as of September 30, 2009 (Unaudited) and December 31, 2008		22
		Condensed Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2009 and 2008		23
		Condensed Statements of Changes in Members’ Capital (Unaudited) for the Nine Months Ended September 30, 2009 and 2008		24
		Notes to Condensed Financial Statements (Unaudited)		25
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		37
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		46
Item 4.		Controls and Procedures		46
PART II – OTHER INFORMATION				47
Item 1.		Legal Proceedings		47
Item 1.A.		Risk Factors		47
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3.		Defaults Upon Senior Securities		47
Item 4.		Submission of Matters to a Vote of Security Holders		47
Item 5.		Other Information		47
Item 6.		Exhibits:		47

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;

FINANCIAL STATEMENTS TO FOLLOW]

 

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DIVERSIFIED FUTURES TRUST I

FINANCIAL STATEMENTS

September 30, 2009

 

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DIVERSIFIED FUTURES TRUST I

CONDENSED STATEMENTS OF FINANCIAL CONDITION

September 30, 2009 (Unaudited) and December 31, 2008

 

 

 

		September 30, 2009			December 31, 2008
ASSETS
Cash		$	38,370		$	29,574
Redemptions receivable from KMP Futures Fund I LLC			251,183			139,679
Investment in KMP Futures Fund I LLC, at fair value (99.72% and 100.05% of net asset value, respectively)			9,068,696			11,561,900
Receivable from Managing Owner			916			1,644
Total assets		$	9,359,165		$	11,732,797
LIABILITIES
Redemptions payable		$	251,128		$	139,702
Administrative services payable			13,999			36,869
Total liabilities			265,127			176,571
TRUST CAPITAL (Net Asset Value)
Limited Interests (40,129.012 and 43,969.385 Interests outstanding) at September 30, 2009 and December 31, 2008, respectively			9,094,038			11,438,896
General Interests (0 and 451 Interests outstanding) at September 30, 2009 and December 31, 2008, respectively			0			117,330
Total trust capital (Net Asset Value)			9,094,038			11,556,226
Total liabilities and trust capital		$	9,359,165		$	11,732,797

Net Asset Value per Limited and General Interest

 

September 30, 2009			December 31, 2008
$	226.62		$	260.16

See accompanying notes.

 

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DIVERSIFIED FUTURES TRUST I

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
NET LOSS FROM TRUST OPERATIONS
REVENUES
Interest income		$	0			$	56			$	0			$	88
Total revenues			0				56				0				88
EXPENSES
Administrative services			176,431				215,518				590,522				654,010
General and administrative			883				963				2,692				1,122
Total expenses			177,314				216,481				593,214				655,132
KMP Futures Fund I LLC administrative expenses borne by the Managing Owner and its affiliates			(2,780	)			(4,912	)			(10,760	)			(18,006	)
Net expenses			174,534				211,569				582,454				637,126
NET LOSS FROM TRUST OPERATIONS			(174,534	)			(211,513	)			(582,454	)			(637,038	)
NET INCOME (LOSS) ALLOCATED FROM KMP FUTURES FUND I LLC:
REVENUES
Realized			(97,605	)			(378,546	)			(702,808	)			1,605,780
Change in unrealized			255,640				(477,486	)			90,918				(239,855	)
Interest income			88				43,573				841				136,853
Total revenues (losses)			158,123				(812,459	)			(611,049	)			1,502,778
EXPENSES
Brokerage commissions and other transaction fees			3,431				4,469				10,510				15,461
Management fees			46,903				56,404				155,079				176,466
Incentive fees			0				0				169				409,087
General and administrative			30,609				12,885				73,612				59,340
Total expenses			80,943				73,758				239,370				660,354
NET INCOME (LOSS) ALLOCATED FROM KMP FUTURES FUND I LLC			77,180				(886,217	)			(850,419	)			842,424
NET INCOME (LOSS)		$	(97,354	)		$	(1,097,730	)		$	(1,432,873	)		$	205,386
NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND GENERAL INTEREST
Net income (loss) per weighted average Limited and General Interest		$	(2.39	)		$	(24.28	)		$	(34.12	)		$	4.47
Weighted average number of Limited and General Interests outstanding			40,683				45,203				41,997				45,921

See accompanying notes.

 

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DIVERSIFIED FUTURES TRUST I

CONDENSED STATEMENTS OF CHANGES IN TRUST CAPITAL

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Interests			Limited Interests				General Interests				Total
Nine months ended September 30, 2009
Trust capital at December 31, 2008		44,420.385			$	11,438,896			$	117,330			$	11,556,226
Redemptions		(4,291.373	)			(916,031	)			(113,284	)			(1,029,315	)
Net loss for the nine months ended September 30, 2009						(1,428,827	)			(4,046	)			(1,432,873	)
Trust capital at September 30, 2009		40,129.012			$	9,094,038			$	0			$	9,094,038
Nine months ended September 30, 2008
Trust capital at December 31, 2007		46,672.067			$	10,883,382			$	113,808			$	10,997,190
Redemptions		(1,714.689	)			(432,833	)			(6,931	)			(439,764	)
Net income for the nine months ended September 30, 2008						203,336				2,050				205,386
Trust capital at September 30, 2008		44,957.378			$	10,653,885			$	108,927			$	10,762,812

See accompanying notes.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. ORGANIZATION

A. General Description of the Trust

Diversified Futures Trust I (the “Trust”) was organized under the Delaware Statutory Trust Act on May 18, 1994 and will continue until December 31, 2020 unless terminated sooner under the provisions of the Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). The Trust was formed to engage in the speculative trading of commodity futures and forward contracts. The Trust’s trustee is Wilmington Trust Company.

Effective May 5, 2009, Preferred Investment Solutions Corp., the managing owner of the Trust, changed its name to Kenmar Preferred Investments Corp. (“Preferred” or the “Managing Owner”). Preferred or Managing Owner refers to either Preferred Investment Solutions Corp. or Kenmar Preferred Investments Corp., depending on the applicable period discussed. Effective December 1, 2008, the Trust Agreement no longer requires the Managing Owner to maintain a capital account equal to 1% of the total capital accounts of the Trust. As such, the Managing Owner redeemed its entire Interest in the Trust in 2009.

Should the Managing Owner make a determination that the Trust’s aggregate net assets in relation to its operating expenses make it unreasonable or imprudent to continue the business of the Trust, or, in the exercise of its reasonable discretion, if the aggregate Net Asset Value of the Trust as of the close of business on any business day declines below $10 million, the Managing Owner may dissolve the Trust.

Effective January 1, 2007, the Trust became a member of KMP Futures Fund I LLC (formerly known as WCM Pool LLC) (the “Company”) (See Note 9). Subject to its agreement with the Company, the Trust received a voting membership interest in the Company. The Company was formed to function as an aggregate trading vehicle. At September 30, 2009, the sole members of the Company are the Trust, Futures Strategic Trust (“FST”), World Monitor Trust II Series D (“Series D”) and World Monitor Trust II Series F (“Series F”) (See Note 9). Effective April 1, 2009, Series D and Series F received a voting membership interest in the Company. FST has been a member of the Company since 2007. Kenmar Global Trust (“KGT”) was a member of the Company from 2007 to September 2009. Effective September 30, 2009, KGT fully redeemed its membership interest from the Company. Preferred is the Managing Owner of FST, KGT, Series D and Series F and has been delegated administrative authority over the operations of the Company. The Company engages in the speculative trading of futures, forward and option contracts. The financial statements of the Company, including the condensed schedule of investments, are included in Section II of these financial statements and should be read in conjunction with the Trust’s financial statements.

B. Regulation

As a registrant with the Securities and Exchange Commission (“SEC”), the Trust is subject to the regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a commodity pool, the Trust is subject to the regulations of the Commodity Futures Trading Commission (“CFTC”), an agency of the U.S. government which regulates most aspects of the commodity futures industry; rules of the National Futures Association (“NFA”), an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Company executes transactions. Additionally, the Trust is subject to the requirements of the futures commission merchants (brokers) and interbank market makers through which the Company trades.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1. ORGANIZATION (CONTINUED)

 

C. The Offering

On January 5, 1995, the Trust completed its initial offering from the sale of limited interests (“Limited Interests”) and general interests (“General Interests”) (collectively, the “Interests”). General Interests were sold exclusively to the Managing Owner. Additional Interests were offered and sold monthly at the then current net asset value (“NAV”) per Interest until the continuous offering period expired on August 31, 1996.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The condensed statement of financial condition as of September 30, 2009, and the condensed statements of operations and condensed statements of changes in trust capital for the three months and nine months ended September 30, 2009 and 2008, are unaudited. In the opinion of Preferred, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of the Trust as of September 30, 2009 and the results of its operations for the three months and nine months ended September 30, 2009 and 2008. The operating results for the interim periods may not be indicative of the results expected for the full year.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Trust’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

The financial statements of the Trust are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

For the nine months ended September 30, 2009 and 2008, the Trust indirectly earned income or loss through its investment in the Company (See Note 5).

The weighted average number of Limited and General Interests outstanding was computed for purposes of disclosing net income (loss) per weighted average Limited and General Interest. The weighted average Limited and General Interests is equal to the number of Interests outstanding at period end, adjusted proportionately for Interests redeemed based on their respective time outstanding during such year.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

The Trust has elected not to provide a Statement of Cash Flows since substantially all of the Company’s investments are highly liquid and carried at fair value, the Company has little or no debt and a Statement of Changes in Trust Capital is provided.

Consistent with standard business practices in the normal course of business, the Trust has provided general indemnifications to the Managing Owner, the Company and others when they act, in good faith, in the best interests of the Trust. The Trust is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.

The Trust accounts for financial assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: quoted market prices in active markets for identical assets and liabilities (Level 1), inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (Level 2), and unobservable inputs for the asset or liability (Level 3).

