UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period ended September 30, 2009

 

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

 

For the transition period from           to           

 

Commission File Number 0-53210

 

ABINGDON FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

 

 

c/o Ceres Managed Futures LLC

55 East 59^th Street - 10^th Floor

New York, New York 10022

(Address of principal executive offices) (Zip Code)

 

(212) 559-2011

(Registrant’s telephone number, including area code)

 

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 (§232.405 of the chapter) 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

 

Yes     No X

 

As of October 31, 2009, 109,964.7581 Limited Partnership Redeemable Units were outstanding.

 

ABINGDON FUTURES FUND L.P.

 

FORM 10-Q

 

INDEX

 

EX - 3.1(b)		Certificate of Amendment to the Certificate of Limited Partnership
EX - 3.2		Amended and Restated Limited Partnership Agreement
EX - 10.4		Form of Subscription Agreement
EX - 10.5		Form of Subscription Agreement
EX - 31.1		Certification
EX - 31.2		Certification
EX - 32.1		Certification
EX - 32.2		Certification

 

 

		September 30,				December 31,
		2009				2008
Assets:
Investment in Master, at fair value		$	125,585,451			$	119,196,221
Cash			247,919				123,784
Total assets		$	125,833,370			$	119,320,005
Liabilities and Partners’ Capital
Liabilities:
Accrued expenses:
Brokerage commissions		$	471,875			$	447,450
Management fees			208,661				197,963
Administrative fees			52,165				49,491
Incentive fees			—				379,396
Other			165,106				94,701
Redemptions payable			4,602,913				3,406,004
Total liabilities			5,500,720				4,575,005
Partners’ Capital:
General Partner, 2,621.7839 Unit equivalent outstanding at September 30, 2009 and December 31, 2008, respectively			2,821,328				3,157,152
Limited Partners, 109,199.7021 and 92,665.2839 Redeemable Units of Limited Partnership Interest outstanding at September 30, 2009 and December 31, 2008, respectively			117,511,322				111,587,848
Total partners’ capital			120,332,650				114,745,000
Total liabilities and partners’ capital		$	125,833,370			$	119,320,005

 

See accompanying notes to financial statements.

		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2009				2008				2009				2008
Income:
Net realized gains (losses) on closed contracts allocated from Master		$	(1,895,240	)		$	(3,844,998	)		$	(9,062,306	)		$	13,537,514
Change in net unrealized gains (losses) on open contracts allocated from Master			3,636,122				(4,638,058	)			1,875,545				(1,246,716	)
Interest income allocated from Master			26,695				327,381				79,377				1,091,768
Expenses allocated from Master			(25,913	)			(26,406	)			(66,971	)			(93,017	)
Total income (loss)			1,741,664				(8,182,081	)			(7,174,355	)			13,289,549
Expenses:
Brokerage commissions			1,381,164				1,233,219				4,176,129				3,749,387
Management fees			610,767				545,901				1,846,815				1,659,667
Administrative fees			152,691				136,475				461,702				414,917
Incentive fees			—				—				—				3,341,970
Other			84,562				108,736				310,764				199,725
Total expenses			2,229,184				2,024,331				6,795,410				9,365,666
Net income (loss)			(487,520	)			(10,206,412	)			(13,969,765	)			3,923,883
Additions — Limited Partners			8,827,000				14,037,000				48,062,000				54,864,000
Additions — General Partner			—				1,000,000				—				1,000,000
Redemptions — Limited Partners			(8,045,921	)			(8,814,740	)			(28,504,585	)			(42,109,485	)
Net increase (decrease) in Partners’ Capital			293,559				(3,984,152	)			5,587,650				17,678,398
Partners’ Capital, beginning of period			120,039,091				112,357,566				114,745,000				90,695,016
Partners’ Capital, end of period		$	120,332,650			$	108,373,414			$	120,332,650			$	108,373,414
Net Asset value per Unit (111,821.4860 and 99,880.4225 Units outstanding at September 30, 2009 and 2008, respectively)		$	1,076.11			$	1,085.03			$	1,076.11			$	1,085.03
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent		$	(4.76	)		$	(104.91	)		$	(128.09	)		$	42.60
Weighted average units outstanding			114,658.8977				96,613.5592				109,928.3141				95,500.6747

 

See accompanying notes to financial statements.

