Attached files
file | filename |
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EX-32.2 - EX-32.2 - FAIRFIELD FUTURES FUND LP II | y02274exv32w2.htm |
EX-31.1 - EX-31.1 - FAIRFIELD FUTURES FUND LP II | y02274exv31w1.htm |
EX-32.1 - EX-32.1 - FAIRFIELD FUTURES FUND LP II | y02274exv32w1.htm |
EX-31.2 - EX-31.2 - FAIRFIELD FUTURES FUND LP II | y02274exv31w2.htm |
EX-10.4.A - EX-10.4.A - FAIRFIELD FUTURES FUND LP II | y02274exv10w4wa.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-51282
FAIRFIELD FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York | 56-2421596 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
c/o Ceres Managed Futures LLC
55 East 59th Street 10th Floor
New York, New York 10022
55 East 59th Street 10th Floor
New York, New York 10022
(212) 559-2011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Redeemable Units of Limited
Partnership Interest
(Title of Class)
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes No X
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K [X]
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):
Large accelerated file | Accelerated filer | Non-accelerated filer X (Do not check if a smaller reporting company) |
Smaller reporting company |
Indicate by check mark if the registrant is a shell company (as defined in rule 2b-2 of the
Exchange Act)
Yes No X
Limited
Partnership Redeemable Units with an aggregate value of $38,474,012 were outstanding and held by
non-affiliates as of the last business day of the registrants most recently completed second
calendar month.
As of February 28, 2010, 38,681.2650 Limited Partnership Redeemable Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
Table of Contents
PART I
Item 1. Business.
(a) General Development of Business. Fairfield Futures Fund L.P. II (formerly,
Citigroup Fairfield Futures Fund L.P. II) (the Partnership) is a limited partnership which was
organized on December 18, 2003 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 operations on March 15, 2004. The commodity interests that are traded by the
Master (as defined below) are volatile and involve a high degree of market risk.
Between January 12, 2004 (commencement of the offering period) and March 12, 2004, 28,601
redeemable units of Limited Partnership Interest (Redeemable Units) and 285 Unit equivalents of
General Partnership Interest were sold at $1,000 per unit. The proceeds of the initial
offering were held in an escrow account until March 15, 2004 at which time they were remitted to
the Partnership for trading. The Partnership privately and continuously offers up to 200,000
Redeemable Units to qualified investors. There is no maximum number
of units that may be sold by the Partnership. Sales and redemptions of Redeemable Units and General
Partner contributions and redemptions for the years ended December 31, 2009, 2008 and 2007 are
reported in the Statements of Changes in Partners Capital on page F-9 under Item 8. Financial
Statements and Supplementary Data.
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 (NFA). 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 June 1, 2006, the Partnership allocated substantially all of its capital to the CMF Graham
Capital Master Fund L.P. (the Master), a limited partnership organized under the partnership laws
of the State of New York. The Partnership purchased 74,569.3761 units of the Master with cash of
$75,688,021. The Master was formed in order to permit accounts managed by Graham Capital Management
L.P. (Graham or the Advisor) using the K4D-12.5 Program, the Advisors proprietary, systematic
trading program, to invest together in one trading vehicle. A description of the trading activities and focus of the Advisor is included on page 8 under Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The General Partner is also the general
partner of the Master. The Masters commodity broker
is CGM. 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
financial statements of the Master, including the Condensed Schedule of Investments, are contained,
elsewhere in this report and should be read together with the Partnerships financial statements.
For the period January 1, 2009 through December 31, 2009, the approximate market sector
distribution for the K4D-12.5 Program was as follows:
At
December 31, 2009 and 2008, the Partnership owned approximately 25.7% and 27.1%,
respectively of the Master. It is the Partnerships intention 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 Masters trading of futures, forwards, swaps and options contracts, if applicable, on
commodities is done primarily on United States of America and foreign commodity exchanges. It
engages in such trading through a commodity brokerage account maintained with CGM.
The Partnership will be liquidated upon the first of the following to occur: December 31,
2023; the net asset value per Redeemable Unit falls below $400 as of the close of any business day;
a decline in net assets after trading commences to less than $1,000,000; or under certain
circumstances as defined in the Limited Partnership Agreement of the Partnership (the Limited
Partnership Agreement).
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Table of Contents
The General Partner administers the business and affairs of the Partnership including
selecting one or more advisors to make trading decisions for the Partnership. The Partnership will
pay the General Partner a monthly administrative fee in return for its services to the Partnership
equal to 1/24 of 1% (0.5% per year) of month-end Net Assets of the Partnership. Month-end Net
Assets, for the purpose of calculating administrative fees are Net Assets, as defined in the
Limited Partnership Agreement, prior to the reduction of the current months management
fee, the General Partners administrative fee, the profit
share allocation accrual and any redemptions or distributions as
of the end of such month.
This fee may be increased or decreased at the discretion of the General Partner.
The General Partner, on behalf of the Partnership, has entered
into a management agreement (the Management
Agreement) with Graham, a registered commodity trading
advisor. The Advisor is not affiliated with the General Partner
or CGM and is not responsible for the organization or operation
of the Partnership. The Partnership pays the Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net
Assets allocated to the Advisor. Month-end Net Assets, for the
purpose of calculating management fees are Net Assets, as
defined in the Limited Partnership Agreement, prior to the
reduction of the current months management fee, the
General Partners administrative fee, the profit share
allocation accrual and any redemptions or distributions as of
the end of such month. The Management Agreement may be
terminated upon notice by either party.
In addition, the Advisor is a special limited partner (the Special Limited Partner) of the Partnership and receives a
quarterly profit share allocation to its capital account in the Partnership in the form of units of
the Partnership, the value of which shall be equal to 20% of the New Trading Profits, as defined in the
Management Agreement, earned by the Advisor on behalf of the Partnership during each calendar quarter and are
issued as Special Limited Partner Units.
The Partnership has entered into a customer agreement (the Customer Agreement) with CGM
which provides that the Partnership will pay CGM a monthly brokerage commission equal to 9/24 of 1%
(4.5% per year) of month-end Net Assets, in lieu of brokerage commissions on a per trade basis.
Month-end Net Assets, for the purpose of calculating commissions are Net Assets, as defined in the
Limited Partnership Agreement, prior to the reduction of the current months brokerage
commissions, management fee, the General Partners
administrative fee, profit share allocation accrual, other
expenses and any redemptions or distributions as of the end of
such month. The Master will pay for NFA
fees as well as exchange, clearing, user,
give-up and
floor brokerage fees (collectively the clearing
fees). CGM will pay a portion of its brokerage commissions
to financial advisors who have sold Redeemable Units in the
Partnership. Brokerage commissions will be paid for the life of
the Partnership, although the rate at which such commissions are
paid may be changed. The Partnerships assets, not held in
the Masters account at CGM, are held in the
Partnerships account at CGM. The Partnerships cash
is deposited by CGM in segregated bank accounts to the extent
required by Commodity Futures Trading Commission regulations.
CGM has agreed to pay the Partnership interest on its allocable
share of 80% of the average daily equity maintained in cash in
the Masters account during each month at a
30-day
U.S. Treasury bill rate determined weekly by CGM based on
the average noncompetitive yield on
3-month
U.S. Treasury bills maturing in 30 days from the date
on which such weekly rate is determined.
CGM will pay such interest to the Partnership out of its own funds whether or not it is able to earn the interest it has obligated itself to pay.
Alternatively, CGM may
place up to all of the Masters assets in 90-day U.S.
Treasury bills and pay the Partnership its allocable share of
80% of the interest earned on 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. 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. The Customer
Agreement may be terminated upon notice by either party.
(b) Financial information about industry segments. The Partnerships business consists
of only one segment, speculative trading of commodity interests. The Partnership does not engage in
sales of goods or services. The Partnerships net income (loss) from operations for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005 is set forth under Item 6. Selected Financial
Data. The Partnerships Capital as of December 31, 2009 was $43,365,226.
(c) Narrative description of business.
See Paragraphs (a) and (b) above. | |||
(i) through (xii) - Not applicable. | |||
(xiii) - The Partnership has no employees. |
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Table of Contents
(d) Financial Information About Geographic Areas. The Partnership does not engage in
the sale of goods or services or own any long lived assets, and therefore this item is not
applicable.
(e)
Available Information. The Partnership does not have an internet address. The
Partnership will provide paper copies of its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and any amendments to these reports free of charge upon request.
(f) Reports to Security Holders. Not applicable.
(g) Enforceability of Civil Liabilities Against Foreign Persons. Not applicable.
(h)
Smaller Reporting Companies. Not applicable.
Item 1A. | Risk Factors. |
As a result of leverage, small changes in the price of the Partnerships positions may result in
major losses.
The trading of commodity interests is speculative, volatile and involves a high degree of
leverage. A small change in the market price of a commodity interest contract can produce major
losses for the Partnership. Market prices can be influenced by, among other things, changing supply and demand
relationships, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events, weather and climate conditions,
insects and plant disease, purchases and sales by foreign countries and changing interest
rates.
An investor may lose all of their investment.
Due to the speculative nature of trading commodity interests, an investor could lose all of
their investment in the Partnership.
The
Partnership will pay substantial fees and expenses regardless of profitability.
Regardless
of its trading performance, the Partnership will incur fees and expenses, including
brokerage and management fees. Fees will be paid to the Advisor even
if the Partnership experiences a
net loss for the full year.
An investors ability to redeem or transfer units is limited.
An investors ability to redeem units is limited and no market exists for the units.
Conflicts of interest exist.
The Partnership is subject to numerous conflicts of interest including those that arise from
the facts that:
1. | The General Partner and commodity broker are affiliates; | ||
2. | The Advisor, the commodity broker and their principals and affiliates may trade in commodity interests for their own accounts; and | ||
3. | An investors financial advisor will receive ongoing compensation for providing services to the investors account. |
Investing in units might not provide the desired diversification of an investors overall
portfolio.
The Partnership will not provide any benefit of diversification of an investors overall
portfolio unless it is profitable and produces returns that are independent from stock and bond
market returns.
Past performance is no assurance of future results.
The Advisors trading strategies may not perform as they have performed in the past. The
Advisor has from time to time incurred substantial losses in trading on behalf of clients.
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Table of Contents
An investors tax liability may exceed cash distributions.
Investors are taxed on their share of the Partnerships income, even though the Partnership
does not intend to make any distributions.
Regulatory changes could restrict the Partnerships operations.
Regulatory changes could adversely affect the Partnership 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; 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) in futures and over-the-counter 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.
Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net
long or net short positions 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 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 by increasing transaction costs to liquidate positions and foregoing potential profits.
5
Table of Contents
Item 2. | Properties. |
The Partnership does not own or lease any properties. The General Partner operates out of
facilities provided by its affiliate, Citigroup.
Item 3. | Legal Proceedings. |
This section describes the major pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which CGM is a party or to which
any of their property is subject. There are no material legal proceedings pending against the
Partnership or the General Partner.
CGM is a New York corporation with its principal place of business at 388 Greenwich St., New
York, New York 10013. CGM is registered as a broker-dealer and futures commission merchant
(FCM), and provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. CGM and its affiliates also provide investment banking and
other financial services for clients worldwide.
There have been no material administrative, civil or criminal actions within the past five years
against CGM (formerly known as Salomon Smith Barney) or any of its individual
principals and no such actions are currently pending, except as follows.
Mutual Funds
Several issues in the mutual fund industry have come under the scrutiny of federal and state
regulators. Citigroup has received subpoenas and other requests for information from various
government regulators regarding market timing, financing, fees, sales practices and other mutual
fund issues in connection with various investigations. Citigroup is cooperating with all such
reviews. Additionally, Citigroup Global Markets has entered into a settlement agreement with the
SEC with respect to revenue sharing and sales of classes of funds.
On May 31, 2005, Citigroup announced that Smith Barney Fund Management LLC and Citigroup
Global Markets completed a settlement with the SEC resolving an investigation by the SEC into
matters relating to arrangements between certain Smith Barney mutual funds, an affiliated transfer
agent and an unaffiliated sub-transfer agent. Under the terms of the settlement, Citigroup agreed
to pay fines totaling $208.1 million. The settlement, in which Citigroup neither admitted nor
denied any wrongdoing or liability, includes allegations of willful misconduct by Smith Barney Fund
Management LLC and Citigroup Global Markets in failing to disclose aspects of the transfer agent
arrangements to certain mutual fund investors.
In May 2007, Citigroup Global Markets finalized its settlement agreement with the NYSE and the
New Jersey Bureau of Securities on the matter related to its market-timing practices prior to
September 2003.
FINRA Settlement
On October 12, 2009, FINRA announced its acceptance of an Award Waiver and Consent (AWC) in
which Citigroup Global Markets, without admitting or denying the findings, consented to the entry
of the AWC and a fine and censure of $600,000. The AWC includes findings that Citigroup Global
Markets failed to adequately supervise the activities of its equities trading desk in connection
with swap and related hedge trades in U.S. and Italian equities that were designed to provide
certain perceived tax advantages. Citigroup Global Markets was charged with failing to provide for
effective written procedures with respect to the implementation of the trades, failing to monitor
Bloomberg messages and failing to properly report certain of the trades to the NASDAQ.