The following table summarizes the assets and liabilities measured at fair value using the fair value hierarchy:

 

September 30, 2009		Level 1			Level 2			Level 3				Total
Assets:
Investment in KMP Futures Fund I LLC, at fair value		$	0		$	9,068,696		$	0			$	9,068,696
December 31, 2008		Level 1			Level 2			Level 3				Total
Assets:
Investment in KMP Futures Fund I LLC, at fair value		$	0		$	11,561,900		$	0			$	11,561,900
Transfers in (out)		$	0		$	11,561,900		$	(11,561,900	)		$	0

Investment classified as Level 2 and Level 3 represents the Trust’s investment in the Company and is valued monthly at the net asset value as reported by the Company. The Company’s net asset value is determined based upon its management’s best estimate of the fair value of its underlying net assets, substantially all of which are investments valued using Level 1 inputs but include certain assets and liabilities where the inputs into the determination of fair value require management judgment or estimation. Preferred determined that certain of the Company’s assets and liabilities which require management judgment or estimation were not material to the Trust’s financial statements and therefore, the Trust’s investment in the Company should be classified as Level 2 at December 31, 2008. A table presenting the changes in the Level 3 fair value categories for the nine months ended September 30, 2008 is included in Note 5 of these condensed financial statements. Of the $842,424 gain for the nine months ended September 30, 2008, reported on the Level 3 investment in Note 5, $(239,855) represents a change in unrealized loss allocated from the Company on the Trust’s condensed statement of operations.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance clarifying the application of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures.” The additional guidance provides for how the fair value of a financial asset is determined when the market for that financial asset is inactive. The guidance was effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. The Trust adopted the guidance effective January 1, 2009. As required, the Trust also adopted guidance relating to recognition and presentation of other-than-temporary impairments, effective January 1, 2009. The adoption of these pronouncements did not have an impact on the Trust’s financial statements.

In March 2008, the FASB issued accounting guidance which established among other things, the disclosure requirements for derivative instruments and for hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Trust’s adoption of the guidance effective January 1, 2009 did not have a material impact on the Trust’s financial statements.

Effective for the quarter ending June 30, 2009, the Trust adopted ASC Topic 855, “Subsequent Events” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of ASC Topic 855 did not have a material impact on the Trust’s financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for the Trust on January 1, 2010. Preferred, as Managing Owner of the Trust, is evaluating the impact of adopting SFAS 166 and its impact on the Trust’s financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for the Trust on January 1, 2010. Preferred, as Managing Owner of the Trust, is evaluating the impact of adopting SFAS 167 and its impact on the Trust’s financial statements.

Effective July 1, 2009, the Trust adopted ASC Topic 105, “Generally Accepted Accounting Principles”. ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change U.S. GAAP but reorganizes the existing literature into Topics. References for FASB guidance throughout this document have been updated for the Codification.

On September 30, 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (“ASU 2009-12”). ASU 2009-12 provides guidance on measuring the fair value of certain alternative investments, and amends ASC Topic 820 to offer investors a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share and require certain disclosures. ASU 2009-12 is effective for periods ending after December 15, 2009, and early adoption is permitted. Preferred, as Managing Owner of the Trust, is evaluating the impact this guidance will have on the Trust’s financial statements.

B. Cash

Cash represents amounts deposited with a bank. The Trust receives interest on all cash balances held by the bank at prevailing rates, as well as its pro rata share of interest income from the Company.

C. Income Taxes

The Trust is treated as a partnership for Federal income tax purposes. As such, the Trust is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the individual Interest holders. The Trust may be subject to other state and local taxes in jurisdictions in which it operates.

The Trust has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense. All tax years which are statutorily open are subject to examination by the appropriate taxing authorities.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

D. Investment in KMP Futures Fund I LLC (formerly known as WCM Pool LLC) (See Note 9)

The investment in the Company is reported in the Trust’s condensed statements of financial condition at the net asset value as reported by the Company. The Trust records its proportionate share of the Company’s income or loss in the condensed statements of operations. Valuation of futures, forward and option contracts by the Company is discussed in the notes to the Company’s financial statements included in Section II of this report. Through its investment in the Company, the Trust pays its pro-rata share of the 2% annual management fee (accrued and paid monthly) and a 20% incentive fee on “New High Net Trading Profits” (accrued monthly and paid quarterly) as defined in the advisory agreement.

E. Profit and Loss Allocation, Distributions and Redemptions

The Trust allocates profits and losses for both financial and tax reporting purposes to its Interest holders monthly on a pro rata basis based on each owner’s Interests outstanding during the month. Distributions (other than redemptions of Interests) are made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital accounts of the Interest holders. The Managing Owner has not and does not intend to make any distributions.

The Trust Agreement provides that an Interest holder may redeem its Interests as of the last business day of any calendar quarter at the then current NAV per Interest. Partial redemptions are permitted.

F. Foreign Currency Transaction

The Trust’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the condensed statements of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently under the caption realized on the condensed statements of operations.

G. Interest Income

Interest income is recorded on an accrual basis.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 3. FEES (SEE NOTE 9)

A. Organizational and General and Administrative Costs

Preferred pays all administrative costs for services it performs for the Trust. Administrative costs include, but are not limited to, those discussed in Note 4 below. Preferred also pays all routine legal, audit, postage and other third party costs of the Trust. The Company allocates general and administrative costs on a pro-rata basis down to the Trust which are paid for by the Trust through its investment in the Company. The Trust pays for its pro-rata allocation of expenses incurred by the Company except for the Spectrum Global Fund Administration administrative fee.

B. Management and Incentive Fees

The Trust pays its pro-rata share of management and incentive fees as disclosed in Note 2 through its investment in the Company.

C. Commissions

The Trust deducts the cost of its pro-rata share of commissions allocated from the Company in calculation of the Managing Owner’s 7.75% per annum administrative charge.

Note 4. RELATED PARTIES

The Managing Owner or third parties engaged by the Managing Owner perform services for the Trust which include, but are not limited to: accounting and financial management; registrar, transfer and assignment function; investor communications; printing and other administrative services. The Managing Owner pays all the costs of these services as well as the Trust’s routine operational, administrative, legal and auditing costs.

The costs and expenses charged to the Trust for services performed and/or paid for by the Managing Owner on behalf of the Trust for the three months and nine months ended September 30, 2009 and 2008 were:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
Administrative services		$	176,431		$	215,518		$	590,522		$	654,010

Expenses payable to the Managing Owner and its affiliates (which are included in administrative services payable less any receivable from the Managing Owner on the condensed statements of financial condition) as of September 30, 2009 and December 31, 2008 were $13,083 and $35,225, respectively.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 5. INVESTMENT IN THE COMPANY (SEE NOTE 9)

Effective January 1, 2007, the Trust invested its assets in the Company. The Trust’s investment in the Company represents approximately 36.25% and 71.68% of the net asset value of the Company at September 30, 2009 and December 31, 2008, respectively. The investment in the Company is subject to the Organization Agreement of the Company. The Company entered into an advisory agreement with Winton Capital Management (“Winton”) whereby Winton makes the trading decisions for the Company and, in turn, the Trust, pursuant to Winton’s Diversified Program.

The Trust records its proportionate share of each item of income and expense from the investment in the Company in the condensed statements of operations.

Summarized information for the Trust’s investment in the Company is as follows:

 

		Net Asset Value December 31, 2008			Loss*				Redemptions				Net Asset Value September 30, 2009
KMP Futures Fund I LLC		$	11,561,900		$	(850,419	)		$	(1,642,785	)		$	9,068,696
		Net Asset Value December 31, 2007			Gain*				Redemptions				Net Asset Value September 30, 2008
KMP Futures Fund I LLC		$	11,055,308		$	842,424			$	(1,126,568	)		$	10,771,164

*

Included in earnings and includes $90,918 and $(239,855), for the nine months ended September 30, 2009 and 2008 respectively, attributable to the change in unrealized gains (losses).

The Trust may make additional contributions to or redemptions from, the Company on a monthly basis.

Certain expenses allocated to the Trust from the Company are reimbursed by the Managing Owner at the Trust level.

Note 6. INCOME TAX REPORTING

There have been no differences between the tax basis and book basis of assets, liabilities or interest holders’ capital since inception of the Trust.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 7. DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS

The Trust’s investment in the Company is subject to the market and credit risks of the futures contracts, options on futures contracts, forward currency contracts and other financial instruments held or sold short by the Company. The Trust bears the risk of loss only to the extent of the market value of its investments and, in certain specific circumstances, distributions and redemptions received.

The Trust has cash on deposit with a financial institution. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protection afforded such deposits. The Managing Owner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Interest holders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.

The Trust’s futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Trust all assets of the Trust relating to domestic futures trading and is not to commingle such assets with its other assets. At September 30, 2009 and December 31, 2008, such segregated assets totaled $0 and $0, respectively. Part 30.7 of the CFTC regulations also requires the Trust’s futures commission merchant to secure assets of the Trust related to foreign futures trading which totaled $0 and $0 at September 30, 2009 and December 31, 2008, respectively. There are no segregation requirements for assets related to forward trading.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 8. FINANCIAL HIGHLIGHTS

The following information presents per Interest performance data and other supplemental financial data for the three months and nine months ended September 30, 2009 and 2008. This information has been derived from information presented in the financial statements.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Per Interest Performance
(for an Interest outstanding throughout the entire period)
Net asset value, beginning of period		$	228.98			$	263.64			$	260.16			$	235.63
Net realized and change in net unrealized gain (loss) on commodity transactions(1), (5)			3.92				(18.90	)			(13.99	)			29.04
Interest income(1), (5)			0.00				0.97				0.02				2.98
Expenses(1), (5)			(6.28	)			(6.31	)			(19.57	)			(28.25	)
Net increase (decrease) for the period			(2.36	)			(24.24	)			(33.54	)			3.77
Net asset value, end of period		$	226.62			$	239.40			$	226.62			$	239.40
Total Return(3)
Total return before incentive fees			(1.03	)%			(9.19	)%			(12.89	)%			5.18	%
Incentive fees			0.00	%			0.00	%			0.00	%			(3.58	)%
Total return after incentive fees			(1.03	)%			(9.19	)%			(12.89	)%			1.60	%
Supplemental Data
Ratios to average net asset value:(5)
Net investment loss before incentive fees(2), (4)			(11.02	)%			(8.63	)%			(10.76	)%			(8.76	)%
Incentive fees(3)			0.00	%			0.00	%			0.00	%			(3.58	)%
Net investment loss after incentive fees			(11.02	)%			(8.63	)%			(10.76	)%			(12.34	)%
Interest income(4)			0.00	%			1.56	%			0.01	%			1.60	%
Incentive fees(3)			0.00	%			0.00	%			0.00	%			3.58	%
Other expenses(4)			11.02	%			10.19	%			10.77	%			10.36	%
Total net expenses			11.02	%			10.19	%			10.77	%			13.94	%

Total returns are calculated based on the change in value of an Interest during the period. An individual Interest holder’s total returns and ratios may vary from the above total returns and ratios based on the timing of redemptions.