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Abingdon Futures Fund L.P. (formerly, Citigroup Abingdon Futures Fund L.P.) (the “Partnership”) is a limited partnership which was formed on November 8, 2005, under the partnership laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The Partnership commenced trading on February 1, 2007. The commodity interests that are traded by the Master (as defined below) are volatile and involve a high degree of market risk. The Partnership privately and continuously offers up to 200,000 redeemable units of Limited Partnership Interest (“Redeemable Units”) in the Partnership to qualified investors. There is no maximum number of units that may be sold by the Partnership.

 

Ceres Managed Futures LLC (formerly Citigroup Managed Futures LLC), a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”), a newly registered non-clearing futures commission merchant and a member of the National Futures Association. Morgan Stanley, indirectly through various subsidiaries, owns 51% of MSSB Holdings. Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership, owns 49% of MSSB Holdings. Citigroup Inc. (“Citigroup”), indirectly through various subsidiaries, wholly owns CGM. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup.

 

 

On February 1, 2007, the Partnership invested substantially all of its capital in the CMF Winton Master L.P. (the “Master”), a limited partnership organized under the partnership laws of the state of New York, having the same investment objective as the Partnership. The Partnership purchased 9,017.0917 Redeemable Units of the Master with cash equal to $12,945,000. The Master was formed in order to permit accounts managed by Winton Capital Management Limited (the “Advisor”) using the Diversified Program, the Advisor’s proprietary systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.

 

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended September 30, 2009.

 

At September 30, 2009 and December 31, 2008, the Partnership owned approximately 24.0% and 21.7%, respectively, of the Master. The Partnership intends to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s Statements of Financial Condition, Schedule of Investments and Statements of Income and Expenses and Changes in Partners’ Capital are included herein.

 

The General Partner and each Limited Partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no Limited Partner shall be liable for obligations of the Partnership in excess of their initial capital contribution and profits, if any, net of distributions.

 

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at September 30, 2009 and December 31, 2008 and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2009 and 2008. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2008.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through November 16, 2009, which is the date the financial statements were issued. As a result, actual results could differ from these estimates.

 

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, also known as FASB Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles” (“ASC 105-10”) (the “Codification”). ASC 105-10 established the exclusive authoritative reference for U.S. GAAP for use in financial statements except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. Codification became the single source of authoritative accounting principles generally accepted in the United States and applies to all financial statements issued after September 15, 2009.

 

The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230-10 Statement of Cash Flows (formerly, FAS No. 102, “Statement of Cash Flows Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale”).

 

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

The Master’s Statements of Financial Condition and Schedule of Investments as of September 30, 2009 and December 31, 2008 and Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2009 and 2008 are presented below:

 

CMF Winton Master L.P.
Statements of Financial Condition
(Unaudited)

		September 30,				December 31,
		2009				2008
Assets:
Equity in trading account:
Cash		$	467,215,840			$	512,248,576
Cash margin			41,093,640				26,405,684
Net unrealized appreciation on open futures contracts			16,429,393				6,936,356
Net unrealized appreciation on open forward contracts			—				2,179,569
Options owned, at fair value (cost $25,675 at September 30, 2009)			16,735				—
Total assets		$	524,755,608			$	547,770,185
Liabilities and Partners’ Capital:
Liabilities:
Net unrealized depreciation on open forward contracts		$	382,321			$	—
Options written, at fair value (premium $59,725 at September 30, 2009)			48,410				—
Accrued expenses:
Professional fees			11,853				18,642
Total liabilities			442,584				18,642
Partners’ Capital:
General Partner, 0.0000 Unit equivalents at September 30, 2009 and December 31, 2008			—				—
Limited Partners’ Capital, 274,881.5114 and 270,994.4921 Redeemable Units of Limited Partnership Interest outstanding at September 30, 2009 and December 31, 2008, respectively			524,313,024				547,751,543
Total liabilities and partners’ capital		$	524,755,608			$	547,770,185

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

*		Due to rounding.