Auction Rate Securities
On May 31, 2006, the SEC instituted and simultaneously settled proceedings against Citigroup
Global Markets and 14 other broker-dealers regarding practices in the Auction Rate Securities
market. The SEC alleged that the broker-dealers violated Section 17(a)(2) of the Securities Act of
1933. The broker-dealers, without admitting or denying liability, consented to the entry of an SEC
cease-and-desist order providing for censures, undertakings and penalties. Citigroup
Global Markets paid a penalty of $1.5 million.
On August 7, 2008, Citigroup reached a settlement with the New York Attorney General, the SEC,
and other state regulatory agencies, pursuant to which Citigroup agreed to offer to purchase at par
Auction Rate Securities from all Citigroup individual investors, small institutions (as defined by
the terms of the settlement), and charities that purchased Auction Rate Securities from Citigroup
prior to February 11, 2008. In addition, Citigroup agreed to pay a $50 million fine to the State
of New York and a $50 million fine to the other state regulatory agencies.
Subprime-Mortgage Related Actions
Citigroup and certain of its affiliates are subject to formal and informal investigations, as
well as subpoenas and/or requests for information, from various governmental and self-regulatory
agencies relating to subprime mortgagerelated activities. Citigroup and its affiliates are
cooperating fully and are engaged in discussions on these matters.
Credit Crisis Related Matters
Beginning in the fourth quarter of 2007, certain of Citigroups, and Citigroup Global Markets
regulators and other state and federal government agencies commenced formal and informal
investigations and inquiries, and issued subpoenas and requested information, concerning
Citigroups subprime mortgage-related conduct and business activities. Citigroup and certain of
its affiliates, including Citigroup Global Markets, are involved in discussions with certain of its
regulators to resolve certain of these matters.
Certain of these regulatory matters assert claims for substantial or indeterminate damages.
Some of these matters already have been resolved, either through settlements or court proceedings,
including the complete dismissal of certain complaints or the rejection of certain claims following
hearings.
In the course of its business, CGM, as a major futures commission merchant and broker-dealer,
is a party to various civil actions, claims and routine regulatory investigations and proceedings
that the general partner believes do not have a material effect on the business of CGM.
Item 4. | [Removed and Reserved] |
6
Table of Contents
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
(a) | Market Information. The Partnership has issued no stock. There is no public market for the Redeemable Units. | |
(b) | Holders. The number of holders of Redeemable Units as of December 31, 2009 was 374. | |
(c) | Dividends. The Partnership did not declare a distribution in 2009, 2008 or 2007. The Partnership does not intend to declare distributions in the foreseeable future. | |
(d) | Securities Authorized for Issuance Under Equity Compensation Plans. None. | |
(e) | Performance Graph. Not applicable. | |
(f) | Recent Sales of Unregistered Securities. For the year ended December 31, 2009, there were additional sales of 3,576.7524 Redeemable Units totaling $3,766,000 and an allocation of 59.3707 Redeemable Units of Special Limited Partner Interest totaling $64,276. For the year ended December 31, 2008, there were additional sales of 4,297.2083 Redeemable Units totaling $4,079,000, an allocation of 1,444.1797 Redeemable Units of Special Limited Partner Interest totaling $1,517,815 and General Partner contributions representing 526.2272 Unit equivalents totaling $500,000. For the year ended December 31, 2007, there were additional sales of 18,052.9703 Redeemable Units totaling $14,858,000. |
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. The Redeemable Units were purchased by
accredited investors, as described
in Regulation D, and a small number of persons who are non-accredited investors.
Proceeds from the sale of additional Redeemable Units are used in the trading of commodity
interests including futures contracts, options, swaps and forward contracts.
(g) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
The following chart sets forth the purchases of Redeemable Units by the Partnership.
(d) Maximum Number |
||||||||||||||||||||
(or Approximate |
||||||||||||||||||||
(c) Total Number |
Dollar Value) of |
|||||||||||||||||||
|
of Redeemable Units |
Redeemable Units that |
||||||||||||||||||
(a) Total Number |
(b) Average |
Purchased as Part |
May Yet Be |
|||||||||||||||||
of Redeemable |
Price Paid per |
of Publicly Announced |
Purchased Under the |
|||||||||||||||||
Period | Units Purchased* | Redeemable Unit** | Plans or Programs | Plans or Programs | ||||||||||||||||
October 1, 2009 October 31, 2009 |
70.2171 | $ | 1,055.92 | N/A | N/A | |||||||||||||||
November 1, 2009 November 30, 2009 |
280.1944 | $ | 1,106.82 | N/A | N/A | |||||||||||||||
December 1, 2009 December 31, 2009 |
489.7677 | $ | 1,071.61 | N/A | N/A | |||||||||||||||
840.1792 | $ | 1,082.04 | ||||||||||||||||||
* | 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, although 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 Partnerships 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. |
Item 6. | Selected Financial Data. |
Net realized and unrealized trading gains (losses), interest income, net income (loss),
increase (decrease) in Net Asset Value per Unit and Net Asset Value per Unit for the years ended December 31, 2009, 2008, 2007,
2006 and 2005, and total assets at December 31, 2009, 2008, 2007, 2006 and 2005 were as follows:
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Net realized and unrealized
trading gains (losses) by the
Partnership and allocated from the
Master, net of expenses allocated
from the Master, brokerage
commissions (including clearing
fees) of $2,041,895, $2,989,992, $3,023,496,
$3,374,786 and $3,862,288, respectively |
$ | 1,056,612 | $ | 15,808,543 | $ | 6,359,058 | $ | (1,156,188 | ) | $ | (10,381,586 | ) | ||||||||
Interest income including interest
income allocated from Master |
31,264 | 690,161 | 2,284,911 | 2,768,911 | 2,043,979 | |||||||||||||||
$ | 1,087,876 | $ | 16,498,704 | $ | 8,643,969 | $ | 1,612,723 | $ | (8,337,607 | ) | ||||||||||
Net income (loss) before allocation
to Special Limited Partner |
$ | (192,469 | ) | $ | 14,689,973 | $ | 6,786,738 | $ | (391,912 | ) | $ | (10,506,006 | ) | |||||||
Allocation to Special Limited Partner |
$ | (64,276 | ) | $ | (1,517,815 | ) | $ | | | | ||||||||||
Net income (loss) after allocation
to Special Limited Partner |
$ | (256,745 | ) | $ | 13,172,158 | $ | 6,786,738 | $ | (391,912 | ) | $ | (10,506,006 | ) | |||||||
Increase (decrease) in Net Asset
Value per Unit |
$ | (4.60 | ) | $ | 197.31 | $ | 85.38 | $ | (4.51 | ) | $ | (109.61 | ) | |||||||
Net Asset Value per Unit |
$ | 1,071.61 | $ | 1,076.21 | $ | 878.90 | $ | 793.52 | $ | 798.03 | ||||||||||
Total assets |
$ | 44,174,544 | $ | 60,887,773 | $ | 69,761,424 | $ | 68,501,056 | $ | 80,751,541 | ||||||||||
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
The
Partnership, through its investment in the Master, aims to achieve substantial capital
appreciation through speculative trading in U.S. and international markets for currencies, interest
rates, stock indices, agricultural and energy products and precious and base metals. The Master may
employ futures, options on futures, and forward and swap contracts in those markets.
The General Partner manages all business of the Partnership. The General Partner has delegated
its responsibility for the investment of the Partnerships
assets to the Advisor. The General Partner
employs a team of approximately 20 professionals whose primary emphasis is on attempting to
maintain quality control among the advisors to the Partnerships operated or managed by the General
Partner. A full-time staff of due diligence professionals use propriety technology and on-site
evaluations to monitor new and existing futures money managers. The accounting and operations staff
provide processing of trading activity and reporting to limited partners and regulatory
authorities. In selecting the Advisor for the Partnership, the General Partner considered 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.
Responsibilities of the General Partner include:
| due diligence examinations of the Advisor; | ||
| selection, appointment and termination of the Advisor; | ||
| negotiation of the Management Agreement; and | ||
| monitoring the activity of the Advisor. |
In addition, the General Partner prepares the books and records and provides the
administrative and compliance services that are required by law or regulation from time to time in
connection with the operation of the Partnership. These services include the preparation of required
books and records and reports to limited partners, government agencies and regulators; computation
of net asset value; calculation of fees; effecting subscriptions, redemptions and limited partner
communications; and preparation of offering documents and sales literature.
The General Partner shall seek the best prices and services available in its commodity futures
brokerage transactions.
As of January 2009, Graham began trading the Partnerships asset in accordance with the
Advisors K4D - 12.5 Program a proprietary systematic trading program. Between June 1, 2006
and January 2009, Graham traded the Partnerships assets allocated to it in accordance with its
Multi-Trend Program at 125% Leverage (Multi-Trend). Prior to June 1, 2006, Graham traded
its Global Diversified Program at Standard Leverage, the Graham Selective Trading Program at
Standard Leverage and the K5 Program on behalf of the Partnership. The Multi-Trend Program combines four
individual Graham investment programs into one program. The K4D -
12.5 Program consolidates on an equal basis, the trading programs that previously comprised Grahams Multi-Trend Program. As market conditions or other circumstances change,
Graham may alter the weightings of the individual programs and add (or delete) other programs to
the K4D - 12.5 Program, as it deems appropriate.
The K4D - 12.5 Program trades in approximately 90 - 100 markets including foreign exchange, global interest
rates, stock index futures, agricultural futures, metals and energy.
In addition to the K4D - 12.5 Program, as of December 31, 2009, Graham traded the following
futures programs: its Global Diversified Program, the Graham Selective Trading Program, the
Proprietary Matrix Program and the K4 Fed Policy Program.
Grahams success depends to a great extent upon the occurrence of market conditions favorable
to its trading strategy. Factors such as lack of major price trends or increased governmental
control of, or participation in, the markets, may reduce Grahams ability to trade profitably in
the future.
As a managed futures partnership, the Partnerships/Masters performance is dependent upon the
successful trading of the Partnerships Advisor to achieve the Partnerships/Masters objectives.
It is the business of the General Partner to monitor the
Advisors performance to ensure compliance
with the Partnerships/Masters trading policies and to determine if the Advisors performance is
meeting the Partnerships/Masters objectives. Based on 2009 results, the General Partner continues
to believe the
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Advisor and the trading of the K4D-12.5 Program has met the Partnerships/Masters objectives
and expects to continue to allocate the Partnerships/Masters assets to the Advisor and this
program unless otherwise indicated.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only assets are its
investment in the 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 illiquidity occurred during the year ended December 31, 2009.
To minimize this risk relating to low margin deposits, the Master follows certain trading
policies, including:
(i) | The Master invests its assets only in commodity interests that the Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisor believes will permit it to enter and exit trades without noticeably moving the market. | ||
(ii) | The Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Masters net assets allocated to the Advisor. | ||
(iii) | The Master may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged. | ||
(iv) | The Master does not employ the trading technique commonly known as pyramiding, in which the speculator uses unrealized profits on existing positions as margin for the purchases or sale of additional positions in the same or related commodities. | ||
(v) | The Master does not utilize borrowings other than short-term borrowings if the Master takes delivery of any cash commodities. | ||
(vi) | The Advisor may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Master. The term spread or straddle describes a commodity futures trading strategy involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets and in which the trader expects to earn a profit from a widening or narrowing of the difference between the prices of the two contracts. | ||
(vii) | The Master will not permit the churning of its commodity trading account. The term churning refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, driven by the desire to generate commission income. |
From January 1, 2009 through December 31, 2009, the Partnerships average margin to equity ratio
(i.e., the percentage of assets on deposit required for margin) was approximately 12.5%. The
foregoing margin to equity ratio takes into account cash held in the Partnerships name, as well as
the allocable value of the positions and cash held on behalf of the Partnership in the name of the
Master.
In the normal course of 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, and 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 specified terms at specified future dates, or, in
the case of derivative commodity interests, 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 options 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 Partnership/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
Partnership/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.
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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 Partnerships/Masters 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
Partnerships/ Masters risk of loss is reduced through the use of legally enforceable master
netting agreements with counterparties that permit the Partnership/Master to offset unrealized
gains and losses and other assets and liabilities with such counterparties upon the occurrence of
certain events. The Partnership/Master have credit risk and concentration risk as the sole
counterparty or broker with respect to the Partnerships/Masters assets is CGM or a CGM affiliate.
Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM,
the Partnerships/Masters counterparty is an exchange or clearing organization.
The General Partner monitors and attempts to control the Masters 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 may be subject. These monitoring systems generally 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. (See also Item 8.
Financial Statements and Supplementary Data for further information on financial
instrument risk included in the notes to the financial statements.)
Other
than the risks inherent in commodity futures and other derivatives trading, the Master knows of no
trends, demands, commitments, events or uncertainties which will result in or which are reasonably
likely to result in the Masters liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its discretion, cause the
Master to cease trading operations and liquidate all open positions under certain circumstances
including a decrease in Net Asset Value per Redeemable Unit to less than $400 as of the close of
business on any business day.