 

(1)

Interest income per Interest and expenses per Interest are calculated by dividing interest income and expenses by the weighted average number of Interests outstanding during the period. Net realized and change in net unrealized gain (loss) on commodity transactions is a balancing amount necessary to reconcile the change in net asset value per Interest with the other per Interest information.

(2)	Represents interest income less total expenses (exclusive of incentive fees).

(3)	Not annualized.

(4)	Annualized.

(5)	Includes the Trust’s proportionate share of income and expenses of KMP Futures Fund I LLC (formerly known as WCM Pool LLC) for the three months and nine months ended September 30, 2009 and 2008.

 

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DIVERSIFIED FUTURES TRUST I

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 9. SUBSEQUENT EVENT

The Managing Owner has evaluated events and transactions that occurred between September 30, 2009 and November 12, 2009, which is the date the financial statements were issued for possible disclosure or recognition in the financial statements. The Managing Owner has determined that there were no such events or transactions that warrant disclosure or recognition in the financial statements except as noted below.

On November 2, 2009, pursuant to Section 13.1(h) of the Trust Agreement, the Board of Directors of Preferred, in its capacity as managing owner of the Trust, determined to dissolve the Trust effective close of business on December 31, 2009. Investors in the Trust will receive a pro rata distribution of their interest in the Company on December 31, 2009 and replace it with a direct ownership interest in the Company on January 1, 2010. The Trust intends to file a Form 15 with the SEC on or about December 31, 2009 de-registering the units of the Trust registered under Section 12(g) of the Securities Exchange Act of 1934.

Management and incentive fees will continue to be calculated by the Company once it converts to a direct investment vehicle. In addition, administrative services fees payable to Preferred and any expense caps, if applicable, that were previously computed by each of the members will be calculated by the Company beginning January 1, 2010. The Company’s administrative services fees and expense cap will both be calculated on the net assets of the Company at rates of 6.00% and 1.50% per annum, respectively. Investors will continue to be able to redeem their units on a monthly basis with the proper redemption notification.

 

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SECTION II

 

 

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

FINANCIAL STATEMENTS

September 30, 2009

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

CONDENSED STATEMENTS OF FINANCIAL CONDITION

September 30, 2009 (Unaudited) and December 31, 2008

 

 

 

		September 30, 2009			December 31, 2008
ASSETS
Cash and cash equivalents (See Note 2)		$	25,048,859		$	19,431,990
Interest receivable			28			479
Commodity options owned, at fair value (premiums paid $150 and $0 at September 30, 2009 and December 31, 2008, respectively)			85			0
Net unrealized gain on open futures contracts			818,813			269,887
Total assets		$	25,867,785		$	19,702,356
LIABILITIES
Commodity options written, at fair value (premiums received $325 and $0 at September 30, 2009 and December 31, 2008, respectively)		$	210		$	0
Accrued expenses payable			99,385			38,738
Management fees payable			43,460			66,550
Incentive fees payable			0			100,116
Redemptions payable			705,795			3,367,541
Total liabilities			848,850			3,572,945
MEMBERS’ CAPITAL (Net Asset Value)
Member DFT I			9,068,696			11,561,900
Member KGT			0			638,493
Member FST			2,903,866			3,929,018
Member Series D			3,467,731			0
Member Series F			9,578,642			0
Total members’ capital (Net Asset Value)			25,018,935			16,129,411
Total liabilities and members’ capital		$	25,867,785		$	19,702,356

See accompanying notes.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

CONDENSED SCHEDULES OF INVESTMENTS

September 30, 2009 (Unaudited) and December 31, 2008

 

 

 

		September 30, 2009							December 31, 2008
		Net Unrealized Gain (Loss) as a % of Members’ Capital			Net Unrealized Gain (Loss)				Net Unrealized Gain (Loss) as a % of Members’ Capital			Net Unrealized Gain (Loss)
Futures Contracts
Futures contracts purchased:
Commodities		0.38	%		$	96,813			0.00	%		$	32
Currencies		1.26	%			314,994			0.20	%			31,725
Interest rates		1.64	%			410,560			2.32	%			375,048
Stock indicies		0.06	%			14,256			0.00	%			0
Net unrealized gain on futures contracts purchased		3.34	%			836,623			2.52	%			406,805
Futures contracts sold:
Commodities		(0.09	)%			(23,409	)		(0.27	)%			(43,517	)
Currencies		0.00	%			677			(0.58	)%			(92,971	)
Interest rates		0.01	%			1,869			0.00	%			(833	)
Stock indices		0.01	%			3,053			0.00	%			403
Net unrealized loss on futures contracts sold		(0.07	)%			(17,810	)		(0.85	)%			(136,918	)
Net unrealized gain on open futures contracts		3.27	%		$	818,813			1.67	%		$	269,887
		Fair Value as a % of Members’ Capital			Fair Value				Fair Value as a % of Members’ Capital			Fair Value
Purchased Options on Futures Contracts:
Fair value on options purchased		0.00	%		$	85			0.00	%		$	0
Commodity options owned, at fair value (premiums paid $150 and $0 at September 30, 2009 and December 31, 2008, respectively)		0.00	%		$	85			0.00	%		$	0
Written Options on Futures Contracts:
Fair value on options written		0.00	%			(210	)		0.00	%			0
Commodity options written, at fair value (premiums received $325 and $0 at September 30, 2009 and December 31, 2008, respectively)		0.00	%		$	(210	)		0.00	%		$	0

See accompanying notes.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2009				2008				2009				2008
REVENUES
Realized		$	(298,788	)		$	(648,743	)		$	(2,338,026	)		$	2,904,255
Change in unrealized			718,100				(829,889	)			548,976				(414,138	)
Interest income			247				74,715				1,343				241,861
Total revenues (losses)			419,559				(1,403,917	)			(1,787,707	)			2,731,978
EXPENSES
Brokerage commissions			9,690				7,649				26,197				27,327
Management fees			132,821				96,729				366,619				311,515
Incentive fees			0				0				593				730,712
Operating expenses			86,303				22,287				174,604				105,421
Total expenses			228,814				126,665				568,013				1,174,975
NET INCOME (LOSS)		$	190,745			$	(1,530,582	)		$	(2,355,720	)		$	1,557,003

See accompanying notes.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

CONDENSED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL (NET ASSET VALUE)

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Members’ Capital
		Member DFT I				Member KGT				Member FST				Member Series D				Member Series F				Total
Nine months ended September 30, 2009
Balances at December 31, 2008		$	11,561,900			$	638,493			$	3,929,018			$	0			$	0			$	16,129,411
Additions			0				0				0				4,887,000				14,195,000				19,082,000
Redemptions			(1,642,785	)			(608,162	)			(739,578	)			(1,107,422	)			(3,738,809	)			(7,836,756	)
Net loss for the nine months ended September 30, 2009			(850,419	)			(30,331	)			(285,574	)			(311,847	)			(877,549	)			(2,355,720	)
Balances at September 30, 2009		$	9,068,696			$	0			$	2,903,866			$	3,467,731			$	9,578,642			$	25,018,935

 

		Members’ Capital
		Member DFF LP				Member DFT I				Member KGT				Member FST				Total
Nine months ended September 30, 2008
Balances at December 31, 2007		$	3,165,178			$	11,055,308			$	1,732,978			$	4,196,579			$	20,150,043
Redemptions			(478,931	)			(1,126,568	)			(980,755	)			(875,398	)			(3,461,652	)
Net income for the nine months ended September 30, 2008			245,436				842,424				138,250				330,893				1,557,003
Balances at September 30, 2008		$	2,931,683			$	10,771,164			$	890,473			$	3,652,074			$	18,245,394

See accompanying notes.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. ORGANIZATION

A. General Description of the Company

KMP Futures Fund I LLC, formerly known as WCM Pool LLC (the “Company”), is a limited liability company organized under the laws of Delaware on November 20, 2006 which commenced operations on January 1, 2007. The Company will terminate on December 31, 2056 unless terminated sooner under the provisions of the Organization Agreement. The Company was formed to engage in the speculative trading of a diversified portfolio of futures contracts, options on futures contracts and forward currency contracts and may, from time to time, engage in cash and spot transactions. The Company currently consists of four members: Diversified Futures Trust I (“Member DFT I”), Futures Strategic Trust (“Member FST”), World Monitor Trust II Series D (“Member Series D”) and World Monitor Trust II Series F (“Member Series F”) (collectively, the “Members”). On April 1, 2009, Member Series D and Member Series F received a voting membership interest in the Company. Member DFT I and Member FST have been members of the Company since 2007. Diversified Futures Fund L.P. (“Member DFF LP”), also a member of the Company beginning in 2007, redeemed all of its membership interests in the Company and terminated its fund operations as of December 31, 2008. Kenmar Global Trust (“Member KGT”) was a member of the Company from 2007 to September 2009. Effective September 30, 2009, Member KGT fully redeemed from the Company.

Effective May 5, 2009, Preferred Investment Solutions Corp. changed its name to Kenmar Preferred Investments Corp. (“Preferred”). Preferred refers to either Preferred Investment Solutions Corp. or Kenmar Preferred Investments Corp., depending on the applicable period discussed. Preferred is the Managing Owner of each of the Company’s members and has been delegated administrative authority over the operations of the Company. The Company shall be dissolved by either an election by Preferred, in its sole discretion, to terminate the Company, or an election by all members holding eighty percent (80%) of the outstanding interests (excluding interests held by Preferred and its affiliates) to dissolve the Company.

The Company is a Member-managed limited liability company that is not registered in any capacity with, or subject directly to regulation by the Commodity Futures Trading Commission (“CFTC”) or the United States Securities and Exchange Commission (“SEC”).