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

CMF Winton Master L.P.
Schedule of Investments
December 31, 2008
(Unaudited)

 

 

*      Due to rounding.

 

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

CMF Winton Master L.P.
Statements of Income and Expenses and Changes in Partners’ Capital
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Income:
Net gains (losses) on trading of commodity interests:
Net realized gains (losses) on closed contracts			(7,818,170	)			(17,267,563	)			(36,243,688	)			65,800,861
Change in net unrealized gains (losses) on open contracts			15,140,518				(21,966,396	)			6,933,522				(6,689,482	)
Gain (loss) from trading, net			7,322,348				(39,233,959	)			(29,310,166	)			59,111,379
Interest income			124,689				1,660,232				373,952				5,729,763
Total income (loss)			7,447,037				(37,573,727	)			(28,936,214	)			64,841,142
Expenses:
Clearing fees			99,035				109,801				253,440				409,472
Professional fees			8,728				9,267				27,410				26,598
Total expenses			107,763				119,068				280,850				436,070
Net income (loss)			7,339,274				(37,692,795	)			(29,217,064	)			64,405,072
Additions – Limited Partners			60,412,948				41,384,712				190,738,991				113,225,126
Redemptions – Limited Partners			(40,126,283	)			(79,547,378	)			(184,586,494	)			(140,035,467	)
Distribution of interest income to feeder funds			(124,689	)			(1,660,232	)			(373,952	)			(5,729,763	)
Net increase (decrease) in Partners’ Capital			27,501,250				(77,515,693	)			(23,438,519	)			31,864,968
Partners’ Capital, beginning of period			496,811,774				566,425,794				547,751,543				457,045,133
Partners’ Capital, end of period			524,313,024				488,910,101				524,313,024				488,910,101
Net Asset Value per Redeemable Unit (274,881.5114 and 274,546.6529 Redeemable Units outstanding at September 30, 2009 and 2008, respectively)		$	1,907.41			$	1,780.79			$	1,907.41			$	1,780.79
Net income (loss) per Redeemable Unit of Limited Partnership Interest		$	26.25			$	(136.12	)		$	(112.46	)		$	212.39
Weighted average units outstanding			279,170.7223				290,538.2465				279,196.2744				296,352.6745

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Changes in the Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2009 and 2008 were as follows:

 

 

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Financial Highlights of the Master:

 

 

 

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.

 

 

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

The customer agreement between the Partnership and CGM and the Master and CGM gives the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition as the criteria under ASC 210-20 Balance Sheet (formerly, FIN No. 39, “Offsetting of Amounts Related to Certain Contracts”) have been met.

 

All of the commodity interests owned by the Master are held for trading purposes. The average fair values of these interests during the nine and twelve months ended September 30, 2009 and December 31, 2008, based on a monthly calculation, were $2,810,549 and $10,226,644, respectively. The fair values of these commodity interests,

 

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

Investments.  All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

Fair Value Measurements.  The Master adopted ASC 820-10 (formerly, FAS No. 157, “Fair Value Measurements”) as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Master did not apply the deferral allowed by ASC 820-10, for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

 

The Master considers prices for exchange traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange traded forwards, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended September 30, 2009 and December 31, 2008, the Master did not hold any derivative instruments for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
						Identical sets				Observable Inputs				Inputs
		9/30/2009				(Level 1)				(Level 2)				(Level 3)
Assets
Futures		$	16,429,393			$	16,429,393			$	—			$	—
Options owned			16,735				16,735				—				—
Total assets			16,446,128				16,446,128				—				—
Liabilities
Forwards			382,321				382,321				—				—
Options written			48,410				48,410				—				—
Total liabilities			430,731				430,731				—				—
Total fair value		$	16,015,397			$	16,015,397			$	—			$	—

						Quoted Prices in								Significant
						Active Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
		12/31/2008				(Level 1)				(Level 2)				(Level 3)
Assets
Futures		$	6,936,356			$	6,936,356			$	—			$	—
Forwards			2,179,569				2,179,569				—				—
Total assets			9,115,925				9,115,925				—				—
Total fair value		$	9,115,925			$	9,115,925			$	—			$	—

 

Abingdon Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

5.  Financial Instrument Risks:

 

 

In the normal course of its business, the Partnership, through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract.