(b) Capital Resources.
(i) The Partnership has made no material commitments for capital expenditures.
(ii) The Partnerships capital consists of the capital contributions of the partners as
increased or decreased by gains or losses allocated from the Master on trading and by expenses,
interest income allocated from the Master, redemptions of Redeemable Units and distributions of
profits, if any. Gains or losses on trading cannot be predicted.
Market movements in commodities are
dependent upon fundamental and technical factors which the Advisor may or may not be able to
identify, such as changing supply and demand relationships, weather, government agricultural,
commercial and trade programs and policies, national and international political and economic
events and changes in interest rates. Partnership expenses consist of, among other things,
commissions, advisory fees and administrative fees. The level of
these expenses is dependent upon trading performance and the level of Net Assets maintained. In addition,
the amount of interest income payable by CGM is dependent upon interest rates over which the
Partnership has no control.
No forecast can be made as to the level of redemptions in any given period. A Limited Partner
may require the Partnership to redeem their Redeemable Units at their Net Asset Value as of the
last day of any month on 10 days notice to the General Partner. There is no fee charged to Limited
Partners in connection with redemptions.
Redemptions generally are funded out of the Partnerships cash holdings.
For the year ended December 31, 2009, 11,070.4695
Redeemable Units were redeemed totaling $11,759,877 and 1,161.1489 Redeemable Units of Special
Limited Partner Interest were redeemed totaling $1,250,000. For the year ended December 31, 2008,
34,524.8501 Redeemable Units were redeemed totaling $34,423,789. For the year ended December 31,
2007, 18,275.3118 Redeemable Units were redeemed totaling $15,219,791.
For the year ended December 31, 2009, there were additional sales of 3,576.7524 Redeemable
Units totaling $3,766,000 and 59.3707 Redeemable Units of Special Limited Partner Interest totaling
$64,276. For the year ended December 31, 2008, there were additional sales of 4,297.2083 Redeemable
Units totaling $4,079,000, 1,444.1797 Redeemable Units of Special Limited Partner Interest totaling
$1,517,815 and General Partner contributions representing 526.2272 Unit equivalents totaling
$500,000. For the year ended December 31, 2007, there were additional sales of 18,052.9703
Redeemable Units totaling $14,858,000.
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(c) Results of Operations.
For the year ended December 31, 2009, the Net Asset Value per Redeemable Unit decreased 0.4%
from $1,076.21 to $1,071.61. For the year ended December 31, 2008, the Net Asset Value per
Redeemable Unit increased 22.5% from $878.90 to $1,076.21. For the year ended December 31, 2007,
the Net Asset Value per Redeemable Unit increased 10.8% from $793.52 to $878.90.
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage commissions and related fees in 2009 of $3,266,492. Gains were primarily attributable to
the Masters trading of commodity futures in currencies,
indices, livestock, metals and softs and were partially offset by
losses in energy, grains, U.S. and non-U.S. interest rates.
2009 was a volatile year for the financial markets. The U.S. stock market entered 2009
reeling from the financial turmoil of 2008. The results of the sub-prime fallout, bank bailouts, auto industry bankruptcies,
and capitulating economic data overwhelmed not just stock prices, but fueled extraordinarily high levels of risk aversion. The
markets recovery was driven by stability in the banking sector and a rapid recovery in global markets. By mid-year 2009, the
market had hit bottom in March, banks were seeking to return TARP
bailout money and other leading indicators were recovering.
In the energy
sector, most of the products did not exhibit any strong trends and mostly remained range bound after the reversals earlier in the year.
This pattern of sharp reversal followed by non-directional volatility
attributed to the losses in this sector. The fixed income sector
also incurred losses. With the economic backdrop of 2008, yields started to exhibit asymmetric volatility due to extreme uncertainty
prevailing in the longer time horizon. Encouraged by the continuing fiscal and monetary efforts of the U.S. government to stabilize the
economy, the markets finally began to recover. In agricultural commodities, losses were realized primarily in corn and wheat. Prices of
corn and wheat both unexpectedly rallied in October as cold, wet weather threatened to delay harvest.
In currencies, the
Partnership registered gains primarily from the strong trend in the Australian Dollar which strengthened against the U.S. Dollar. The
Partnership recorded gains in the metals sector primarily from gold, zinc and copper. Investors across the world chose to buy gold through
ETFs and bullion as a hedge against inflation, driven by the massive monetary influx of the central banks. In softs, the Partnership
recorded gains in sugar, cotton and cocoa. In stock indices, strong trends emerged in the second quarter after the lows of March 2009.
The Partnership was favorably positioned to capitalize on these trends and recover the losses from the sharp reversals.
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage commissions and related fees in 2008 of $19,100,001. Gains were primarily attributable to
the Masters trading of commodity futures in currencies, energy, grains, U.S. and non-U.S. interest
rates, indices, livestock, metals and softs.
In 2008, the liquidity crisis that began in 2007 rapidly spread to all corners of the globe,
significantly pushing down global economic growth and presenting the economies with some of the
hardest challenges. During the year, the worlds credit markets virtually seized up, commodity
prices plunged and most major equity indices declined dramatically, while some of the large
financial institutions were under pressure. Faced with unprecedented and rapid deterioration in
economic data and outlook, and fearing a snowball adverse effect of the credit crunch, global
central banks reacted with aggressive campaigns of interest rate cuts and coordinated capital
injections. As the markets re-priced the cost of risk, several strong trends emerged. The
Partnership strongly capitalized on the trends and was profitable in currencies,
energy, grains, interest rates, metals, agricultural softs and stock indices. The Partnership was
well positioned to capitalize on the strong trends that emerged in currencies and realized
gains for the year. The U.S. Dollar was relatively strong compared with most of the other developed
economy currencies. The Euro was put to its first major test since
its inception. The UK, Germany and
France continued to show weak growth early in the year and as the situations worsened in the
latter part of the year, these countries officially entered
recession. The Japanese Yen remained an
exception and showed extraordinary strength as the carry trade reversed.
The Partnership realized most of the profits in the energy sector by capturing both the
bullish and the bearish trends. In the earlier part of the year, crude oil pushed towards a
historic high of $147 per barrel and in the latter part, the trend suddenly reversed and a strong
negative trend emerged with crude oil dropping to about $32 per barrel. Natural gas also
contributed to profits as prices plunged from $14 to about $5 per
MMBtu. In grains and agricultural softs,
the Partnership was profitable as the trading strategy successfully navigated the trend reversal
period and captured the bullish and bearish legs of the trend across several products. Corn prices
continued to show a strong correlation to the energy prices and while peaking at 800 cents around
mid year, closed the year around 400 cents.
The
Partnership was profitable in interest rates as the yields on the shorter end of the yield
curve dropped to almost unphysical levels. Short term U.S. Treasury bills were in such high demand
due to flight-to-quality that the yields dropped below zero. While
the 10 Yr T-bill yielded on an
average between 3.5%-4% most of the year, the yield dropped to 2% in December. Non-U.S. interest
rates also showed tremendous volatility as the rates dropped precipitously due to the actions of
the central banks.
The Partnership registered gains in the metals sector primarily from the industrials. Precious
metals did not demonstrate a very strong directional trend, but the industrial metals reflected the
general economic malaise. Copper, which is usually considered essential for growth, dropped from 4
cents to 1.5 cents per pound.
Global stock indices also contributed to the gains as the indices continued to test multi-year
lows. As banks continued to write off the assets and as bankruptcies loomed, investors lost
confidence in the equity markets. Futures markets offered greater flexibility as the SEC
temporarily banned short selling in the equity markets.
Interest income on 80% of the Partnerships 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 Masters assets in cash and/or place all
of the Masters assets in 90-day Treasury bills and pay the Partnership its allocated share of 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 twelve months ended December 31, 2009 decreased by $17,643 and $658,897, 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 twelve months ended December 31, 2009 as compared to
the corresponding periods in 2008.
Interest earned by the Partnership will increase the net asset value of the Partnership.
Brokerage commissions are calculated as a percentage of the Partnerships adjusted net asset value
on the last day of each month and are affected by trading performance, additions and redemptions.
Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values.
Brokerage commissions for the three and twelve months ended December 31, 2009 decreased by $212,359
and $948,097, respectively as compared to the corresponding periods in 2008. The decrease in
brokerage commissions is due to lower average net assets as compared to the corresponding periods
in 2008.
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Management fees are calculated as a percentage of the Partnerships adjusted 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 twelve months ended December 31, 2009 decreased by $93,657 and
$418,355, respectively as compared to the corresponding periods in 2008. The decrease in management
fees is due to lower average net assets as compared to the corresponding periods in 2008.
Administrative fees are calculated as a percentage of the Partnerships adjusted 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 twelve months ended December 31, 2009 decreased
by $23,414 and $104,591, respectively as compared to the corresponding periods in 2008. The
decrease in administrative fees is due to lower average net assets as compared to the corresponding
periods in 2008.
Special Limited Partner profit share allocations are based on the new trading profits generated by
the Advisor at the end of the quarter, as defined in the Management
Agreement. There were no profit share allocations earned for
the three months ended December 31, 2009. The profit share allocations earned for the twelve months
ended December 31, 2009 were $64,276. The profit share allocations earned for the three and twelve
months ended December 31, 2008 were $1,003,319 and $1,517,815, respectively.
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage commissions and related fees in 2007 of $9,655,747. Gains were primarily attributable to
the Masters trading of commodity futures in currencies, energy, grains, U.S. and non-U.S. interest
rates and indices and were partially offset by losses in livestock, metals and softs.
In 2007, the Partnership profited from macro-economic developments that stimulated volatility
and asset price trends of a favorable duration to the Advisors trading strategies. Negative
developments in the U.S. mortgage markets and the increasing probability of recession resonated
throughout the capital and commodity markets. A surge in volatility in the global equity markets in
February was driven by a tumble in Chinese stock valuations that curbed sentiment for global risk
assets and sparked a material sell-off in global stock prices. The year would go on to be
highlighted by two additional measurable equity market corrections in the summer and fall.
By mid-summer, dislocations in U.S. asset-backed and mortgage
backed credit markets emerged as the central focal point of global capital markets. The ensuing
re-pricing of credit risk resulted in a flight-to-quality driven rally in prices of sovereign debt,
especially in the U.S. Treasury markets as the Federal Open Market Committee acted rapidly to stem
the negative implications for growth. As a result of the series of rate cuts and negative economic
data, the U.S. dollar became less attractive and weakened materially against most major currencies
during the latter part of the year. Commodity markets continued to signal inflation, further
clouding the economic landscape, as global demand for most food and raw materials continued to be
robust. Prices moved rather erratically at times. The Partnership was profitable in currencies,
energy, grains, interest rates and stock indices while it recorded losses in metals and
agricultural softs.
The Partnership realized gains in currencies through wide exposure to various currencies.
While many developing countries and developed countries displayed strong growth and thus strong
trends in currencies, several factors including the unwinding of the Japanese Yen carry trade and
the changing views on global growth and inflation contributed to interruptions in established
long-term trends in certain other currencies. In the energy sector, crude oil continued the
long-term upward trend while breaching psychological resistance level of $100, although there were
brief corrections, midway through the year. The Partnership was positioned to benefit from this
strong trend across the petroleum complex. The Partnership realized profits in the grains sector as
wheat, corn and soybeans reached record level prices while consistently displaying a strong
long-term trend. Ethanol-based alternative fuel usage coupled the corn price to crude oil price as
these two products demonstrated strong correlation through the year, although the individual
demand-supply characteristics of these two distinct products continued to affect their respective
prices in the interim. Trading in interest rates was profitable as the yields declined in the later
part of the year. The sub prime issue demonstrated that redistribution of risk through
securitization of mortgages might not entirely shield investors from pricing risk inherent to the
valuation of these securities. By shifting away from riskier assets and by buying U.S. Treasury
notes as collateral for the riskier assets, the markets effectively lowered the yields on the U.S.
Treasury notes while establishing a strong trend. Equity indices also contributed to gains as
strong gains realized earlier in the year were able to offset losses later in the year due to major
corrections in global equity indices with high volatility levels previously seen during the
technology bubble earlier in the decade.
Trading in metals contributed to losses. While precious metals like gold reached record
prices, industrial metals like copper, zinc and aluminum experienced several price corrections,
synchronous with the conflicting views on global growth and inflation. In the agricultural softs
sector, coffee, cotton and sugar demonstrated strong long-term trends constantly punctuated by
short-term price reversals.
In the General Partners opinion, the Advisor continues to employ its trading methods in a
consistent and disciplined manner and its results are consistent with the objectives of the
Partnership and expectations for the Advisors programs. The General Partner continues to monitor
the Advisors performance on a daily, weekly, monthly and annual
basis to ensure that these objectives
are met.
Commodity 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 depends on the existence of major price trends and the ability
of the Advisor to correctly identify those price trends correctly. 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 expects to increase capital through operations.
In allocating substantially all of the assets of the Partnership to the Master, the General
Partner considered the Advisors 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.
(d)
Off-Balance Sheet Arrangements. None.