Effective October 22, 2009, the Company changed its name to KMP Futures Fund I LLC. Preferred will convert the Company from an aggregate trading vehicle to a direct investment vehicle and dissolve each Member effective close of business on December 31, 2009. Investors’ units in the Members will be redeemed on December 31, 2009 and replaced with a direct ownership interest in the Company on January 1, 2010. Upon effectiveness of its registration statement, the Company will become a reporting company pursuant to the Securities Exchange Act of 1934. Moreover, as a commodity pool, the Company will become subject to the record keeping and reporting requirements of the CFTC and the National Futures Association (“NFA”). The Members will no longer be subject to the reporting requirements of the SEC and CFTC upon their dissolution on December 31, 2009.

B. The Trading Advisor

The Company operates under an advisory agreement with Winton Capital Management Limited (the “Trading Advisor”) to make the trading decisions for the Company. The Trading Advisor manages approximately 100% of the assets of the Company pursuant to its Diversified Program Portfolio.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The condensed statement of financial condition, including the condensed schedule of investments, as of September 30, 2009, and the condensed statements of operations and the condensed statements of changes in members’ capital (net asset value) for the three months and nine months ended September 30, 2009 and 2008, are unaudited. In the opinion of Preferred, such financial statements reflect all adjustments, (consisting of only normal recurring adjustments), necessary to state fairly the financial position of the Company as of September 30, 2009, and the results of operations for the three months and nine months ended September 30, 2009 and 2008. The operating results for these interim periods may not be indicative of the results expected for a full year.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Member’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which requires Preferred to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Commodity futures and foreign exchange transactions are reflected in the accompanying condensed statements of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) are offset when reflected in the financial statements since the contracts are executed with the same counter party under a master netting arrangement. The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The values which will be used by the Company for open forward and option positions will be provided by its administrator, who obtains market quotes from data vendors and third parties. Any change in net unrealized gain or loss during the current period is reported in the condensed statement of operations. Realized gains and losses on transactions are recognized in the period in which the contracts are closed. Brokerage commissions include other trading fees and are charged to expense when incurred.

The Company has elected not to provide a Statement of Cash Flows since substantially all of the Company’s investments are highly liquid and carried at fair value, the Company has little or no debt and a statement of changes in members’ capital (net asset value) is provided.

Consistent with standard business practices in the normal course of business, the Company has provided general indemnifications to its Trading Advisor and others when they act, in good faith, in the best interests of the Company. The Company is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

The Company accounts for financial assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: quoted market prices in active markets for identical assets and liabilities (Level 1), inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (Level 2), and unobservable inputs for the asset or liability (Level 3).

The Company considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by third-party data providers such as Bloomberg, Reuters, and or Super Derivatives who derive fair values for those assets from models with observable inputs (Level 2). There are no Level 3 investments on September 30, 2009 or December 31, 2008.

The following table summarizes the assets and liabilities measured at fair value using the fair value hierarchy:

 

September 30, 2009		Level 1			Level 2				Level 3			Total
Assets:
Net unrealized gain on open futures contracts		$	818,813		$	0			$	0		$	818,813
Commodity options owned, at fair value		$	0		$	85			$	0		$	85
Liabilities:
Commodity options written, at fair value		$	0		$	(210	)		$	0		$	(210	)
December 31, 2008		Level 1			Level 2				Level 3			Total
Assets:
Net unrealized gain on open futures contracts		$	269,887		$	0			$	0		$	269,887

In April 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance clarifying the application of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures.” The additional guidance provides for how the fair value of a financial asset or liability is determined when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. The guidance was effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. The Company adopted the guidance effective January 1, 2009. As required, the Company also adopted guidance relating to recognition and presentation of other-than-temporary impairments, effective January 1, 2009. The adoption of these pronouncements did not have an impact on the Company’s financial statements.

In March 2008, the FASB issued accounting guidance which established among other things, the disclosure requirements for derivative instruments and for hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the guidance effective January 1, 2009. The following table summarizes quantitative information required by the guidance.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

The fair value of the Company’s derivatives by instrument type, as well as the location of those instruments on the condensed statement of financial condition as of September 30, 2009 are included in the condensed schedule of investments, all of which are deemed derivatives not designated as hedging instruments under ASC Topic 815, “Derivatives and Hedging”.

The trading revenue of the Company’s derivatives by instrument type, as well as the location of those gains and losses on the condensed statements of operations, for the three and nine months ended September 30, 2009 is as follows:

 

		Trading Revenue for the Three Months Ended September 30, 2009				Trading Revenue for the Nine Months Ended September 30, 2009
Type of Instrument
Commodities Contracts		$	(33,666	)		$	(475,133	)
Currencies Contracts			392,923				(179,824	)
Interest Rate Contracts			474,744				(365,675	)
Stock Indices Contracts			(416,824	)			(771,190	)
Purchased Options on Futures Contracts			(2,058	)			(2,558	)
Written Options on Futures Contracts			4,193				5,330
Total		$	419,312			$	(1,789,050	)
Line item in Condensed Statements of Operations
Realized		$	(298,788	)		$	(2,338,026	)
Change in unrealized			718,100				548,976
Total		$	419,312			$	(1,789,050	)

Effective for the quarter ending June 30, 2009, the Company adopted ASC Topic 855, “Subsequent Events” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of ASC Topic 855 did not have a material impact on the Company’s financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for the Company on January 1, 2010. Preferred is evaluating the impact of adopting SFAS 166 and its impact on the Company’s financial statements.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for the Company on January 1, 2010. Preferred is evaluating the impact of adopting SFAS 167 and its impact on the Company’s financial statements.

Effective July 1, 2009, the Company adopted ASC Topic 105, “Generally Accepted Accounting Principles.” ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with US GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. The Codification did not change US GAAP but reorganizes the existing literature into Topics. References for FASB guidance throughout this document have been updated for the Codification.

On September 30, 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (“ASU 2009-12”). ASU 2009-12 provides guidance on measuring the fair value of certain alternative investments, and amends ASC Topic 820 to offer investors a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share and require certain disclosures. ASU 2009-12 is effective for periods ending after December 15, 2009, and early adoption is permitted. Preferred is evaluating the impact this guidance will have on the Company’s financial statements.

B. Cash and Cash Equivalents

Cash represents amounts deposited with a bank and clearing broker, a portion of which is restricted for purposes of meeting margin requirements, which typically range from 0% to 35% of the notional amounts of the derivatives traded. As of September 30, 2009 and December 31, 2008, restricted cash totaled $1,997,013 and $670,420, respectively. The Company receives interest at prevailing interest rates on all cash balances held by the clearing broker and bank.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

C. Income Taxes

The Company is treated as a partnership for Federal income tax purposes. As such, the Company is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the Members. The Company may be subject to other state and local taxes in jurisdictions in which it operates.

The Company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense. All tax years which are statutorily open are subject to examination by the appropriate taxing authorities.

D. Capital Accounts

The Company accounts for subscriptions, allocations and redemptions on a per member capital account basis.

The Company allocates profits and losses, prior to calculation of the incentive fee, for both financial and tax reporting purposes to its Members monthly on a pro rata basis based on each Member’s pro rata capital in the Company during the month. Each Member is then charged with the applicable incentive fee. Distributions (other than redemptions of capital) may be made at the sole discretion of the Members on a pro rata basis in accordance with the Members’ respective capital balances. The Company has not and does not presently intend to make any distributions.

E. Foreign Currency Transactions

The Company’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the condensed statements of financial condition. Income and expense items denominated in currencies other than U.S. dollars are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently under the caption realized in the condensed statements of operations.

F. Interest Income

Interest income is recorded on an accrual basis.

Note 3. FEES (SEE NOTE 10)

A. Operating Expenses

Operating expenses of the Company are paid for by the Company.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 3. FEES (SEE NOTE 10) (CONTINUED)

 

B. Management and Incentive Fees

The Company pays the Trading Advisor a management fee at an annual rate of 2% of the Company’s Net Assets determined as of the close of business each month. For purposes of determining the management fee, any distributions, redemptions or reallocation of assets made as of the last day of the month shall be added back to the assets and there shall be no reduction for (i) the management fees calculated or (ii) any accrued but unpaid incentive fees due the Trading Advisor.

Additionally, the Company pays the Trading Advisor a quarterly incentive fee of 20% (the “Incentive Fee”) of “New High Net Trading Profits” (as defined in the Advisory Agreement). For the nine months ended September 30, 2009 and 2008, the Trading Advisor earned incentive fees of $593 and $730,712, respectively, of which $0 remains payable at September 30, 2009.

C. Commissions

The Company is obligated to pay all floor brokerage expenses, give-up charges and National Futures Association clearing and exchange fees incurred in connection with the Company’s commodity trading activities.

Note 4. RELATED PARTIES

The Company reimburses Preferred for services it performs for the Company, which include, but are not limited to: management, accounting, printing, and other administrative services.

The expenses incurred by the Company for services performed by Preferred for the Company for the three months and nine months ended September 30, 2009 and 2008 were:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2009			2008			2009			2008
General and administrative		$	25,847		$	6,505		$	42,927		$	16,870

Expenses payable to Preferred and its affiliates (which are included in accrued expenses payable on the condensed statements of financial condition) as of September 30, 2009 and December 31, 2008 were $25,847 and $7,480, respectively.

Note 5. INCOME TAXES

There have been no differences between the tax basis and book basis of assets, liabilities or members’ capital since inception of the Company.

Note 6. DEPOSITS WITH COMMODITY BROKER, PRIME BROKER AND BANK

The Company deposits funds with a commodity broker subject to CFTC regulations and various exchange and commodity broker requirements. Margin requirements are satisfied by the deposit of cash with such commodity broker. The Company earns interest income on assets deposited with the commodity broker.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 6. DEPOSITS WITH COMMODITY BROKER, PRIME BROKER AND BANK (CONTINUED)

 

The Company also deposits funds with a prime broker. Margin requirements are satisfied by the deposit of cash with such prime broker. The Company earns interest income on assets deposited with its prime broker. The Company also earns interest on funds deposited with JP Morgan Chase Bank Nassau branch.

Note 7. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS

Investments in the Company are made subject to the terms of the Organization Agreement.

The Company is not required to make distributions, but could do so at the discretion of the Members. A Member can request and receive redemption of capital, subject to the terms in the Organization Agreement.

Note 8. DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS

The Company has cash on deposit with financial institutions. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protection afforded such deposits.

The Company is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Company’s investment activities (credit risk).