 

Market risk is the potential for changes in the value of the financial instruments traded by the Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

 

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Master has credit risk and concentration risk as the sole counterparty or broker with respect to the Master’s assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Master’s counterparty is an exchange or clearing organization.

 

     As both a buyer and seller of options, the Master 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 Master to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Master does not consider these contracts to be guarantees as described in ASC 460-10, Guarantees (formerly, FAS No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees”).

 

The General Partner monitors and controls the Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Master is subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

 

The majority of these instruments mature within one year of the inception date. However, due to the nature of the Master’s business, these instruments may not be held to maturity.

 

Liquidity and Capital Resources

 

The Partnership does not engage in sales of goods or services. Its only assets are its investment in Master and cash. The Master does not engage in sales of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such losses occurred in the third quarter of 2009.

 

The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by income (loss) from its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

 

For the nine months ended September 30, 2009, Partnership capital increased 4.9% from $114,745,000 to $120,332,650. This increase was attributable to additional sales of 41,633.6095 Redeemable Units of Limited Partnership Interest totaling $48,062,000, which was partially offset by the redemption of 25,099.1913 Redeemable Units of Limited Partnership Interest totaling $28,504,585 and a net loss of $13,969,765. Future redemptions can impact the amount of funds available for investment in the Master in subsequent periods.

 

The Master’s capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on trading, expenses, interest income, redemptions of Units and distributions of profits, if any.

 

For the nine months ended September 30, 2009, the Master’s capital decreased 4.3% from $547,751,543 to $524,313,024. This decrease was attributable to the net loss from operations of $29,217,064 coupled with the redemption of 94,016.2665 Redeemable Units of Limited Partnership Interest totaling $184,586,494 and distribution of interest income to feeder funds totaling $373,952, which was partially offset by the additional sales of 97,903.2858 Redeemable Units of Limited Partnership Interest totaling $190,738,991. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

 

Critical Accounting Policies

     Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

     Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230-10.

     Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in note 2 of the Master’s notes to the annual financial statements as of December 31, 2008.

     Fair Value Measurements. The Partnership and the Master adopted ASC 820-10 as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Partnership and the Master did not apply the deferral allowed by ASC 820-10, for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

     The Partnership values investments in Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the period ended September 30, 2009, the Partnership did not hold any derivative instruments that are are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

     The Master considers prices for exchange traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange traded forwards, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Master are priced based on the end of the day net asset value (Level 2). As of and for the period ended September 30, 2009, the Master did not hold any derivative instruments for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

     Futures Contracts. The Master trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

     London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of Aluminum, Copper, Lead, Nickel, Tin or Zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. A contract is considered offset when all long positions have been matched with short positions. When the contract is closed at the prompt date, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.  

Options. The Master may purchase and write (sell) both exchange listed and over-the-counter options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

     Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnership’s income and expenses.

     In 2007, the Partnership adopted ASC 740-10 Income Taxes (formerly, FAS No. 48, “Accounting for Uncertainty in Income Taxes”). ASC 740-10 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has continued to evaluate the application of ASC 740-10 and has concluded that the adoption of ASC 740-10 had no impact on the operations of the Partnership for the nine months ended September 30, 2009 and that no provision for income tax is required in the Partnership’s financial statements.

     The following are the major tax jurisdictions for the Partnership and the earliest tax year subject to examination: United States – 2007.

      Recent Accounting Pronouncements. In 2009, the Partnership adopted ASC 820-10-65 Fair Value Measurements (formerly, FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). ASC 820-10-65 reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820-10-65 also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The application of ASC 820-10-65 is required for interim and annual reporting periods ending after June 15, 2009. Management has concluded that based on available information in the marketplace, there has not been a decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities. The adoption of ASC 820-10-65 had no effect on the Partnership’s Financial Statements.