(e)
Contractual Obligations. None.
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(f) Operational Risk.
The Partnership through its investment in the Master is directly exposed to market risk and
credit risk, which arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment with increasing
transaction volumes and an expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk the risk of financial and opportunity loss and legal liability
attributable to operational problems, such as inaccurate pricing of transactions, untimely trade
execution, clearance and/or settlement, or the inability to process large volumes of transactions.
The Master is subject to increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater than in more
established markets.
Technological Risk the risk of loss attributable to technological limitations or hardware
failure that constrain the Masters ability to gather, process, and communicate information
efficiently and securely, without interruption, to customers, and in the markets where the
Partnership participates.
Legal/Documentation Risk the risk of loss attributable to deficiencies in the documentation
of transactions (such as trade confirmations) and customer relationships (such as master netting
agreements) or errors that result in noncompliance with applicable legal and regulatory
requirements.
Financial Control Risk the risk of loss attributable to limitations in financial systems
and controls. Strong financial systems and controls ensure that assets are safeguarded, that
transactions are executed in accordance with managements authorization, and that financial
information utilized by management and communicated to external parties, including the
Partnerships Redeemable Unit holders, creditors, and regulators, is free of material errors.
(g) 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. In making these estimates and assumptions, management has considered the
effects, if any, of events occurring after the date of the Partnerships Statements of Financial
Condition through the date the financial statements were issued. 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, 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).
Partnerships
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
Masters notes to the annual financial statements as of December 31, 2009.
Partnerships
and Masters Fair Value Measurements. The Partnership and the Master adopted ASC 820, Fair Value
Measurements and Disclosures (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.
The Partnership and the Master did not apply the deferral allowed by ASC 820 for nonfinancial
assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.
The
Partnership values investments in the 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 Partnerships
investment in the Master reflects its proportional interest in the Master. As of and for the years
ended December 31, 2009 and 2008, 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 managements 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
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assets from observable inputs (Level 2). As of and for the years ended December 31, 2009 and
2008, the Master did not hold any derivative instruments that are priced at fair value using
unobservable inputs through the application of managements assumptions and internal valuation
pricing models (Level 3).
Futures Contracts. The Master trades 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
can not occur (such as the 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.
Forward
Foreign Currency Contracts. Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed
quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily,
and the Masters net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the
forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the
Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are
recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income
and Expenses.
The Master does not
isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from
fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the
Statements of Income and Expenses.
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.
Income Taxes. Income taxes have not been provided as each partner is individually liable for
the taxes, if any, on their share of the Partnerships income and expenses.
In 2007, the Partnership adopted ASC 740, Income Taxes (formerly, FAS No. 48, Accounting
for Uncertainty in Income Taxes). ASC 740 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing
the Partnerships 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 concluded that no
provision for income tax is required in the Partnerships financial statements.
The following is the major tax jurisdiction for the Partnership and the earliest tax year
subject to examination: United States 2006.
Subsequent Events. In 2009, the Partnership adopted ASC 855, Subsequent Events (formerly,
FAS No. 165, Subsequent Events). The objective of ASC 855 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. Management has determined that there were no subsequent events requiring adjustment or disclosure
in the financial statements.
Recent Accounting Pronouncements. In January 2010, the FASB issued Accounting Standards Update
No. 2010-06 (ASU 2010-06), Improving Disclosures about Fair Value Measurements, which , among
other things, amends ASC 820 to require entities to separately present purchases, sales, issuances,
and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such
items on a gross basis rather than on a net basis), and which clarifies existing disclosure
requirements provided by ASC 820 regarding the level of disaggregation and the inputs and valuation
techniques used to measure fair value for measurements that fall within either Level 2 or Level 3
of the fair value hierarchy. ASU 2010-06 is effective for interim and annual periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements (which are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years).
Management is currently assessing the impact that the adoption of ASU 2010-06 will have on the
Partnerships financial statements disclosures.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (ASU 2010-09), Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which among other things
amended ASC 855 to remove the requirement for an SEC filer to disclose the date through which subsequent events
have been evaluated. This change alleviates potential conflicts between ASC 855 and the SECs requirements.
All of the amendments in this update are effective upon issuance of this update. Management has included the provisions of these
amendments in the financial statements.
Certain prior period amounts have been reclassified to conform to the current year presentation.
14
Table of Contents
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Introduction
All of the Partnerships 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
the Master are acquired for speculative trading purposes, and all or substantially all of the Masters
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 Masters main line of business.
The
risk to the limited partners that have purchased Redeemable Units is limited
to the amount of their capital contributions to the Partnership and
their share of the Partnership 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 market value of the Masters open
positions and, consequently, in its earnings and cash flow. The Masters 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 Masters 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 Masters 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 Masters 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 Masters 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 Masters losses in any market sector will be limited to Value at Risk or by
the Masters attempts to manage its market risk.
Materiality
as used in this section, Qualitative and Quantitative Disclosures About Market
Risk, is based on an assessment of reasonably possible market movements and the potential losses
caused by such movements, taking into account the leverage, optionality and multiplier features of
the Masters market sensitive instruments.
Quantifying the Partnerships Trading Value at Risk
The following quantitative disclosures regarding the Masters market risk exposures contain
forward-looking statements within the meaning of the safe harbor from civil liability provided
for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section
27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act)). All quantitative disclosures in
this section are deemed to be forward-looking statements for purposes of the safe harbor except for
statements of historical fact (such as the terms of particular contracts and the number of market
risk sensitive instruments held during or at the end of the reporting period).
The Masters risk exposure in the various market sectors traded by the Advisor is quantified
below in terms of Value at Risk. Due to the Partnerships mark-to-market accounting, any loss in
the fair value of the Partnerships investment in the Master is directly reflected in the Partnerships
earnings (realized or unrealized). 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 intervals. The maintenance margin levels are established by dealers and exchanges using
historical price studies as well as an assessment of current market volatility (including the
implied volatility of the options on a given futures contract) and economic fundamentals to provide
a probabilistic estimate of the maximum expected near-term one-day price fluctuation. 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.
In the case of market sensitive instruments which are not exchange traded (almost exclusively
currencies in the case of the Master), the margin requirements for the equivalent futures positions
have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers margins have been used.
The fair value of the Masters futures and forward positions does not have any optionality
component. However, the Advisor may trade commodity options. The Value at Risk associated with
options is reflected in the following table as the margin requirement attributable to the
instrument underlying each option. Where this instrument is a futures contract, the futures margin,
and where this
15
Table of Contents
instrument is a physical commodity, the futures-equivalent maintenance margin has been used.
This calculation is conservative in that it assumes that the fair value of an option will decline
by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair
values of the options traded by the Master in almost all cases fluctuate to a lesser extent than
those of the underlying instruments.
In
quantifying the Masters Value at Risk, 100% positive correlation in the different
positions held in each market risk category has been assumed. Consequently, the margin requirements
applicable to the open contracts have simply been added to determine each trading categorys
aggregate Value at Risk. The diversification effects resulting from the fact that the Masters
positions are rarely, if ever, 100% positively correlated have not been reflected.
The Partnerships Trading Value at Risk in Different Market Sectors
Value
at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Masters open
positions by market category as of December 31, 2009 and
December 31, 2008, the highest and lowest value at any point and
the average value during the
years. All open position
trading risk exposures of the Master have been included in calculating the figures set forth below.
As of December 31, 2009, the Masters total capitalization
was $171,212,260 and the
Partnership owned approximately 25.7% of the Master. The Partnership invests substantially all of
its assets in the Master. The Partnerships Value at Risk for the portion of its assets that are
traded indirectly through its investment in the Master as of December 31, 2009 was as follows:
December 31, 2009
% of Total | High | Low | Average * | |||||||||||||||||
Market Sector | Value at Risk | Capitalization | Value at Risk | Value at Risk | Value at Risk | |||||||||||||||
Currencies |
$ | 2,410,532 | 1.41 | % | $ | 8,136,447 | $ | 833,881 | $ | 4,612,528 | ||||||||||
Energy |
684,083 | 0.40 | % | 3,017,929 | 273,236 | 1,214,764 | ||||||||||||||
Grains |
549,675 | 0.32 | % | 1,846,996 | 96,550 | 731,407 | ||||||||||||||
Interest Rates U.S. |
142,150 | 0.08 | % | 2,365,808 | 87,777 | 859,990 | ||||||||||||||
Interest Rates Non-U.S. |
1,869,099 | 1.09 | % | 8,320,518 | 471,498 | 2,867,131 | ||||||||||||||
Livestock |
59,200 | 0.04 | % | 160,380 | 1,080 | 58,409 | ||||||||||||||
Metals |
1,222,254 | 0.71 | % | 1,806,942 | 297,478 | 1,002,985 | ||||||||||||||
Softs |
1,131,557 | 0.66 | % | 1,479,945 | 190,202 | 768,323 | ||||||||||||||
Indices |
4,809,915 | 2.81 | % | 12,019,804 | 623,680 | 5,396,991 | ||||||||||||||
Total |
$ | 12,878,465 | 7.52 | % | ||||||||||||||||
* | Annual average of month-end value at risk | |
As of December 31, 2008, the Masters total capitalization was $224,490,942 and the Partnership owned approximately 27.1% of the Master. The Partnership invests substantially all of its assets in the Master. The Partnerships Value at Risk for the portion of its assets that are traded indirectly through its investment in the Master as of December 31, 2008 was as follows: |
December 31, 2008
% of Total | High | Low | Average | |||||||||||||||||
Market Sector |
Value at Risk | Capitalization | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Currencies |
$ | 1,855,003 | 0.83 | % | $ | 35,051,712 | $ | 1,110,258 | $ | 17,137,503 | ||||||||||
Energy |
446,536 | 0.20 | % | 5,209,200 | 310,300 | 1,557,045 | ||||||||||||||
Grains |
161,000 | 0.07 | % | 1,281,500 | 52,500 | 498,714 | ||||||||||||||
Interest Rates U.S. |
719,400 | 0.32 | % | 2,381,150 | 24,412 | 619,143 | ||||||||||||||
Interest Rates Non-U.S. |
1,293,650 | 0.58 | % | 4,718,751 | 461,503 | 1,792,563 | ||||||||||||||
Livestock |
13,200 | 0.01 | % | 27,600 | 800 | 15,664 | ||||||||||||||
Metals |
680,383 | 0.30 | % | 2,071,925 | 31,044 | 777,494 | ||||||||||||||
Softs |
201,831 | 0.09 | % | 752,387 | 14,000 | 395,956 | ||||||||||||||
Indices |
592,157 | 0.26 | % | 5,407,658 | 235,978 | 2,482,935 | ||||||||||||||
Total |
$ | 5,963,160 | 2.66 | % | ||||||||||||||||
* | Annual average of month-end value at risk |
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Master is typically many times the
applicable maintenance margin requirement (margin requirements generally range between 2% and 15%
of contract face value) as well as many times the capitalization of the Master. The magnitude of
the Masters open positions creates a risk of ruin not typically found in most other
16
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investment vehicles. Because of the size of its positions, certain market conditions
unusual, but historically recurring from time to time could cause the Master to incur severe
losses over a short period of time. The foregoing Value at Risk table as well as the past
performance of the Master give no indication of this risk of ruin.
Non-Trading Risk
The Master has non-trading market risk on its foreign cash balances not needed for margin.
However, these balances (as well as any market risk they represent) are immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Masters market risk exposures except
for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how
the Master manages its primary market risk exposures constitute forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The
Masters primary market risk exposures as well as the strategies used and to be used by the General
Partner and the Advisor for managing such exposures are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual results of the Masters risk
controls to differ materially from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors,
political upheavals, changes in historical price relationships, an influx of new market
participants, increased regulation and many other factors could result in material losses as well
as in material changes to the risk exposures and the management strategies of the Master. There can
be no assurance that the Masters current market exposure and/or risk management strategies will
not change materially or that any such strategies will be effective in either the short or long
term. Investors must be prepared to lose all or substantially all of their investment in the
Master.
The following were the primary trading risk exposures of the Master as of December 31, 2009, by market sector.
Interest Rates. Interest rate movements directly affect the price of the futures
positions held by the Master and indirectly the value of its stock index and currency positions.
Interest rate movements in one country as well as relative interest rate movements between
countries materially impact the Masters profitability. The Masters primary interest rate exposure
is to interest rate fluctuations in the United States and the other G-8 countries. However, the
Master also takes futures positions on the government debt of smaller nations e.g., Australia.
Currencies. The Masters currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships between different currencies and
currency pairs. These fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the risk profile of the
Masters currency sector will change significantly in the future. The currency trading Value at
Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk inherent to the dollar-based Master in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Masters primary equity exposure is to equity price risk in the G-8
countries. The stock index futures traded by the Master are limited to futures on broadly based
indices. The Masters primary exposures were in the EUREX stock indices. The General Partner
anticipates little, if any, trading in non-G-8 stock indices. The Master is primarily exposed to
the risk of adverse price trends or static markets in the major U.S., European and Japanese
indices. (Static markets would not cause major market changes but would make it difficult for the
Master to avoid being whipsawed into numerous small losses.)