Market Risk

Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Company’s net assets being traded, significantly exceeds the Company’s future cash requirements since the Company intends to close out its open positions prior to settlement. As a result, the Company is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, the Company considers the “fair value” of its derivative instruments to be the net unrealized gain or loss on the contracts.

The market risk associated with the Company’s commitments to purchase commodities is limited to the gross or face amount of the contract held. However, when the Company enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Company to unlimited risk. In addition, as both a buyer and seller of options, the Company pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Company to potentially unlimited liability, and purchased options expose the Company to a risk of loss limited to the premiums paid.

Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments the Company holds and the liquidity and inherent volatility of the markets in which the Company trades.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 8. DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

Credit Risk

When entering into futures, forward and option contracts, the Company is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions entered into by the Company, as the Company’s forward broker is the sole counterparty. The Company has entered into a master netting agreement with its forward broker and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the condensed statements of financial condition. The amount at risk associated with counterparty non-performance of all of the Company’s contracts is the net unrealized gain or loss included in the condensed statements of financial condition; however, counterparty non-performance on only certain of the Company’s contracts may result in greater loss than non-performance on all of the Company’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Company.

Preferred attempts to minimize both credit and market risks by requiring the Company and its Trading Advisor to abide by various trading limitations and policies. Preferred monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.

Additionally, pursuant to the Advisory Agreement among the Company, Preferred and the Trading Advisor, the Company shall automatically terminate the Trading Agreement, if the net asset value allocated to the Trading Advisor declines by 40% from the value at the beginning of any year or since the effective date of the Advisory Agreement. The decline in net asset value is after giving effect for distributions, subscriptions and redemptions.

The Company’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Company all assets of the Company relating to domestic futures trading and is not allowed to commingle such assets with its other assets. At September 30, 2009 and December 31, 2008, such segregated assets totaled $20,628,944 and $12,595,893, respectively, which are included in cash and cash equivalents on the condensed statements of financial condition. Part 30.7 of the CFTC regulations also requires the Company’s futures commission merchant to secure assets of the Company related to foreign futures trading which totaled $200,999 and $1,274,591 at September 30, 2009 and December 31, 2008, respectively. There are no segregation requirements for assets related to forward trading.

As of September 30, 2009, all open futures contracts mature within twenty-seven months.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 9. FINANCIAL HIGHLIGHTS

The following information presents the financial highlights of the Company for the three months and nine months ended September 30, 2009 and 2008. This information has been derived from information presented in the financial statements.

 

		Three Months Ended September 30, 2009 (Unaudited)															Nine Months Ended September 30, 2009 (Unaudited)
		Member DFT I			Member KGT(6)			Member FST			Member Series D			Member Series F			Member DFT I			Member KGT(6)			Member FST			Member Series D(5)			Member Series F(5)
Total return:(1), (4)
Total return before incentive fee		0.85	%		0.85	%		0.85	%		0.85	%		0.85	%		(7.78	)%		(7.78	)%		(7.78	)%		(6.27	)%		(6.27	)%
Incentive fee		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.01	%		0.01	%		0.01	%		0.00	%		0.00	%
Total return after incentive fee		0.85	%		0.85	%		0.85	%		0.85	%		0.85	%		(7.77	)%		(7.77	)%		(7.77	)%		(6.27	)%		(6.27	)%
Ratios to average net asset values:
Expenses prior to incentive fee(2)		3.51	%		4.10	%		3.53	%		3.53	%		3.54	%		3.12	%		3.27	%		3.13	%		3.18	%		3.18	%
Incentive fee(1)		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.07	%		0.01	%		0.00	%		0.00	%
Total expenses and incentive fee		3.51	%		4.10	%		3.53	%		3.53	%		3.54	%		3.12	%		3.34	%		3.14	%		3.18	%		3.18	%
Net investment loss(2), (3)		(3.51	)%		(4.09	)%		(3.52	)%		(3.52	)%		(3.54	)%		(3.11	)%		(3.26	)%		(3.12	)%		(3.18	)%		(3.18	)%

Total returns are calculated based on the change in value of Members’ capital during the period. An individual Member’s total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.

 

(1)	Not annualized.

(2)	Annualized.

(3)	Represents interest income less total expenses (exclusive of incentive fee).

(4)	Includes realized and unrealized gains (losses) on securities transactions.

(5)	Member Series D and Member Series F contributed their net assets to the Company effective April 1, 2009.

(6)	Member KGT redeemed all of its membership interest in the Company as of September 30, 2009.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 9. FINANCIAL HIGHLIGHTS (CONTINUED)

 

		Three Months Ended September 30, 2008 (Unaudited)												Nine Months Ended September 30, 2008 (Unaudited)
		Member DFF LP(5)			Member DFT I			Member KGT			Member FST			Member DFF LP(5)			Member DFT I			Member KGT			Member FST
Total return(1), (4)
Total return before incentive fees		(7.43	)%		(7.43	)%		(7.43	)%		(7.43	)%		10.98	%		10.98	%		10.98	%		10.98	%
Incentive fees		0.00	%		0.00	%		0.00	%		0.00	%		(3.67	)%		(3.67	)%		(3.68	)%		(3.67	)%
Total return after incentive fees		(7.43	)%		(7.43	)%		(7.43	)%		(7.43	)%		7.31	%		7.31	%		7.30	%		7.31	%
Ratios to average net asset values:
Expenses prior to incentive fees(2)		2.64	%		2.63	%		2.81	%		2.63	%		2.93	%		2.92	%		3.06	%		2.95	%
Incentive fees(1)		0.00	%		0.00	%		0.00	%		0.00	%		3.62	%		3.57	%		4.10	%		3.63	%
Total expenses and incentive fees		2.64	%		2.63	%		2.81	%		2.63	%		6.55	%		6.49	%		7.16	%		6.58	%
Net investment loss(2), (3)		(1.08	)%		(1.08	)%		(1.19	)%		(1.08	)%		(1.34	)%		(1.33	)%		(1.39	)%		(1.35	)%

Total returns are calculated based on the change in value of Members’ capital during the period. An individual Member’s total returns and ratios may vary from the above total returns and ratios based on the timing of redemptions.

 

(1)	Not annualized.

(2)	Annualized.

(3)	Represents interest income less total expenses (exclusive of incentive fees).

(4)	Includes realized and unrealized gains (losses) on securities transactions.

(5)	Member DFF LP redeemed all of its membership interest in the Company and terminated its fund operations as of December 31, 2008.

 

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KMP FUTURES FUND I LLC (formerly known as WCM POOL LLC)

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 10. SUBSEQUENT EVENT

Preferred has evaluated events and transactions that occurred between September 30, 2009 and November 12, 2009, which is the date the financial statements were issued, for possible disclosure or recognition in the financial statements. Preferred has determined that there were no such events or transactions that warrant disclosure or recognition in the financial statements except as noted below.

In connection with the change of name and change to a direct investment vehicle (See Note 1A), management and incentive fees will continue to be calculated by the Company once it converts to a direct investment vehicle. In addition, administrative services fees payable to Preferred and any expense caps, if applicable, that were previously computed by each of the Members will be calculated by the Company beginning January 1, 2010. The Company’s administrative services fees and expense cap will both be calculated on the net assets of the Company at rates of 6.00% and 1.50% per annum, respectively. Investors will continue to be able to redeem their units on a monthly basis with the proper redemption notification.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report on Form 10-Q (the “Report”) for the quarter ending September 30, 2009 (“Third Quarter 2009”) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments Corp., the managing owner of Diversified Futures Trust I (“Registrant”), about the future results, performance, prospects and opportunities of Registrant. The managing owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “should,” “estimate” or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the managing owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause Registrant’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the managing owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

General

Registrant, a Delaware business trust, was organized under the Delaware Statutory Trust Act on May 18, 1994 and will terminate on December 31, 2020 unless terminated sooner under the provisions of the Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). Registrant’s trustee is Wilmington Trust Company. Registrant was formed to engage in the speculative trading of commodity futures, forwards and option contracts. Registrant’s fiscal year for book and tax purposes ends on December 31.

Registrant is engaged solely in the business of commodity futures, forward and option trading; therefore, presentation of industry segment information is not applicable.

Managing Owner and its Affiliates

Effective May 5, 2009, Preferred Investment Solutions Corp. changed its name to Kenmar Preferred Investments Corp. (“Preferred” or the “Managing Owner”). Preferred or Managing Owner refers to either Preferred Investment Solutions Corp. or Kenmar Preferred Investments Corp., depending on the applicable period discussed.

Preferred has been the managing owner of Registrant since October 1, 2004.

Effective December 1, 2008, the Trust Agreement no longer requires the Managing Owner to maintain a capital account equal to 1% of total capital accounts of the Registrant. As such, the Managing Owner redeemed its entire Interest in the Registrant in 2009.

The Trading Advisor and the Trading Vehicle

Effective January 1, 2007, Registrant became a member of and allocated all of its assets to KMP Futures Fund I LLC (formerly known as WCM Pool LLC) (the “Trading Vehicle”), a Delaware limited liability company, and received a voting membership interest in the Trading Vehicle and became party to the Trading Vehicle’s Organization Agreement. The Trading Vehicle was formed to function as an aggregate trading vehicle for its members. At September 30, 2009, the sole members of the Trading Vehicle are the Registrant, Futures Strategic Trust, World Monitor Trust II – Series D and World Monitor Trust II – Series F. Effective April 1, 2009, World Monitor Trust II – Series D and World Monitor Trust II – Series F received a voting membership interest in the Trading Vehicle. All other members as of September 30, 2009 have had a voting membership interest in the Trading Vehicle since 2007. Kenmar Global Trust (“KGT”) maintained a voting membership interest in the Trading Vehicle from 2007 to Third Quarter 2009. Effective September 30, 2009, KGT fully redeemed its membership interest from the Trading Vehicle. Preferred is the Managing Owner of each of these Trading Vehicle members and has been delegated administrative authority over the operations of the Trading Vehicle. The Trading Vehicle engages in the speculative trading of futures, forwards and option contracts. The financial statements of the Trading Vehicle, including the condensed schedule of investments, are included in Section II of Registrant’s financial statements, and should be read in conjunction with Registrant’s financial statements.