     Subsequent Events. In 2009, the Partnership adopted ASC 855-10 Subsequent Events (formerly, FAS No. 165, “Subsequent Events”). The objective of ASC 855-10 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.

Results of Operations

     During the Partnership’s third quarter of 2009, the Net Asset Value per Redeemable Unit decreased 0.4% from $1,080.87 to $1,076.11 as compared to a decrease of 8.8% in the third quarter of 2008. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2009 of $1,740,882. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, grains, U.S. and non-U.S. interest rates, livestock, metals and were partially offset by losses in energy, softs and indices. The Partnership experienced a net trading loss before brokerage commissions and fees in the third quarter of 2008 of $8,483,056. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy, grains, metals, softs and were partially offset by gains in U.S. and non-U.S. interest rates, indices, lumber and livestock.

     The third quarter of 2009 presented a challenging trading environment with mixed technical signals across the markets. While the broad trends indicated that most economies and markets were recovering, some trends were not well established to be profitable. The Partnership was profitable in currencies, grains, interest rates, livestock and metals while losses were captured in energy, soft commodities and stock indices.

     In currencies, strong gains were captured from trading the Australian dollar, New Zealand dollar and Euro, while modest losses were captured in the Canadian dollar and Japanese yen. In grains, modest gains were realized in wheat and corn which were partially offset by losses in the soybean complex. In interest rates, the Partnership was profitable in both the U.S. and non-U.S. bonds. Most of the gains were recorded in the longer-term maturity bonds which tend to be less influenced by government monetary policies. Central reserve banks of most developed economies seemed to be in a dilemma, balancing the future inflationary expectations with the current fragile condition of the economies. In livestock, the Partnership was profitable from trading cattle and lean hog positions. In metals, most industrial and precious metals established firm bullish trends that began in early 2009. The Partnership capitalized on these trends and registered strong gains.

     In the energy sector, losses were captured as the markets remained in contango. Natural gas demonstrated a strong bearish trend but the trend seemed to be reversing late in the quarter. Crude oil and heating oil remained mostly trend-less and volatile, thus contributing to losses. In soft commodities, strong losses in cocoa could not offset gains in coffee and cotton. The Partnership registered losses in stock indices, mostly in the early months of the quarter as the bullish trends were still developing.

 

During the Partnership’s nine months ended September 30, 2009, the Net Asset Value per Redeemable Unit decreased 10.6% from $1,204.20 to $1,076.11 as compared to an increase of 4.1% during the nine months ended September 30, 2008. The Partnership, through its investment in the Master, experienced a net trading loss before brokerage commissions and related fees in the nine months ended September 30, 2009 of $7,186,761. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy, U.S. and non-U.S. interest rates, metals, softs, indices, lumber and were partially offset by gains in grains and livestock. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2008 of $12,290,798. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, U.S. and non-U.S. interest rates, lumber, metals, energy, grains, indices and were partially offset by losses in softs and livestock.

 

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Master) depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership (and the Master) expects to increase capital through operations.

 

Interest income on 80% of the Partnership’s daily average equity allocated to it by the Master was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days. CGM may continue to maintain the Master’s assets in cash and/or place all of the Master’s assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. Twenty percent of the interest earned on Treasury bills purchased may be retained by CGM and/or credited to the General Partner. Interest income allocated from the Master for the three and nine month ended September 30, 2009 decreased by $300,686 and $1,012,391, respectively as compared to the corresponding periods in 2008. The decrease in interest income is primarily due to lower U.S. Treasury bill rates during the three and nine months ended September 30, 2009 as compared to the corresponding periods in 2008.

     Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Brokerage commissions and fees for the three and nine months ended September 30, 2009 increased by $147,945 and $426,742, respectively as compared to the corresponding periods in 2008. The increase in brokerage commissions and fees is due to higher net assets during the three and nine months ended September 30, 2009 as compared to the corresponding periods in 2008.

     Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and nine months ended September 30, 2009 increased by $64,866 and $187,148, respectively as compared to the corresponding periods in 2008. The increase in management fees is due to higher net assets during the three and nine months ended September 30, 2009 as compared to the corresponding periods in 2008.

     Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. These fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Administrative fees for the three and nine months ended September 30, 2009 increased by $16,216 and $46,785 as compared to the corresponding periods in 2008. The increase in administrative fees is due to an increase in net assets during the three and nine months ended September 30, 2009 as compared to the corresponding periods in 2008.

     Incentive fees paid by the Partnership are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the management agreements between the Partnership, the General Partner and the Advisor. There were no incentive fees for the three and nine months ended September 30, 2009. There were no incentive fees for the three months ended September 30, 2008. Trading performance for the nine months ended September 30, 2008 resulted in incentive fees of $3,341,970. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

     In allocating substantially all of the assets of the Partnership to the Master, the General Partner considered the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or substantially all of the Master’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master’s main line of business.

 

The risk to the Limited Partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law.

 

Market movements result in frequent changes in the fair value of the Master’s open positions and, consequently, in its earnings and cash flow. The Master’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Master’s open positions and the liquidity of the markets in which it trades.

 

The Master rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master’s past performance is not necessarily indicative of its future results.

 

Value at Risk is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master’s speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master’s losses in any market sector will be limited to Value at Risk or by the Master’s attempts to manage its market risk.

 

Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

The following table indicates the trading Value at Risk associated with the Master’s open positions by market category as of September 30, 2009, and the highest, lowest and average values during the three months ended September 30, 2009. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2008.

As of September 30, 2009, the Master’s total capitalization was $524,313,024 and the Partnership owned approximately 24.0% of the Master. The Partnership invests substantially all of its assets in the Master. The Partnership’s Value at Risk for the portion of its assets that are traded indirectly through its investment in the Master as of September 30, 2009 was as follows:

*		Average of month-end Values at Risk.

 

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods expected in the Commission’s rules and forms. Disclosed controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

 

Management is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

 

The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009 and, based on that evaluation, the CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.

 

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:

 

 

There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended September 30, 2009 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

 

 

The following disclosure supplements the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Forms 10-Q for the quarters ended March 31, 2009 and June 30, 2009.

 

Speculative position and trading limits may reduce profitability. The Commodity Futures Trading Commission (“CFTC”) and U.S. exchanges have established speculative position limits on the maximum net long or net short position which any person may hold or control in particular futures and options on futures. The trading instructions of an advisor may have to be modified, and positions held by the Partnership and the Master may have to be liquidated in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership and the Master by increasing transaction costs to liquidate positions and foregoing potential profits.

 

Regulatory changes could restrict the Partnership’s operations. Regulatory changes could adversely affect the Partnership and the Master by restricting its markets or activities, limiting its trading and/or increasing the taxes to which investors are subject. The General Partner is not aware of any definitive regulatory developments that might adversely affect the Partnership and the Master; however, since June 2008, several bills have been proposed in the U.S. Congress in response to record energy and agricultural prices and the financial crisis. Some of the pending legislation, if enacted, could impact the manner in which swap contracts are traded and/or settled and limit trading by speculators (such as the Partnership and the Master) in futures and OTC markets. One of the proposals would authorize the CFTC and the Commission to regulate swap transactions. Other potentially adverse regulatory initiatives could develop suddenly and without notice.

 

 

For the three months ended September 30, 2008, there were additional sales of 8,297.8224 Redeemable Units totaling $8,827,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. These units were purchased by accredited investors as defined in Regulation D.

 

Proceeds of net offering were used for the trading of commodity interests, including futures contracts, options and forwards contracts.

 

The following chart sets forth the purchases of Redeemable Units by the Partnership.

 

 

* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on 10 days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption but to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners.

 

** Redemptions of Redeemable Units are effected as of the last day of each month at the Net Asset Value per Redeemable Unit as of that day.