Metals. The Masters primary metal market exposure is to fluctuations in the price of
gold, copper, aluminum and zinc.
Softs. The Masters primary commodities exposure is to agricultural price movements
which are often directly affected by severe or unexpected weather conditions. Cocoa, sugar, and
cotton accounted for the bulk of the Masters commodity exposure.
17
Table of Contents
Energy. The Masters primary energy market exposure is to natural gas and oil price
movements, often resulting from political developments in the Middle East. Oil prices can be
volatile and substantial profits and losses have been and are expected to continue to be
experienced in this market.
Grains. The Masters commodities exposure is to agricultural price movements which are
often directly affected by severe or unexpected weather conditions.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Master as of December 31, 2009.
Foreign Currency Balances. The Masters primary foreign currency balances are in
Japanese yen, Euro and Canadian dollars. The Advisor regularly converts foreign currency balances
to U.S. dollars in an attempt to control the Masters non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Masters 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.
The General Partner monitors the Masters performance and the concentration of its open
positions, and consults with the Advisor concerning the Masters overall risk profile. If the
General Partner felt it necessary to do so, the General Partner could require the Advisor to close
out individual positions as well as enter certain positions traded on behalf of the Master.
However, any such intervention would be a highly unusual event. The General Partner primarily
relies on the Advisors own risk control policies while maintaining a general supervisory overview
of the Masters market risk exposures.
The Advisor applies its own risk management policies to its trading. The Advisor often follows
diversification guidelines, margin limits and stop loss points to exit a position. The Advisors
research of risk management often suggests ongoing modifications to its trading programs.
As part of the General Partners risk management, the General Partner periodically meets with
the Advisor to discuss its risk management and to look for any material changes to the Advisors
portfolio balance and trading techniques. The Advisor is required to notify the General Partner of
any material changes to its programs.
18
Table of Contents
Item 8. | Financial Statements and Supplementary Data. |
FAIRFIELD FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page | ||
Number | ||
Oath or Affirmation |
F-2 | |
Managements Report on Internal Control over Financial Reporting |
F-3 | |
Reports of Independent Registered Public Accounting Firms |
F-4 F-6 | |
Statements of Financial Condition at December 31, 2009 and 2008 |
F-7 | |
Statements
of Income and Expenses for the years ended December 31, 2009,
2008 and 2007 |
F-8 | |
Statements
of Changes in Partners Capital for the years ended
December 31, 2009, 2008 and 2007 |
F-9 | |
Notes to Financial Statements |
F-10 F-20 | |
Selected Unaudited Quarterly Financial Data |
F-21 | |
Financial Statements of CMF Graham Capital Master Fund L.P. Oath or Affirmation |
F-22 |
|
Reports of Independent Registered Public Accounting Firms |
F-23 F-25 | |
Statements
of Financial Condition at December 31, 2009 and 2008 |
F-26 | |
Condensed Schedules of
Investments at December 31, 2009 and 2008 |
F-27 F-28 | |
Statements
of Income and Expenses for the year ended December 31, 2009,
2008 and 2007 |
F-29 | |
Statements
of Changes in Partners Capital for the year ended
December 31, 2009, 2008 and 2007 |
F-30 | |
Notes to Financial Statements |
F-31 F-39 | |
Selected Unaudited Quarterly Financial Data |
F-40 |
F-1
Table of Contents
To the Limited
Partners of
Fairfield Futures Fund L.P. II
Fairfield Futures Fund L.P. II
To the best of the knowledge and belief of the undersigned, the
information contained herein is accurate and complete.
By: | Jennifer Magro |
Chief Financial Officer and Director
Ceres Managed Futures LLC
General Partner,
Fairfield Futures Fund L.P. II
Ceres Managed Futures LLC
55 East 59th Street
10th Floor
New York, N.Y. 10022
212-559-2011
55 East 59th Street
10th Floor
New York, N.Y. 10022
212-559-2011
F-2
Table of Contents
Managements
Report on Internal Control Over
Financial Reporting
Financial Reporting
The management of Fairfield Futures Fund L.P. II (formerly,
Citigroup Fairfield Futures Fund L.P. II) (the
Partnership), Ceres Managed Futures LLC (formerly, Citigroup
Managed Futures LLC), is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in Rules 13a 15(f) and
15d 15(f) under the Securities Exchange Act of 1934
and for our assessment of internal control over financial
reporting. The Partnerships internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America. The Partnerships internal
control over financial reporting includes those policies and
procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Partnership;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of the Partnership are being made only in
accordance with authorizations of management and directors of
the Partnership; and
(iii) provide reasonable assurance regarding prevention or
timely detection and correction of unauthorized acquisition, use
or disposition of the Partnerships assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The management of Fairfield Futures Fund L.P. II has
assessed the effectiveness of the Partnerships internal
control over financial reporting as of December 31, 2009.
In making this assessment, management used the criteria set
forth in the Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on our assessment, management concluded
that the Partnership maintained effective internal control over
financial reporting as of December 31, 2009 based on the
criteria referred to above.
The Partnerships independent registered public accounting
firm, Deloitte & Touche LLP, has audited the effectiveness
of the Partnerships internal control over financial
reporting as of December 31, 2009, as stated in their
report dated March 19, 2010 which appears herein.
Jennifer Magro
Chief Financial Officer and Director
Ceres Managed Futures LLC
General Partner,
Fairfield Futures Fund L.P. II
Chief Financial Officer and Director
Ceres Managed Futures LLC
General Partner,
Fairfield Futures Fund L.P. II
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Fairfield Futures Fund L.P. II:
Fairfield Futures Fund L.P. II:
We have audited the accompanying statement of financial condition of Fairfield Futures Fund L.P. II
(the Partnership) as of December 31, 2009, and the related statements of income and expenses, and
changes in partners capital for the year then ended. We also have audited the Partnerships
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Partnerships management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on these financial statements and an opinion on the Partnerships internal control over
financial reporting based on our audit. The financial statements of the Partnership for the years
ended December 31, 2008 and 2007 were audited by other auditors whose reports, dated March 26, 2009
and March 24, 2008, respectively, expressed unqualified opinions on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A partnerships internal control over financial reporting is a process designed by, or under the
supervision of, the partnerships principal executive and principal financial officers, or persons
performing similar functions, and effected by the partnerships general partner, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
A partnerships internal control over financial reporting includes those policies and procedures
that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the partnership; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of
the partnership are being made only in accordance with authorizations of management and general
partner of the partnership; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Partnerships assets that could
have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Fairfield Futures Fund L.P. II as of December 31, 2009, and the
results of its operations and its changes in partners capital for the year then ended, in
conformity with accounting principles generally accepted in the United States of America. Also, in
our opinion, the Partnership maintained, in all material respects, effective internal control over
financial reporting as of
December 31, 2009, based on the criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
New York, New York
New York, New York
March 19, 2010
F-4
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Partners of
Fairfield Futures Fund L.P. II:
Fairfield Futures Fund L.P. II:
In our opinion, the accompanying statement of financial condition, the related statement of income
and expenses, and statement of changes in partners capital present fairly, in all material
respects, the financial position of Fairfield Futures Fund L.P. II (formerly known as Citigroup
Fairfield Futures Fund L.P. II) at December 31, 2008 and the results of its operations for the year
then ended in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Partnership maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Partnerships management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express opinions on these financial statements and on the Partnerships internal control over
financial reporting based on our integrated audit. We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audit of the financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 2009
March 26, 2009
F-5
Table of Contents
Report of Independent Registered Public Accounting Firm
The Partners
Fairfield Futures Fund L.P. II:
Fairfield Futures Fund L.P. II:
We have audited the accompanying statements of income and expenses and changes in partners capital
Fairfield Futures Fund L.P. II (formerly, Citigroup Fairfield Futures Fund L.P. II) for the year
ended December 31, 2007. These financial statements are the responsibility of the Partnerships
management. Our responsibility is to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the results of operations and changes in partners capital of Fairfield Futures Fund L.P.
II for the year ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
March 24, 2008
March 24, 2008
F-6
Table of Contents
2009 | 2008 | |||||||
Assets:
|
||||||||
Investment in Master, at fair value (Note 1)
|
$ | 44,070,980 | $ | 60,716,373 | ||||
Cash (Note 3c)
|
103,564 | 171,400 | ||||||
Total assets
|
$ | 44,174,544 | $ | 60,887,773 | ||||
Liabilities and Partners Capital:
|
||||||||
Liabilities:
|
||||||||
Accrued expenses:
|
||||||||
Brokerage commissions (Note 3c)
|
$ | 165,655 | $ | 228,329 | ||||
Management fees (Note 3b)
|
73,303 | 100,972 | ||||||
Administrative fees (Note 3a)
|
18,326 | 25,243 | ||||||
Professional fees
|
19,723 | 57,582 | ||||||
Other
|
7,471 | 18,835 | ||||||
Redemptions payable
|
524,840 | 7,655,240 | ||||||
Total liabilities
|
809,318 | 8,086,201 | ||||||
Partners Capital (Notes 1 and 5):
|
||||||||
General Partner, 1,250.2679 Unit equivalents outstanding at
December 31, 2009 and 2008, respectively
|
1,339,800 | 1,345,551 | ||||||
Special Limited Partner, 442.4015 and 1,544.1797 Redeemable
Units of Limited Partnership Interest outstanding at
December 31, 2009 and 2008, respectively
|
474,082 | 1,661,862 | ||||||
Limited Partners, 38,774.5548 and 46,268.2719 Redeemable Units
of Limited Partnership Interest outstanding at December 31,
2009 and 2008, respectively
|
41,551,344 | 49,794,159 | ||||||
Total partners capital
|
43,365,226 | 52,801,572 | ||||||
Total liabilities and partners capital
|
$ | 44,174,544 | $ | 60,887,773 | ||||
See accompanying notes to financial statements.
F-7
Table of Contents
Fairfield Futures
Fund L.P. II
Statements of Income and Expenses
for the years ended December 31, 2009, 2008 and 2007
Statements of Income and Expenses
for the years ended December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
Income:
|
||||||||||||
Net realized gains (losses) on closed contracts allocated from
Master
|
$ | 2,947,993 | $ | 18,751,076 | $ | 11,562,268 | ||||||
Change in net unrealized gains (losses) on open contracts
allocated from Master
|
318,499 | 348,925 | (1,906,521 | ) | ||||||||
Interest Income allocated from Master
|
31,264 | 690,161 | 2,284,911 | |||||||||
Expenses allocated from Master
|
(167,985 | ) | (301,466 | ) | (273,193 | ) | ||||||
Total income (loss)
|
3,129,771 | 19,488,696 | 11,667,465 | |||||||||
Expenses:
|
||||||||||||
Brokerage commissions (Note 3c)
|
2,041,895 | 2,989,992 | 3,023,496 | |||||||||
Management fees (Note 3b)
|
903,247 | 1,321,602 | 1,336,711 | |||||||||
Administrative fees (Note 3a)
|
225,812 | 330,403 | 334,177 | |||||||||
Professional fees
|
117,024 | 125,698 | 127,050 | |||||||||
Other
|
34,262 | 31,028 | 59,293 | |||||||||
Total expenses
|
3,322,240 | 4,798,723 | 4,880,727 | |||||||||
Net income (loss) before allocation to Special Limited Partner
|
(192,469 | ) | 14,689,973 | 6,786,738 | ||||||||
Allocation to Special Limited Partner (Note 3b)
|
(64,276 | ) | (1,517,815 | ) | | |||||||
Net income (loss) after allocation to Special Limited Partner
|
$ | (256,745 | ) | $ | 13,172,158 | $ | 6,786,738 | |||||
Net income (loss) per Redeemable Unit of Limited Partnership
Interest and General Partner Unit equivalent (Notes 1 and 6)
|
$ | (4.60 | ) | $ | 197.31 | $ | 85.38 | |||||
Weighted average units outstanding
|
42,526.3913 | 67,734.9400 | 80,103.1417 | |||||||||
See accompanying notes to financial statements.