 

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The Trading Vehicle has entered into an advisory agreement (the “Trading Vehicle Advisory Agreement”) with Winton Capital Management Limited (“Winton”), whereby Winton makes the trading decisions for the Trading Vehicle and, in turn, Registrant, pursuant to Winton’s Diversified Program. The Advisory Agreement may be terminated for various reasons, including at the discretion of the Trading Vehicle. Registrant has allocated 100% of the proceeds from the initial and continuous offering of Registrant to the Trading Vehicle. Registrant, through its investment in the Trading Vehicle, pays a monthly management fee equal to 0.16667% (2% annually) of the assets allocated to the Trading Advisor. Registrant, through its investment in the Trading Vehicle, pays Winton an incentive fee of 20% of “New High Net Trading Profits” (as defined in the Advisory Agreement) generated by the Trading Vehicle. Incentive fees will accrue monthly and be paid quarterly in arrears.

The term “Trading Advisor”, as used herein, refers to Winton. The term “Trading Advisor Agreement”, as used herein, refers to the Trading Vehicle Advisory Agreement.

Competition

The Managing Owner and its affiliates have formed, and may continue to form, various entities to engage in the speculative trading of futures, forward and option contracts that have certain of the same investment policies as Registrant.

Registrant does not currently, and does not intend in the future to, solicit the sale of additional Interests. As such, Registrant does not compete with other entities to attract new fund participants. However, to the extent that the Trading Advisor recommends similar or identical trades to Registrant and other accounts that it manages, Registrant may compete with those accounts, as well as with other market participants, for the execution of the same or similar trades.

Employees

Registrant has no employees. Management and administrative services for Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3 and 4 of Registrant’s financial statements included in its annual report for the year ended December 31, 2008 (“Registrant’s 2008 Annual Report”), which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

Critical Accounting Policies

Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the application of appropriate accounting rules and guidance. Applying these policies requires the Managing Owner to make judgments, estimates and assumptions in connection with the preparation of Registrant’s financial statements. Actual results may differ from the estimates used.

The Managing Owner has evaluated Registrant’s financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For a further discussion of Registrant’s significant accounting policies, see Note 2 to Registrant’s financial statements for the year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

The valuation of Registrant’s investments that are not traded on a United States (“US”) or internationally recognized futures exchange is a critical accounting policy. The market values of futures (exchange traded) contracts is verified by Registrant’s administrator, which obtains valuation data from third party data providers such as Bloomberg, Reuters and/or Super Derivatives and compares those prices with Registrant’s clearing broker. The market value of currency swap and forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices quoted as of 4 pm on the last business day of the reporting period. All values assigned by the administrator and confirmed by the Managing Owner are final and conclusive as to all of Registrant’s Unitholders.

 

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As such, if actual results vary from estimates used, they are not anticipated to have a material impact on the financial statements and related disclosures.

Registrant records all investments at fair value in its financial statements, with changes in fair value reported as a component of Revenues—Unrealized in the Condensed Statements of Operations. Registrant considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps, and certain option contracts for which market quotations are not readily available are priced by third party data providers such as Bloomberg, Reuters and/or Super Derivatives who derive fair values for those assets from observable inputs (Level 2). Level 3 inputs reflect Registrant’s assumptions that it believes market participants would use in pricing the asset or liability. Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or Registrant’s proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data.

Of the Registrant’s investment at September 30, 2009, $0 or 0.00% is classified as Level 1 or Level 3 and $9,068,696 or 100.00% is classified as Level 2 using the fair value hierarchy. Of the Registrant’s investment at December 31, 2008, $0 or 0.00% is classified as Level 1 or Level 3 and $11,561,900 or 100.00% is classified as Level 2 using the fair value hierarchy.

Investment classified as Level 2 and Level 3 represent the Registrant’s investment in the Trading Vehicle and is valued monthly at the net asset value as reported by the Trading Vehicle. The Trading Vehicle’s net asset value is determined based upon its management’s best estimate of the fair value of its underlying net assets, substantially all of which are investments valued using Level 1 inputs but include certain assets and liabilities where the inputs into the determination of fair value require management judgment or estimation. The Managing Owner determined that certain of the Trading Vehicle’s assets and liabilities which require management judgment or estimation were not material to Registrant’s financial statements and therefore Registrant’s investment in the Trading Vehicle should be classified as Level 2 at December 31, 2008. A table presenting the changes in the Level 3 fair value category for the nine months ended September 30, 2008 is provided in Note 5 of Registrant’s financial statements. Of the $842,424 gain for the nine months ended September 30, 2008 reported as Level 3 investments in Note 5, $(239,855) represents a change in unrealized loss allocated from the Trading Vehicle on Registrant’s condensed statement of operations.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance clarifying the application of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures.” The additional guidance provides for how the fair value of a financial asset is determined when the market for that financial asset is inactive. The guidance was effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. The Registrant adopted the guidance effective January 1, 2009. As required, the Registrant also adopted guidance relating to recognition and presentation of other-than-temporary impairments, effective January 1, 2009. The adoption of these pronouncements did not have an impact on the Registrant’s financial statements.

In March 2008, the FASB issued accounting guidance which established among other things, the disclosure requirements for derivative instruments and for hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Registrant’s adoption of the guidance effective January 1, 2009 did not have a material impact on the Registrant’s financial statements.

Effective for the quarter ending June 30, 2009, the Registrant adopted ASC Topic 855, “Subsequent Events” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of ASC Topic 855 did not have a material impact on the Registrant’s financial statements.

In June 2009, the FASB issued Statements of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a

 

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variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is effective for the Registrant on January 1, 2010. The Managing Owner is evaluating the impact of adopting SFAS 167 and its impact on the Registrant’s financial statements.

Effective July 1, 2009, the Registrant adopted ASC Topic 105, “Generally Accepted Accounting Principles.” ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change U.S. GAAP but reorganizes the existing literature into Topics. References for FASB guidance throughout this document have been updated for the Codification.

On September 30, 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (“ASU 2009-12”). ASU 2009-12 provides guidance on measuring the fair value of certain alternative investments, and amends ASC Topic 820 to offer investors a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share and require certain disclosures. ASU 2009-12 is effective for periods ending after December 15, 2009, and early adoption is permitted. The Managing Owner is evaluating the impact of adopting ASU 2009-12 and its impact on the Registrant’s financial statements.

Liquidity and Capital Resources

Registrant commenced operations on January 5, 1995 with gross proceeds of $25,262,800 allocated to commodities trading. Additional contributions raised through the continuous offering of limited interests (“Limited Interests”) and general interests (“General Interests” and, together with the Limited Interests, “Interests”) of beneficial ownership in Registrant through August 31, 1996 resulted in additional gross proceeds to Registrant of $41,129,100. The continuous offering period ended on August 31, 1996.

For Third Quarter 2009, the period January 1, 2009 to September 30, 2009 (“Year-To-Date 2009”), the period July 1, 2008 to September 30, 2008 (“Third Quarter 2008”) and the period January 1, 2008 to September 30, 2008 (“Year-To-Date 2008”) there were no subscriptions of Limited Interests or General Interests.

Interests in Registrant may be redeemed on a quarterly basis. Redemptions of Limited Interests for Third Quarter 2009 and Year-To-Date 2009 were $251,128 and $916,031, respectively. Redemptions of Limited Interests for Third Quarter 2008 and Year-To-Date 2008 were $75,047 and $432,833, respectively.

Redemptions of General Interests for Third Quarter 2009 and Year-To-Date 2009 were $0 and $113,284, respectively. Redemptions of General Interests for Third Quarter 2008 and Year-To-Date 2008 were $3,352 and $6,931, respectively.

Future redemptions will impact the amount of funds available for investment in commodity contracts in subsequent periods.

At September 30, 2009, 99.72% of Registrant’s net assets were allocated to commodities trading through its investment in the Trading Vehicle. A significant portion of Registrant’s net assets invested in the Trading Vehicle was held in cash, which was used as margin for trading in commodities. In as much as the sole business of Registrant is to trade in commodities (through its investment in the Trading Vehicle), Registrant continues to own such liquid assets to be used as margin. The clearing broker and bank credit the Trading Vehicle (and, in turn, Registrant, as a member of the Trading Vehicle) with interest income on 100% of its average daily equity maintained in its accounts with the clearing broker and bank during each month at competitive interest rates.

The commodities contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have

 

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occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Trading Vehicle (and, in turn, Registrant) from promptly liquidating its commodity futures positions.

Since Registrant’s business is to trade futures, forward and option contracts (through its investment in the Trading Vehicle), its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond Registrant’s experience to date and could ultimately lead to a loss of all or substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Registrant, the Trading Vehicle and the Trading Advisor to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. For a further discussion of the credit and market risks associated with Registrant’s futures, forward and option contracts through its investment in the Trading Vehicle, see Note 7 to Registrant’s financial statements for the year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

Registrant does not have, nor does it expect to have, any capital assets.

Market Overview

Following is a market overview for Third Quarter 2009 and Third Quarter 2008:

Third Quarter 2009

The National Bureau of Economic Research is likely mark the third quarter of 2009 as the beginning of the recovery in the US economy. Gross Domestic Product data for the quarter will not be published until later in October, but based on other data released to date, it is clear that economic growth picked up nicely in the quarter. The stimulus packages made their full impact during the quarter and the cash-for-clunkers program gave a further boost to the economy. More importantly, the US housing market, which had been at the epicenter of the current downturn, showed tentative signs of building on the modest gains of the previous quarter, aided by the $8,000 first time homebuyer credit. The latest Case-Shiller Housing Index indicated that home prices and existing and new home sales both recorded decent gains during the quarter. However, the labor market remained in the doldrums. While the pace of job losses slowed, they continued at levels that almost matched the peak of the previous recession and the unemployment rate marched relentlessly up to 9.8%. The current downturn now ranks as the worst among all postwar recessions in terms of percentage job losses.

Despite the indications of economic recovery and the growing risk appetite, US Treasury yields rallied during the quarter on the back of weak and falling inflation figures, robust demand at auctions, and the Federal Reserve’s (the “Fed”) quantitative easing program. The 10-year yield fell to end the quarter at 3.31%. The Fed kept rates unchanged through the quarter. However, at its September meeting, the Federal Open Market Committee, while reiterating its support for near zero rate policy, offered a slightly hawkish nuance, reflecting the growing discomfort among the “hawks” at the Fed. The European Central Bank, the Bank of England and the Bank of Japan kept key rates unchanged through the quarter as well. As in the US, market participants feel that the worst appears to be over across the globe.

The US dollar experienced another losing quarter, with the Dollar Index declining approximately 4%. The increased appetite for risk and the growing global discomfort with the massive monetary and fiscal policy stimuli weighed on the dollar. The British pound was the only major currency to lose ground to the US dollar during the quarter, again reflecting the global unease with massive fiscal stimulus and quantitative easing. The euro finished the third quarter up approximately 4% on the dollar. More surprising was the near 7% gain in the Japanese yen, in a quarter in which risk assets surged and Japan’s economy remained weak in comparison to its developed market peers.

Coming on the heels of what was already the best quarter in over 10 years for the S&P 500, it was remarkable that the third quarter gain was as strong as the second quarter gain. In fact, the second and third quarter 2009 combined percentage change in the S&P 500 was the largest two quarter upswing since 1975 and the second largest in the entire postwar era. Financials led the way, but the rally was broad based. The gains in the other US

 

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indices were equally impressive, with the NASDAQ recording its largest two-quarter rise since the peak of the Dotcom Bubble in 2000. The Dow Jones Industrial Average, S&P 500 and NASDAQ rose approximately 15%, 15% and 16%, respectively, for the quarter. The third quarter was even better for Europe, where the gains exceeded those in the previous quarter. The STOXX 600, a broad measure of European equities, rose approximately 18% during the quarter. The CAC, FTSE 100, and DAX closed the quarter with near 20% gains. Asian markets rose as well, but the performance was more mixed. While the Korean Kospi jumped 20% and the Hang Seng registered a solid 14% gain, the Nikkei only managed a modest 2% rise. The Australian All Ordinaries Index posted a 20% increase.

Crude oil had a basically flat quarter, ending the period up approximately 1%. Rising economic optimism and dollar weakness were offset by reports of plentiful crude inventory and continued soft demand. Natural gas surged approximately 26%, but the bottom line masks the drama during the quarter. Natural gas suffered an 18% decline in August and fell to a seven-year low in early September. However, it recovered sharply in September on the back of stronger economic data, lower-than-expected inventory reports, expectations of lower winter temperatures, and short covering. Heating oil ended the quarter with an approximate 5% gain. Reformulated gasoline had a weak quarter, declining approximately 9%, as demand recovery remained elusive.

As the economic recovery gained ground in the third quarter, incipient fears of soaring inflation down the road spurred the demand for gold even as flight-to-safety demand dwindled during the third quarter. The yellow metal posted an approximate 9% gain in the third quarter. Also, reserve diversification by China and others may well be supporting gold. Silver surged up approximately 22% with the twin engines of investment demand and industrial demand firing. Base metals witnessed overall gains across the board in the quarter as global industrial production, especially auto production, turned up smartly. Copper and zinc finished up the quarter with both realizing overall gains greater than 20%.

Pork bellies, which had suffered a collapse in the second quarter following the ban on US pork products emanating from H1N1 Influenza (Swine Flu) fears, recovered sharply in the third quarter, registering an approximate 50% increase as some countries lifted the ban. Cotton prices continued their upward march during the quarter, rising approximately 15%. Wheat and soybeans fell sharply as initial fears of bad weather did not pan out and the USDA planting reports indicated solid harvests. Soybeans, wheat and corn posted losses of 24%, 10%, and 1%, respectively. Sugar continued its parabolic rise in the third quarter, skyrocketing approximately 43% following a 32% surge in the second quarter. The worst drought in more than two decades in India, the world’s largest consumer of sugar and the biggest swing factor in global markets, propelled sugar to its highest level since 1981. Hopes of stronger consumer spending fueled by the global economic recovery lifted cocoa prices by over 25% in the quarter. Coffee also registered a solid quarter, gaining approximately 7%.

Third Quarter 2008

Clearly, the financial crisis gripping the nation is resonating throughout all corners of the economy and the effects will be felt for some time to come. Consumers have already cut back spending dramatically but more retrenchment can be expected in response to worsening job and income prospects as well as the growing wealth destruction that has taken place in recent months. There is no longer any doubt that the economy is mired in a recession; the only question is how deep and long it will be. Economists are crossing their fingers that the downturn will be no worse than the last two mild recessions in 1990-91 and 2001. However, many believe that conditions will be at least as bad as they were during the worst post-war recessions, which occurred in 1980-81 and 1973-74. The credit crisis got worse with each passing day, despite huge Federal Reserve liquidity additions, a $700 billion bailout package and numerous other measures. The “broker dealer,” as once known, basically ceased to exist as Goldman Sachs, Merrill Lynch, Morgan Stanley and others changed structure to essentially become “banks”. The economic data flow in the US can only be described as feeble and promises to get even weaker. In the US, housing, employment and manufacturing data were all anemic throughout the third quarter of 2008 with many indications of worse to come.

A strengthening US dollar throughout the quarter added to demand for US Treasuries as well as flight-to-safety support. After seeing their largest monthly yield declines since February in the month of August, Treasury yields saw further erosion in September. The benchmark 10-Year Note saw its yield fall approximately 20 basis points during the quarter and the 2-Year yield dipped by roughly 70 basis points as the yield curve experienced a severe steepening. Central banks kept rates unchanged throughout the third quarter but in early October they collaboratively cut key rates in response to the global credit crisis. During the quarter, the Federal Reserve, Bank of England, European Central Bank and others injected huge amounts of liquidity into the markets.

 

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Currencies: The Dollar Index, which measures the US unit against a basket of other currencies, ended the quarter up overall and up 3.7% for the year. Among the majors, the euro and pound were particularly weak in September as the UK and the Eurozone experienced severe economic problems to go along with a burgeoning credit crisis. The British pound slipped to a 2-year low against the US dollar as the UK suffered recessionary-like conditions, including a 12.4% year-to-date drop in housing prices. The euro scored an all-time high in July, but from the peak it was all downhill as the euro slumped badly in August and September to close out the quarter near $1.41. The yen suffered far less fallout from the global credit crisis. It showed particular strength against both the euro and pound while gaining modestly to the dollar. The Australian dollar was pressured versus the yen as carry trades were unwound. The New Zealand dollar experienced a similar fate.

Energies: Crude posted steep losses in September down more than 13% within the Dow Jones AIG Index and over 31% for the quarter. Crude was pummeled by intense selling, the ongoing feature throughout the period. In addition, a firming US dollar, a significant slowing in global demand and above-quota OPEC output weighed on sentiment, which more than offset the geopolitical events surrounding Iran, Nigeria, Russia, Venezuela and the Middle East. Combined gasoline, heating oil and jet fuel demand is down more than 7% compared to last September. Natural gas followed suit and ended the quarter much lower.

Agriculturals: With steady declines in both price and open interest during the month of September, as well as all of the third quarter, the agricultural futures markets were prime examples of the widespread deleveraging seen across all markets. The deterioration in values came despite occasional weather concerns, which typically are the impetus for late summer rallies. For the quarter, corn, soybeans, wheat and cotton saw high-to-low declines in value from 37% to 30%. Corn and wheat lost roughly $3.00 per bushel each and soybeans lost over $6.00. Cotton also dropped significantly. The longer-term implications of the recent price plunge will be played out first in farmers’ springtime planting decisions. In addition to the normal, net profit calculations, banking considerations will play a major role in next season’s production potential. Understandably, the ongoing tight credit markets will cause bankers to shy away from lending money to farmers wishing to grow high-input-cost crops, regardless of profit potential.

Indices: Global equities suffered from a total lack of confidence as related to the credit crisis, which got worse instead of better throughout the quarter, despite herculean efforts from central banks and various government agencies. US stocks were hit with massive fund liquidations, partially due to margin needs but also due to large redemption levels that picked up speed with each passing session. After managing very modest gains in August, despite a sharp month-end slide, all the major US indices were lower in September. The Dow Jones Industrial Average, S&P 500 and NASDAQ fell over 4%, 9% and 9% respectively for the quarter. Financial stocks, including banks, brokers and insurance companies were particularly weak, as were retail issues and energy stocks. The markets failed to react to the much-debated and delayed $700 billion Treasury “rescue” plan. US stocks were clearly hurt by the credit crisis in Europe.

Europe saw similar performance as their financial crisis was equally, if not more, dire than that in the US. The UK in particular has seen rigorous credit issues as the DJ Stoxx 600 lost approximately 12% during the third quarter due to staggering financial sector events. The German DAX, the French CAC and London’s FTSE all ended the quarter with losses. The Russian stock market was particularly weak, forcing trading halts on numerous occasions.

Asia posted the weakest equity performance of the three major regions during the quarter and it has subsequently experienced massive liquidation from international funds despite the fact that Japan and the region in general have less exposure to the global credit crisis. The Nikkei lost nearly 2,000 points and Korea’s Kospi fell over 14% throughout the period. Hong Kong was extremely weak and Shanghai extended a yearlong slide. Australian equities could not ward off the credit crisis and ended the quarter lower.

Metals: After a brief run in mid-July and a sell-off through the second week in of September, late quarter gains were not enough to offset losses as gold finished down over 5% for the period. Silver was down a hefty 29% for the third quarter. Base metals were sold heavily across the markets in September, to an even greater degree than in July and August, and all metals within the GSCI Commodity Index finished down for the quarter. Increasing exchange warehouse inventories as well as slowing global demand patterns weighted on metals. A firmer US dollar did not help the cause, neither did the general outflow of capital from commodities.

Softs and Livestock: Individual soft commodity fundamentals were similarly overwhelmed by capital outflows and fund liquidation pressures in September. Cocoa had managed gains in August but this was not the case in September. Sugar extended its August losses into September. Supplies hold ample and Brazilian sugar exports have accelerated. Coffee lost nearly 17% for the quarter.

 

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Live hogs fell almost 4.5% and cattle 4.9%. Hogs were again hurt by increased slaughter levels and sluggish demand. Both markets saw slaughter increases related to higher feed costs and, like many agricultural commodities, were pressured by financing difficulties for farmers.

Sector Performance

Due to the nature of Registrant’s trading activities through its investment in the Trading Vehicle, a period-to-period comparison of its trading results is not meaningful. However, a discussion of Registrant’s trading results for the major sectors in which Registrant traded for Third Quarter 2009 and Third Quarter 2008 is presented below.