F-8
Table of Contents
Fairfield Futures
Fund L.P. II
Statements of Changes in Partners Capital
for the years ended December 31, 2009, 2008 and 2007
Statements of Changes in Partners Capital
for the years ended December 31, 2009, 2008 and 2007
Special |
||||||||||||||||
Limited |
Limited |
General |
||||||||||||||
Partners | Partner | Partner | Total | |||||||||||||
Partners Capital at December 31, 2006
|
$ | 60,877,548 | $ | 79,352 | $ | 574,541 | $ | 61,531,441 | ||||||||
Sale of 18,052.9703 Redeemable Units of Limited Partnership
Interest
|
14,858,000 | | | 14,858,000 | ||||||||||||
Redemption of 18,275.3118 Redeemable Units of Limited
Partnership Interest
|
(15,219,791 | ) | | | (15,219,791 | ) | ||||||||||
Net income (loss)
|
6,716,382 | 8,538 | 61,818 | 6,786,738 | ||||||||||||
Partners Capital at December 31, 2007
|
67,232,139 | 87,890 | 636,359 | 67,956,388 | ||||||||||||
Sale of 4,297.2083 Redeemable Units of Limited Partnership
Interest
|
4,079,000 | | | 4,079,000 | ||||||||||||
Addition of 526.2272 Units of General Partner Interest
|
| | 500,000 | 500,000 | ||||||||||||
Allocation of 1,444.1797 Redeemable Units of Special Limited
Partner Interest
|
| 1,517,815 | | 1,517,815 | ||||||||||||
Redemption of 34,524.8501 Redeemable Units of Limited
Partnership Interest
|
(34,423,789 | ) | | | (34,423,789 | ) | ||||||||||
Net income (loss) available for pro rata distribution
|
12,906,809 | 56,157 | 209,192 | 13,172,158 | ||||||||||||
Partners Capital at December 31, 2008
|
49,794,159 | 1,661,862 | 1,345,551 | 52,801,572 | ||||||||||||
Sale of 3,576.7524 Redeemable Units of Limited Partnership
Interest
|
3,766,000 | | | 3,766,000 | ||||||||||||
Allocation of 59.3707 Redeemable Units of Special Limited
Partner Interest
|
| 64,276 | | 64,276 | ||||||||||||
Redemption of 11,070.4695 Redeemable Units of Limited
Partnership Interest
|
(11,759,877 | ) | | | (11,759,877 | ) | ||||||||||
Redemption of 1,161.1489 Redeemable Units of Special Limited
Partner Interest
|
| (1,250,000 | ) | | (1,250,000 | ) | ||||||||||
Net income (loss) available for pro rata distribution
|
(248,938 | ) | (2,056 | ) | (5,751 | ) | (256,745 | ) | ||||||||
Partners Capital at December 31, 2009
|
$ | 41,551,344 | $ | 474,082 | $ | 1,339,800 | $ | 43,365,226 | ||||||||
Net Asset Value per Unit:
|
2007:
|
$ | 878.90 | ||
2008:
|
$ | 1,076.21 | ||
2009:
|
$ | 1,071.61 | ||
See accompanying notes to financial statements.
F-9
Table of Contents
1. | Partnership Organization: |
Fairfield Futures Fund L.P. II (formerly, Citigroup
Fairfield Futures Fund L.P. II) (the
Partnership) is a limited partnership which was
organized on December 18, 2003 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 commodity
interests that are traded by the Master (as defined below) are
volatile and involve a high degree of market risk.
Between January 12, 2004 (commencement of the offering
period) and March 12, 2004, 28,601 redeemable units of
Limited Partnership Interest (Redeemable Units) and
285 Unit equivalents of General Partnership Interest were sold
at $1,000 per unit. The proceeds of the initial offering were
held in an escrow account until March 15, 2004 at which
time they were remitted to the Partnership for trading. The
Partnership privately and continuously offers up to 200,000
Redeemable Units 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 (NFA). 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 June 1, 2006, the Partnership allocated substantially
all of its capital to the CMF Graham Capital Master
Fund L.P. (the Master), a limited partnership
organized under the partnership laws of the State of New York.
The Partnership purchased 74,569.3761 units of the Master with
cash equal to $75,688,021. The Master was formed in order to
permit accounts managed by Graham Capital Management L.P.
(Graham or the Advisor) using the
K4D-12.5 Program, the Advisors proprietary, systematic
trading program, to invest together in one trading vehicle. The
General Partner is also the general partner of the Master. In
addition, the Masters commodity broker is CGM. 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 financial statements of the Master, including the Condensed
Schedule of Investments, are contained elsewhere in this report
and should be read together with the Partnerships
financial statements.
At December 31, 2009 and 2008, the Partnership owned
approximately 25.7% and 27.1%, respectively of the Master. It is
the Partnerships intention 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 General Partner and each Limited Partner share in the
profits and losses of the Partnership, after the allocation to
the Special Limited Partner (defined herein) 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, net of distributions.
The Partnership will be liquidated upon the first to occur of
the following: December 31, 2023; the net asset value of a
Redeemable Unit decreases to less than $400 per Redeemable Unit
as of a close of any business day; a decline in net assets after
trading commences to less than $1,000,000; or under certain
F-10
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
other circumstances as defined in the Limited Partnership
Agreement of the Partnership (the Limited Partnership
Agreement).
On July 1, 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (FAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, also known as FASB Accounting Standards
Codification (ASC) 105, Generally Accepted
Accounting Principles (ASC 105) (the
Codification). ASC 105 established the exclusive
authoritative reference for U.S. Generally Accepted
Accounting Principles (GAAP) for use in financial
statements except for Securities and Exchange Commission
(SEC) rules and interpretive releases, which are
also authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting
standards. The Codification is the single source of
authoritative accounting principles generally accepted in the
United States and applies to all financial statements issued
after September 15, 2009.
2. | Accounting Policies: |
a. | 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. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnerships Statements of Financial Condition through the date the financial statements were issued. As a result, actual results could differ from these estimates. | |
b. | Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230, 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). | |
c. | Partnerships 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 Masters notes to the annual financial statements as of December 31, 2009. |
Partnerships Fair Value
Measurements. The Partnership adopted ASC 820,
Fair Value Measurements and Disclosures (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 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 Partnership did not apply the deferral allowed
by ASC 820 for nonfinancial assets and nonfinancial liabilities
measured at fair value on a nonrecurring basis.
In 2009, the Partnership adopted amendments to ASC 820, Fair
Value Measurements and Disclosures (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) which
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. These amendments to ASC 820
also reaffirm 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. These
amendments to ASC 820 are required for interim and annual
F-11
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
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 Partnerships Level 2 assets
and liabilities. The adoption of the amendments to ASC 820 had
no effect on the Partnerships Financial Statements.
The Partnership values investments in the 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
Partnerships investment in the Master reflects its
proportional interest in the Master. As of and for the years
ended December 31, 2009 and 2008, the Partnership did not
hold any derivative instruments that 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 managements assumptions
and internal valuation pricing models (Level 3).
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Investment in Master
|
$ | 44,070,980 | $ | | $ | 44,070,980 | $ | | ||||||||
Total fair value
|
$ | 44,070,980 | $ | | $ | 44,070,980 | $ | | ||||||||
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2008 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Investment in Master
|
$ | 60,716,373 | $ | | $ | 60,716,373 | $ | | ||||||||
Total fair value
|
$ | 60,716,373 | $ | | $ | 60,716,373 | $ | | ||||||||
Masters 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.
Masters Fair Value Measurements. The
Master adopted ASC 820, Fair Value Measurements and Disclosures
(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
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
F-12
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
did not apply the deferral allowed by ASC 820 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 years ended December 31,
2009 and 2008, the Master did not hold any derivative
instruments that are priced at fair value using unobservable
inputs through the application of managements assumptions
and internal valuation pricing models (Level 3).
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 406,652 | $ | 406,652 | $ | | $ | | ||||||||
Forwards
|
1,562,793 | 1,309,482 | 253,311 | | ||||||||||||
Total assets
|
1,969,445 | 1,716,134 | 253,311 | | ||||||||||||
Total fair value
|
$ | 1,969,445 | $ | 1,716,134 | $ | 253,311 | $ | | ||||||||
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2008 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 1,162,793 | $ | 1,162,793 | $ | | $ | | ||||||||
Forwards
|
86,222 | 86,222 | | | ||||||||||||
Total assets
|
1,249,015 | 1,249,015 | | | ||||||||||||
Liabilities
|
||||||||||||||||
Forwards
|
$ | 366,179 | $ | | $ | 366,179 | $ | | ||||||||
Total liabilities
|
366,179 | | 366,179 | | ||||||||||||
Total fair value
|
$ | 882,836 | $ | 1,249,015 | $ | (366,179 | ) | $ | | |||||||
Futures Contracts. The Master trades 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 can not occur (such as the 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
F-13
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
limited. Realized gains (losses) and changes in unrealized gains
(losses) on futures contracts are included in the Statements of
Income and Expenses.
Forward Foreign Currency Contracts. Foreign
currency contracts are those contracts where the Master agrees
to receive or deliver a fixed quantity of foreign currency for
an
agreed-upon
price on an agreed future date. Foreign currency contracts are
valued daily, and the Masters net equity therein,
representing unrealized gain or loss on the contracts as
measured by the difference between the forward foreign exchange
rates at the dates of entry into the contracts and the forward
rates at the reporting date, is included in the Statements of
Financial Condition. Realized gains (losses) and changes in
unrealized gains (losses) on foreign currency contracts are
recognized in the period in which the contract is closed or the
changes occur, respectively, and are included in the Statements
of Income and Expenses.
The Master does not isolate that portion of the results of
operations arising from the effect of changes in foreign
exchange rates on investments from fluctuations from changes in
market prices of investments held. Such fluctuations are
included in net gain (loss) on investments in the Statements of
Income and Expenses.
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, cooper, 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.
d. | Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnerships income and expenses. |
In 2007, the Partnership adopted ASC 740, Income Taxes
(formerly, FAS No. 48, Accounting for
Uncertainty in Income Taxes). ASC 740 provides guidance
for how uncertain tax positions should be recognized, measured,
presented and disclosed in the financial statements. ASC 740
requires the evaluation of tax positions taken or expected to be
taken in the course of preparing the Partnerships
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 concluded that no provision for income tax is required
in the Partnerships financial statements.
The following is the major tax jurisdiction for the Partnership
and the earliest tax year subject to examination: United
States 2006.
e. | Subsequent Events. In 2009, the Partnership adopted ASC 855, Subsequent Events (formerly, FAS No. 165, Subsequent Events). The objective of ASC 855 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. Management has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements. |
F-14
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
f. | Recent Accounting Pronouncements. In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Improving Disclosures about Fair Value Measurements, which, among other things, amends ASC 820 to require entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements provided by ASC 820 regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements (which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years). Management is currently assessing the impact that the adoption of ASU 2010-06 will have on the Partnerships financial statements disclosures. |
In February 2010, the FASB issued Accounting Standards Update
No. 2010-09
(ASU
2010-09),
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements, which among other
things amended ASC 855 to remove the requirement for an SEC
filer to disclose the date through which subsequent events have
been evaluated. This change alleviates potential conflicts
between ASC 855 and the SECs requirements. All of the
amendments in this update are effective upon issuance of this
update. Management has included the provisions of these
amendments in the financial statements.
g. | Certain prior period amounts have been reclassified to conform to the current year presentation. | |
h. | Net Income (Loss) per Redeemable Unit. Net income (loss) per Redeemable Unit is calculated in accordance with investment company guidance. See footnote 6 for Financial Highlights. |
3. | Agreements: |
a. | Limited Partnership Agreement: |
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make
trading decisions for the Partnership. The Partnership will pay
the General Partner a monthly administrative fee in return for
its services to the Partnership equal to 1/24 of 1% (0.5% per
year) of month-end Net Assets of the Partnership. Month-end Net
Assets, for the purpose of calculating administrative fees are
Net Assets, as defined in the Limited Partnership Agreement,
prior to the reduction of the current months management
fee, the General Partners administrative fee, the profit
share allocation accrual and any redemptions or distributions as
of the end of such month. This fee may be increased or decreased
at the discretion of the General Partner.
b. | Management Agreement: |
The General Partner, on behalf of the Partnership, has entered
into a management agreement (the Management
Agreement) with Graham, a registered commodity trading
advisor. The Advisor is not affiliated with the General Partner
or CGM and is not responsible for the organization or operation
of the Partnership. The Partnership pays the Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net
Assets allocated to the Advisor. Month-end Net Assets, for the
purpose of calculating management fees are Net Assets, as
defined in the Limited Partnership Agreement, prior to the
reduction of the current months management fee, the
General Partners administrative fee, the profit share
allocation accrual and any redemptions or distributions as of
the end of such month. The Management Agreement may be
terminated upon notice by either party.
F-15
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
In addition, Graham is a special limited partner (the
Special Limited Partner) of the Partnership and
receives a quarterly profit share allocation to its capital
account in the Partnership in the form of units of the
Partnership, the value of which shall be equal to 20% of the New
Trading Profits, as defined in the Management Agreement, earned
by Graham on behalf of the Partnership during each calendar
quarter and are issued as Special Limited Partner Units.
In allocating substantially all of the assets of the Partnership
to the Master, the General Partner considered the Advisors
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.
c. | Customer Agreement: |
The Partnership has entered into a customer agreement (the
Customer Agreement) which provides that the
Partnership will pay CGM a monthly brokerage commission equal to
9/24 of 1% (4.5% per year) of month-end Net Assets in lieu of
brokerage commissions on a per trade basis. Month-end Net
Assets, for the purpose of calculating brokerage commissions are
Net Assets, as defined in the Limited Partnership Agreement,
prior to the reduction of the current months brokerage
commissions, management fee, the General Partners
administrative fee, profit share allocation accrual, other
expenses and any redemptions or distributions as of the end of
such month. The Master will pay for National Futures Association
fees as well as exchange, clearing, user,
give-up and
floor brokerage fees (collectively the clearing
fees). CGM will pay a portion of its brokerage commissions
to financial advisors who have sold Redeemable Units in the
Partnership. Brokerage commissions will be paid for the life of
the Partnership, although the rate at which such commissions are
paid may be changed. The Partnerships assets, not held in
the Masters account at CGM, are held in the
Partnerships account at CGM. The Partnerships cash
is deposited by CGM in segregated bank accounts to the extent
required by Commodity Futures Trading Commission regulations.
CGM has agreed to pay the Partnership interest on its allocable
share of 80% of the average daily equity maintained in cash in
the Masters account during each month at a
30-day
U.S. Treasury bill rate determined weekly by CGM based on
the average noncompetitive yield on
3-month
U.S. Treasury bills maturing in 30 days from the date
on which such weekly rate is determined. Alternatively, CGM may
place up to all of the Masters assets in 90-day U.S.
Treasury bills and pay the Partnership its allocable share of
80% of the interest earned on 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. The
Customer Agreement may be terminated upon notice by either party.
4. | Trading Activities: |
The Partnerships pro-rata share of the results of the
Masters trading activities are shown in the Statements of
Income and Expenses.
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, Balance Sheet
(formerly, FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts)
have been met.
Brokerage commissions are calculated as a percentage of the
Partnerships adjusted net asset value on the last day of
each month and are affected by trading performance, additions
and redemptions.
The Master adopted ASC 815, Derivatives and Hedging (formerly,
FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities) as of January 1,
2009 which requires qualitative
F-16
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. ASC 815 only expands the disclosure
requirements for derivative instruments and related hedging
activities and has no impact on the Statements of Financial
Condition, Statements of Income and Expenses and Statements of
Changes in Partners Capital. All of the commodity
interests owned by the Master are held for trading purposes. The
average number of futures and metal forward contracts traded for
the year ended December 31, 2009 based on a quarterly
calculation, was 6,966. The average notional values of currency
forward contracts for the year ended December 31, 2009
based on a quarterly calculation, was $944,178,446. The
following table indicates the fair values of derivative
instruments of futures and forward contracts as separate assets
and liabilities.
December 31, 2009 | ||||
Assets
|
||||
Futures Contracts
|
||||
Currencies
|
$ | 29,498 | ||
Energy
|
357,695 | |||
Grains
|
223,296 | |||
Indices
|
871,966 | |||
Interest Rates U.S.
|
10,273 | |||
Interest Rates
Non-U.S.
|
169,828 | |||
Livestock
|
20,482 | |||
Metals
|
93,687 | |||
Softs
|
810,673 | |||
Total unrealized appreciation on open futures contracts
|
$ | 2,587,398 | ||
Liabilities
|
||||
Futures Contracts
|
||||
Currencies
|
$ | (17,658 | ) | |
Energy
|
(155,804 | ) | ||
Grains
|
(131,463 | ) | ||
Indices
|
(231,926 | ) | ||
Interest Rates U.S.
|
(104,941 | ) | ||
Interest Rates
Non-U.S.
|
(1,108,842 | ) | ||
Metals
|
(175,760 | ) | ||
Softs
|
(254,352 | ) | ||
Total unrealized depreciation on open futures contracts
|
$ | (2,180,746 | ) | |
Net unrealized appreciation on open futures contracts
|
$ | 406,652 | * | |
Assets
|
||||
Forward Contracts
|
||||
Currencies
|
$ | 7,739,782 | ||
Metals
|
2,324,147 | |||
Total unrealized appreciation on open forward contracts
|
$ | 10,063,929 | ||
Liabilities
|
||||
Forward Contracts
|
||||
Currencies
|
$ | (7,486,471 | ) | |
Metals
|
(1,014,665 | ) | ||
Total unrealized depreciation on open forward contracts
|
$ | (8,501,136 | ) | |
Net unrealized appreciation on open forward contracts
|
$ | 1,562,793 | ** | |
F-17
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
* | This amount is in Net unrealized appreciation on open futures contracts on the Masters Statements of Financial Condition. | |
** | This amount is in Net unrealized appreciation on open forward contracts on the Masters Statements of Financial Condition. |
The following table indicates the trading gains and losses, by
market sector, on derivative instruments for the period ended
December 31, 2009.
December 31, 2009 |
||||||||
Sector
|
Gain (loss) from Trading | |||||||
Currencies
|
$ | 3,111,674 | ||||||
Energy
|
(3,297,102 | ) | ||||||
Grains
|
(1,460,464 | ) | ||||||
Indices
|
15,480,005 | |||||||
Interest Rates U.S.
|
(3,698,764 | ) | ||||||
Interest Rates
Non-U.S.
|
(2,767,757 | ) | ||||||
Livestock
|
21,968 | |||||||
Softs
|
1,832,133 | |||||||
Metals
|
3,246,372 | |||||||
Total
|
$ | 12,468,065 | *** | |||||
*** | This amount is in Gain (loss) from trading, net on the Masters Statements of Income and Expenses. |
5. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors and they
become Limited Partners on the first day of the month after
their subscription is processed. Distributions of profits, if
any, will be made at the sole discretion of the General Partner
and at such times as the General Partner may decide. A Limited
Partner may require the Partnership to redeem their Redeemable
Units at their Net Asset Value per Redeemable Unit as of the
last day of any month on ten days notice to the General
Partner. There is no fee charged to Limited Partners in
connection with redemptions.
6. | Financial Highlights: |
Changes in the Net Asset Value per Redeemable Unit of Limited
Partnership Interest for the years ended December 31, 2009,
2008 and 2007, were as follows:
2009 | 2008 | 2007 | ||||||||||
Net realized and unrealized gains (losses)*
|
$ | 26.62 | $ | 239.00 | $ | 80.12 | ||||||
Interest income
|
0.74 | 9.73 | 28.54 | |||||||||
Expenses **
|
(31.96 | ) | (51.42 | ) | (23.28 | ) | ||||||
Increase (decrease) for the year
|
(4.60 | ) | 197.31 | 85.38 | ||||||||
Net Asset Value per Redeemable Unit, beginning of year
|
1,076.21 | 878.90 | 793.52 | |||||||||
Net Asset value per Redeemable Unit, end of year
|
$ | 1,071.61 | $ | 1,076.21 | $ | 878.90 | ||||||
* | Includes Partnership brokerage commissions and expense allocated from the Master. | |
** | Excludes Partnership brokerage commissions and expenses allocated from the Master. |
F-18
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
2009 | 2008 | 2007 | ||||||||||
Ratios to Average Net Assets:
|
||||||||||||
Net investment income (loss) before allocation to Special
Limited Partner***
|
(7.7 | )% | (6.9 | )% | (4.4 | )% | ||||||
Operating expenses
|
7.8 | % | 8.0 | % | 7.9 | % | ||||||
Allocation to Special Limited Partner
|
0.1 | % | 2.4 | % | | % | ||||||
Total expenses
|
7.9 | % | 10.4 | % | 7.9 | % | ||||||
Total return:
|
||||||||||||
Total return before allocation to Special Limited Partner
|
(0.3 | )% | 26.0 | % | 10.8 | % | ||||||
Allocation to Special Limited Partner
|
(0.1 | )% | (3.5 | )% | | % | ||||||
Total return after allocation to Special Limited Partner
|
(0.4 | )% | 22.5 | % | 10.8 | % | ||||||
*** | Interest income allocated from Master less total expenses. |
The above ratios may vary for individual investors based on the
timing of capital transactions during the year. Additionally,
these ratios are calculated for the Limited Partner class using
the Limited Partners share of income, expenses and average
net assets.
7. | 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 Partnership/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 Partnership/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 Partnerships/Masters 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 Partnerships/ Masters risk of loss
is reduced through the use of legally enforceable master netting
agreements with counterparties that permit the
Partnership/Master to offset unrealized gains and losses and
other assets and liabilities with such counterparties upon the
occurrence of certain events. The Partnership/Master have credit
risk and concentration risk as the sole counterparty or broker
with respect to the Partnerships/Masters assets is
F-19
Table of Contents
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
CGM or a CGM affiliate. Credit risk with respect to
exchange-traded instruments is reduced to the extent that
through CGM, the Partnerships/Masters counterparty
is an exchange or clearing organization.
The General Partner monitors and attempts to control the
Partnerships/Masters 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 Partnership/Master may be subject. These
monitoring systems generally 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
Partnerships/Masters business, these instruments may
not be held to maturity.
F-20
Table of Contents
Selected unaudited quarterly financial data for the Partnership for the years ended December 31, 2009 and 2008 are summarized below:
For the period from | For the period from | For the period | For the period from | |||||||||||||
October 1, 2009 to | July 1, 2009 to | from April 1, 2009 | January 1, 2009 to | |||||||||||||
December 31, 2009 | September 30, 2009 | to June 30, 2009 | March 31, 2009 | |||||||||||||
Net realized and
unrealized trading
gains (losses),
expenses and
interest income
allocated from
Master, net of
brokerage
commissions |
$ | (96,416 | ) | $ | 3,219,232 | $ | (1,078,976 | ) | $ | (955,964 | ) | |||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | (425,338 | ) | $ | 2,912,328 | $ | (1,381,204 | ) | $ | (1,298,255 | ) | |||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | (425,338 | ) | $ | 2,848,052 | $ | (1,381,204 | ) | $ | (1,298,255 | ) | |||||
Increase (decrease)
in Net Asset Value
per Unit |
$ | (11.02 | ) | $ | 69.79 | $ | (33.39 | ) | $ | (29.98 | ) | |||||
For the period from | For the period from | For the period | For the period from | |||||||||||||
October 1, 2008 to | July 1, 2008 to | from April 1, 2008 | January 1, 2008 to | |||||||||||||
December 31, 2008 | September 30, 2008 | to June 30, 2008 | March 31, 2008 | |||||||||||||
Net realized and
unrealized trading
gains (losses),
expenses and
interest income
allocated from
Master, net of
brokerage
commissions |
$ | 9,049,935 | $ | (3,293,203 | ) | $ | 5,028,423 | $ | 5,713,549 | |||||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | 8,646,610 | $ | (3,734,323 | ) | $ | 4,560,112 | $ | 5,217,574 | |||||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | 7,646,291 | $ | (3,734,323 | ) | $ | 4,042,616 | $ | 5,217,574 | |||||||
Increase (decrease)
in Net Asset Value
per Unit |
$ | 126.71 | $ | (55.94 | ) | $ | 59.14 | $ | 67.40 | |||||||
F-21
TABLE OF CONTENTS
Table of Contents
To the best of the knowledge and belief of the undersigned, the
information contained herein is accurate and complete.
By: |
Jennifer Magro Chief Financial Officer and Director Ceres Managed Futures LLC General Partner, CMF Graham Capital Master Fund L.P. |
Ceres Managed Futures LLC
55 East 59th Street
10th Floor
New York, N.Y. 10022
212-559-2011
55 East 59th Street
10th Floor
New York, N.Y. 10022
212-559-2011
F-22
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
CMF Graham Capital Master Fund L.P.:
CMF Graham Capital Master Fund L.P.:
We have audited the accompanying statement of financial condition of CMF Graham Capital Master Fund
L.P. (the Partnership), including the condensed schedule of investments, as of December 31, 2009, and the
related statements of income and expenses, and changes in partners capital for the year then
ended. These financial statements are the responsibility of the Partnerships management. Our
responsibility is to express an opinion on these financial statements based on our audit. The
financial statements of the Partnership for the years ended December 31, 2008 and 2007 were audited
by other auditors whose reports, dated March 26, 2009 and March 24, 2008, expressed unqualified
opinions on those statements.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Partnership is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Partnerships internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of CMF Graham Capital Master Fund L.P. as of December 31, 2009, and the results of its
operations and its changes in partners capital for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
New York, New York
March 19, 2010
F-23
Table of Contents
Report of Independent Auditors
To the Partners of
CMF Graham Capital Master Fund L.P.:
CMF Graham Capital Master Fund L.P.:
In our opinion, the accompanying
statement of financial condition, including the condensed schedule of
investments, and the related statement of income and expenses, and statement of changes in partners
capital present fairly, in all material respects, the financial position of CMF Graham Capital
Master Fund L.P. at December 31, 2008, and the results of its operations for the year then
ended in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 26, 2009
March 26, 2009
F-24
Table of Contents
Report of Independent Registered Public Accounting Firm
The Partners
CMF Graham Capital Master Fund L.P.:
CMF Graham Capital Master Fund L.P.:
We have audited the accompanying statements of income and expenses and changes in partners capital
of CMF Graham Capital Master Fund L.P. for the year ended December 31, 2007. These financial
statements are the responsibility of the Partnerships management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the results of operations and changes in partners capital of CMF Graham Capital Master
Fund L.P. for the year ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
March 24, 2008
March 24, 2008
F-25
Table of Contents
2009 | 2008 | |||||||
Assets:
|
||||||||
Equity in commodity futures trading account:
|
||||||||
Cash (Note 3c)
|
$ | 153,765,196 | $ | 214,551,266 | ||||
Cash margin (Note 3c)
|
15,503,558 | 9,073,580 | ||||||
Net unrealized appreciation on open futures contracts
|
406,652 | 1,162,793 | ||||||
Net unrealized appreciation on open forward contracts
|
1,562,793 | | ||||||
Total assets
|
$ | 171,238,199 | $ | 224,787,639 | ||||
Liabilities and Partners Capital:
|
||||||||
Liabilities:
|
||||||||
Net unrealized depreciation on open forward contracts
|
$ | | $ | 279,957 | ||||
Accrued expenses:
|
||||||||
Professional fees
|
25,939 | 16,740 | ||||||
Total liabilities
|
25,939 | 296,697 | ||||||
Partners Capital:
|
||||||||
General Partner, 0.0000 Unit equivalents at December 31,
2009 and 2008
|
| | ||||||
Limited Partners Capital, 104,371.4673 and 146,784.8652
Redeemable Units of Limited Partnership Interest outstanding at
December 31, 2009 and 2008, respectively
|
171,212,260 | 224,490,942 | ||||||
Total liabilities and partners capital
|
$ | 171,238,199 | $ | 224,787,639 | ||||
See accompanying notes to financial statements.