Third Quarter 2009

Currencies: (+) Registrant experienced a majority of its gains in the Australian and New Zealand dollars and euro. The majority of losses were seen in the British pound, Canadian dollar and Japanese yen.

Energies: (-) Registrant experienced gains in natural gas. Losses were incurred in reformulated gasoline, heating oil, crude oil and Brent crude.

Grains: (+) Registrant experienced gains in wheat, corn and cotton. Losses were incurred in soybeans.

Indices: (-) Registrant experienced gains is the Taiwanese Index, Nasdaq and Hang Seng. Losses were incurred in the DAX, DJ STOXX, London FTSE, CAC and the S&P 500.

Interest Rates: (+) Registrant experienced a majority of its gains in the Euribor Liffe, German Bund and Bobl, Eurodollar, Japanese Government Bonds, 3-month short sterling and US Treasuries. Losses were incurred in Australian Bonds and Bank Bills.

Meats: (+) Registrant experienced gains in live hogs and live and feeder cattle.

Metals: (+) Registrant experienced gains in gold, copper and silver. Losses were incurred in nickel, zinc and aluminum.

Softs: (-) Registrant experienced gains in coffee. Losses were incurred in cocoa and sugar.

Third Quarter 2008

Currencies: (-) Registrant experienced a majority of its losses in the euro, Swiss franc, Australian dollar and Japanese yen.

Energies: (-) Registrant experienced losses in gasoline, heating oil, brent crude, crude oil, gas oil and natural gas.

Grains: (-) Registrant experienced gains in cotton. The majority of losses were seen in corn, wheat, soybeans and soybean meal.

Indices: (+) Registrant experienced a majority of its gains in the DJ Stoxx 50, S&P 500 and the Nikkei. Losses were made in the Russell 2000 and the Canadian S&P TSE 60 Index.

Interest Rates: (+) Registrant experienced a majority of its gains in US Treasury Notes, Australian Bonds and the German Bund. The majority of losses were incurred in Euribor, Short Sterling and Australian Bank Bills.

Meats: (-) Registrant experienced gains in feeder cattle and live cattle. Losses were incurred in live hogs.

Metals: (-) Registrant experienced gains in nickel and zinc. Losses were incurred in gold, aluminum, copper and platinum.

Softs: (-) Registrant experienced losses in coffee, cocoa and sugar.

 

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Results of Operations

The net asset value (“Net Asset Value”) per Interest as of September 30, 2009 was $226.62, a decrease of 12.89% from the December 31, 2008 Net Asset Value per Interest of $260.16 and a decrease of 1.03% from the June 30, 2009 Net Asset Value per Interest of $228.98. The Net Asset Value per Interest as of September 30, 2008 was $239.40, an increase of 1.60% from the December 31, 2007 Net Asset Value per Interest of $235.63 and a decrease of 9.19% from the June 30, 2008 Net Asset Value per Interest of $263.64. Past performance is not necessarily indicative of future results.

Registrant’s trading gains (losses) before commissions and related fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $158,000 and $(612,000), respectively. Registrant’s trading gains (losses) before commissions and related fees during Third Quarter 2008 and Year-To-Date 2008 were approximately $(856,000) and $1,366,000, respectively.

Registrant’s average net asset level decreased during Third Quarter 2009 and Year-To-Date 2009 in comparison to Third Quarter 2008 and Year-To-Date 2008 primarily due to the effect of negative trading performance and redemptions. The Registrant’s average net asset level increased during the Third Quarter 2008 in comparison to Third Quarter 2007 primarily due to positive trading performance entering into the Third Quarter 2008 relative to Third Quarter 2007 which offset the effect of quarterly redemptions in the Third Quarter 2008. The Registrant’s average net asset level decreased Year-To-Date 2008 in comparison to Year-To-Date 2007 primarily due to the effect of redemptions and a significant decline in trading performance in the Third Quarter 2008.

Interest income is earned on the average daily equity maintained with the clearing broker or bank at competitive interest rates and, therefore, varies monthly according to interest rates, trading performance and redemptions. Interest income during Third Quarter 2009 and Year-To-Date 2009 were approximately $0 and $1,000, respectively, a decrease of approximately $44,000 and $136,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to declining interest rates and reduced average net asset levels discussed above. Interest income during Third Quarter 2008 and Year-To-Date 2008 was approximately $44,000 and $137,000, respectively, a decrease of approximately $74,000 and $258,000, respectively, as compared to Third Quarter 2007 and Year-To-Date 2007, primarily due to declining interest rates and the effect of redemptions discussed above.

Commissions and administrative services are calculated on Registrant’s Net Asset Value at the beginning of each month and therefore, vary according to monthly trading performance and redemptions. Other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the Trading Advisor executes, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions, administrative services and other transaction fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $180,000 and $601,000, respectively, a decrease of approximately $40,000 and $68,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to reduced average net asset levels discussed above. Commissions, administrative services and other transaction fees during the Third Quarter 2008 and Year-To-Date 2008 were approximately $220,000 and $669,000, respectively, an increase of approximately $5,000 as compared to Third Quarter 2007, primarily due to increased average net asset levels discussed above and a decrease of approximately $23,000 as compared to Year-To-Date 2007, primarily due to reduced average net asset levels discussed above.

Management fees are calculated on the net asset value of Registrant’s investment in the Trading Vehicle at the end of each month, and therefore, are affected by trading performance and redemptions. Management fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $47,000 and $155,000, respectively, a decrease of approximately $9,000 and $21,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to reduced average net asset levels discussed above. Management fees during the Third Quarter 2008 and Year-To-Date 2008 were approximately $56,000 and $176,000, respectively, a decrease of approximately $1,000 and $5,000, respectively, as compared to Third Quarter 2007 and Year-To-Date 2007, primarily due to the effect of redemptions discussed above.

Incentive fees, which are based on the “New High Net Trading Profits” (as defined in the Advisory Agreement) generated by the Trading Advisor, are accrued monthly and are ultimately determined as of the close of business on the last business day of each calendar quarter. Incentive fees during Third Quarter 2009 and Year-To-Date 2009 were $0 and $169, respectively. Incentive fees during Third Quarter 2008 and Year-To-Date 2008 were approximately $0 and $409,000, respectively.

 

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General and administrative expenses during Third Quarter 2009 and Year-To-Date 2009 were approximately $29,000 and $66,000, respectively. General and administrative expenses during Third Quarter 2008 and Year-To-Date 2008 were approximately $9,000 and $42,000, respectively. These primarily consist of expenses charged to Registrant through its investment in the Trading Vehicle and include accounting, audit, tax, and legal fees, as well as printing and postage costs related to reports sent to limited owners.

Inflation

Inflation has had no material impact on the operations or on the financial condition of Registrant from inception through September 30, 2009.

Off-Balance Sheet Arrangements and Contractual Obligations

As of September 30, 2009, Registrant had not utilized special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers, such as our accountants, undertake in performing services which are in the best interests of Registrant. While Registrant’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on Registrant’s financial position.

Registrant’s contractual obligations are with the Managing Owner and the Trading Vehicle and, as a result of its investment in the Trading Vehicle, with the Trading Advisor and the Trading Vehicle’s commodity broker. Management fees payable by Registrant to the Trading Advisor (through its investment in the Trading Vehicle) and administrative services and other transaction fees payable to the Managing Owner are calculated as a fixed percentage of the Trading Vehicle and Registrant’s Net Asset Value, respectively. Incentive fees payable by the Registrant to the Trading Advisor (through its investment in the Trading Vehicle) are at a fixed rate, calculated as a percentage of the Trading Vehicle’s “New High Net Trading Profits”. As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and “New High Net Trading Profits” are not known until a future date. Commissions payable to the Trading Vehicle’s commodity broker are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. For a further discussion of Registrant’s contractual obligations, see Notes 1, 3 and 4 to Registrant’s financial statements for the year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Information regarding quantitative and qualitative disclosures about market risk is not required pursuant to Item 305(e) of Regulation S-K.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Registrant’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed by Registrant in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to Registrant’s management, including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration (who, in these capacities, function as the Principal Executive Officers and Principal Financial Officer, respectively, of Registrant), as appropriate to allow for timely decisions regarding required disclosure.

 

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In designing and evaluating Registrant’s disclosure controls and procedures, the Managing Owner recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can prove absolute assurance that all control issues and instances of fraud, if any, within Registrant have been detected.

The Managing Owner’s management, under the supervision and with the participation of certain officers of the Managing Owner (including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration), has evaluated the effectiveness of Registrant’s disclosure controls and procedures as of the end of the period covered by this report. Based upon such evaluation, the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration have concluded that, as of the end of such period, Registrant’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in Registrant’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during Third Quarter 2009 that have materially affected, or are reasonably likely to materially affect, Registrant’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

There are no legal proceedings pending by or against Registrant or the Managing Owner, or to which Registrant or Managing Owner was a party during the period covered by this Report.

 

Item 1.A.

Risk Factors

There have been no changes from risk factors as previously disclosed in Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Submission of Matters to a Vote of Security Holders

None

 

Item 5.

Other Information

On November 2, 2009, pursuant to Section 13.1(h) of the Trust Agreement, the Board of Directors of Preferred, in its capacity as managing owner of Registrant, determined to dissolve Registrant effective as of close of business on December 31, 2009. Investors in Registrant will receive a pro rata distribution of their interest in KMP Futures Fund I LLC (formerly known as WCM Pool LLC). Registrant intends to file a Form 15 with the Securities and Exchange Commission on or about December 31, 2009 de-registering the units of Registrant registered under Section 12(g) of the Securities Exchange Act of 1934.

 

Item 6.

Exhibits:

 

31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

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32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY.]

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DIVERSIFIED FUTURES TRUST I

By:

Kenmar Preferred Investments Corp., its managing owner

By:

/s/ Kenneth A. Shewer

Date: November 12, 2009

Name:

Kenneth A. Shewer

Title:

Co-Chief Executive Officer

(Principal Executive Officer)

By:

/s/ David K. Spohr

Date: November 12, 2009

Name:

David K. Spohr

Title:

Senior Vice President and

Director of Fund Administration

(Principal Financial/Accounting Officer)

 

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