F-26
Table of Contents
Notional ($)/ |
||||||||||||
Number of |
% of Partners |
|||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased
|
||||||||||||
Currencies
|
2 | $ | 360 | 0.00 | %* | |||||||
Energy
|
449 | 242,192 | 0.14 | |||||||||
Grains
|
286 | 34,342 | 0.02 | |||||||||
Indices
|
1,065 | 633,603 | 0.37 | |||||||||
Interest Rates U.S.
|
233 | (94,262 | ) | (0.06 | ) | |||||||
Interest Rates
Non-U.S.
|
1,523 | (996,822 | ) | (0.58 | ) | |||||||
Livestock
|
74 | 20,482 | 0.01 | |||||||||
Metals
|
78 | (100,473 | ) | (0.06 | ) | |||||||
Softs
|
589 | 556,321 | 0.33 | |||||||||
Total futures contracts purchased
|
295,743 | 0.17 | ||||||||||
Futures Contracts Sold
|
||||||||||||
Currencies
|
69 | 11,480 | 0.01 | |||||||||
Energy
|
308 | (40,301 | ) | (0.02 | ) | |||||||
Grains
|
275 | 57,491 | 0.03 | |||||||||
Indices
|
7 | 6,437 | 0.00 | * | ||||||||
Interest Rates U.S.
|
50 | (406 | ) | (0.00 | )* | |||||||
Interest Rates
Non-U.S.
|
451 | 57,808 | 0.03 | |||||||||
Metals
|
10 | 18,400 | 0.01 | |||||||||
Total futures contracts sold
|
110,909 | 0.06 | ||||||||||
Unrealized Appreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 550,199,867 | 7,739,782 | 4.52 | ||||||||
Metals
|
429 | 2,324,147 | 1.36 | |||||||||
Total unrealized appreciation on open forward contracts
|
10,063,929 | 5.88 | ||||||||||
Unrealized Depreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 551,949,465 | (7,486,471 | ) | (4.37 | ) | ||||||
Metals
|
285 | (1,014,665 | ) | (0.59 | ) | |||||||
Total unrealized depreciation on open forward contracts
|
(8,501,136 | ) | (4.96 | ) | ||||||||
Total fair value
|
$ | 1,969,445 | 1.15 | % | ||||||||
* Due to rounding.
See accompanying notes to financial statements.
F-27
Table of Contents
Notional ($)/ |
||||||||||||
Number of |
% of Partners |
|||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased
|
||||||||||||
Currencies
|
14 | $ | 1,840 | 0.00 | %* | |||||||
Energy
|
96 | 325,615 | 0.15 | |||||||||
Grains
|
52 | 13,370 | 0.01 | |||||||||
Indices
|
5 | (19,645 | ) | (0.01 | ) | |||||||
Interest Rates
Non-U.S.
|
1,235 | 947,609 | 0.42 | |||||||||
Interest Rates U.S.
|
564 | 507,653 | 0.23 | |||||||||
Metals
|
52 | 33,132 | 0.01 | |||||||||
Softs
|
13 | 3,251 | 0.00 | * | ||||||||
Total futures contracts purchased
|
1,812,825 | 0.81 | ||||||||||
Futures Contracts Sold
|
||||||||||||
Currencies
|
14 | 8,038 | 0.00 | * | ||||||||
Energy
|
159 | (266,237 | ) | (0.12 | ) | |||||||
Grains
|
53 | (207,227 | ) | (0.09 | ) | |||||||
Indices
|
87 | (86,831 | ) | (0.04 | ) | |||||||
Interest Rates
Non-U.S.
|
17 | (9,163 | ) | (0.00 | )* | |||||||
Livestock
|
11 | 25,220 | 0.01 | |||||||||
Metals
|
16 | (35,970 | ) | (0.02 | ) | |||||||
Softs
|
99 | (77,862 | ) | (0.03 | ) | |||||||
Total futures contracts sold
|
(650,032 | ) | (0.29 | ) | ||||||||
Unrealized Appreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 87,112,212 | 2,398,640 | 1.07 | ||||||||
Metals
|
59 | 297,268 | 0.13 | |||||||||
Total unrealized appreciation on open forward contracts
|
2,695,908 | 1.20 | ||||||||||
Unrealized Depreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 86,429,816 | (2,764,819 | ) | (1.23 | ) | ||||||
Metals
|
96 | (211,046 | ) | (0.10 | ) | |||||||
Total unrealized depreciation on open forward contracts
|
(2,975,865 | ) | (1.33 | ) | ||||||||
Total fair value
|
$ | 882,836 | 0.39 | % | ||||||||
* Due to rounding.
See accompanying notes to financial statements.
F-28
Table of Contents
CMF Graham
Capital Master Fund L.P.
Statements of Income and Expenses
for the years ended
December 31, 2009, 2008 and 2007
Statements of Income and Expenses
for the years ended
December 31, 2009, 2008 and 2007
2009 | 2008 | 2007 | ||||||||||
Income:
|
||||||||||||
Net gains (loss) on trading of commodity interests:
|
||||||||||||
Net realized gains (losses) on closed contracts
|
$ | 11,381,456 | $ | 61,878,532 | $ | 37,612,230 | ||||||
Change in net unrealized gains (losses) on open contracts
|
1,086,609 | 1,251,182 | (7,303,599 | ) | ||||||||
Gain (loss) from trading, net
|
12,468,065 | 63,129,714 | 30,308,631 | |||||||||
Interest income
|
125,256 | 2,202,621 | 7,463,020 | |||||||||
Total income (loss)
|
12,593,321 | 65,332,335 | 37,771,651 | |||||||||
Expenses:
|
||||||||||||
Clearing fees
|
614,452 | 940,378 | 857,460 | |||||||||
Professional fees
|
46,648 | 30,056 | 29,466 | |||||||||
Total expenses
|
661,100 | 970,434 | 886,926 | |||||||||
Net income (loss)
|
11,932,221 | $ | 64,361,901 | $ | 36,884,725 | |||||||
Net income (loss) per Redeemable Unit of Limited Partnership
Interest (Notes 1 and 6)
|
$ | 112.10 | $ | 396.07 | $ | 187.22 | ||||||
Weighted average units outstanding
|
118,814.5765 | 167,979.9211 | 208,730.7408 | |||||||||
See accompanying notes to financial statements.
F-29
Table of Contents
CMF Graham
Capital Master Fund L.P.
Statements of Changes in Partners Capital
for the years ended
December 31, 2009, 2008 and 2007
Statements of Changes in Partners Capital
for the years ended
December 31, 2009, 2008 and 2007
Partners |
||||
Capital | ||||
Partners Capital at December 31, 2006
|
$ | 226,673,516 | ||
Net income (loss)
|
36,884,725 | |||
Sale of 20,875.4865 Redeemable Units of Limited Partnership
Interest
|
21,067,811 | |||
Redemption of 62,214.7369 Redeemable Units of Limited
Partnership Interest
|
(63,568,645 | ) | ||
Distribution of interest income to feeder funds
|
(7,463,020 | ) | ||
Partners Capital at December 31, 2007
|
213,594,387 | |||
Net income (loss)
|
64,361,901 | |||
Sale of 3,998.1810 Redeemable Units of Limited Partnership
Interest
|
5,096,496 | |||
Redemption of 43,548.1379 Redeemable Units of Limited
Partnership Interest
|
(56,359,221 | ) | ||
Distribution of interest income to feeder funds
|
(2,202,621 | ) | ||
Partners Capital at December 31, 2008
|
224,490,942 | |||
Net income (loss)
|
11,932,221 | |||
Sale of 7,455.9216 Redeemable Units of Limited Partnership
Interest
|
11,912,177 | |||
Redemption of 49,869.3195 Redeemable Units of Limited
Partnership Interest
|
(76,997,824 | ) | ||
Distribution of interest income to feeder funds
|
(125,256 | ) | ||
Partners Capital at December 31, 2009
|
$ | 171,212,260 | ||
Net Asset Value per Redeemable Unit of Limited Partnership
Interest:
|
2007:
|
$ | 1,146.29 | ||
2008:
|
$ | 1,529.39 | ||
2009:
|
$ | 1,640.41 | ||
See accompanying notes to financial statements.
F-30
Table of Contents
1. | Partnership Organization: |
CMF Graham Capital Master Fund L.P. (the
Master) is a limited partnership which was organized
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, livestock, metals, softs, U.S. and
non-U.S. interest rates. The commodity interests that are traded
by the Master are volatile and involve a high degree of market
risk. The Master is authorized to sell an unlimited number of
redeemable units of Limited Partnership Interest
(Redeemable Units).
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 Master. 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 (NFA). 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 Master, 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 April 1, 2006 (commencement of trading operations),
Diversified 2000 Futures Fund L.P. (formerly Citigroup
Diversified 2000 Futures Fund L.P.) (Diversified
2000), Smith Barney Global Markets Futures Fund
(Global Markets), Diversified Multi-Advisor Futures
Fund L.P. (formerly Smith Barney Diversified Futures
Fund L.P.) (Diversified I) and Diversified
Multi-Advisor Futures Fund L.P. II (formerly Smith Barney
Diversified Futures Fund L.P. II) (Diversified
II) each allocated a portion of its capital to the Master.
Diversified 2000 purchased 41,952.2380 Redeemable Units with
cash equal to $41,952,238. Global Markets purchased 2,355.5550
Redeemable Units with cash equal to $2,355,555. Diversified I
purchased 14,741.1555 Redeemable Units with cash equal to
$14,741,156. Diversified II purchased 11,192.9908
Redeemable Units with cash equal to $11,192,991. On May 1,
2006, Alera Portfolios SPC. (Alera SPC) allocated a
portion of its capital to the Master and purchased 4,592.0784
Redeemable Units with cash equal to $4,801,938. On June 1,
2006, Fairfield Futures Fund L.P. II (formerly Citigroup
Fairfield Futures Fund L.P. II) (Fairfield II)
allocated substantially all of its capital and Tactical
Diversified Futures Fund L.P. (formerly Citigroup
Diversified Futures Fund L.P.) (Tactical
Diversified) allocated a portion of its capital to the
Master. Fairfield II purchased 74,569.3761 Redeemable Units
with cash equal to $75,688,021. Tactical Diversified purchased
101,486.0491 Redeemable Units with cash equal to $103,008,482.
As of March 31, 2007, Alera SPC fully redeemed its
investment of 1,805.5482 Redeemable Units with a fair value of
$1,661,443, which includes interest income of $7,289. As of
December 31, 2007, Global Markets fully redeemed its
investment of 1,566.2278 Redeemable Units with a fair value of
$1,799,772, which includes interest income of $4,415. The Master
was formed to permit commodity pools managed now or in the
future by Graham Capital Management, L.P. (the
Advisor), using the K4D 12.5 program,
the Advisors proprietary, systematic trading program, to
invest together in one trading vehicle.
The Master operates under a structure where its investors
consist of Diversified 2000, Diversified I, Diversified II,
Fairfield II and Tactical Diversified (each a
Feeder, collectively the Funds) with
approximately 13.2%, 5.4%, 4.6%, 25.7% and 51.1% investments in
the Master at December 31, 2009, respectively. Diversified
2000, Diversified I, Diversified II, Fairfield II and
Tactical Diversified had approximately 12.6%, 5.0%, 4.7%, 27.1%
and 50.6% investments in the Master at December 31, 2008,
respectively.
F-31
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
The Master will be liquidated upon the first to occur of the
following: December 31, 2025; or under certain other
circumstances as defined in the Limited Partnership Agreement of
the Master (the Limited Partnership Agreement).
On July 1, 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (FAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, also known as FASB Accounting Standards
Codification (ASC) 105, Generally Accepted
Accounting Principles (ASC 105) (the
Codification). ASC 105 established the exclusive
authoritative reference for U.S. generally accepted
accounting principles (GAAP) for use in financial
statements except for Securities and Exchange Commission
(SEC) rules and interpretive releases, which are
also authoritative GAAP for SEC registrants. The Codification
supersedes all existing non-SEC accounting and reporting
standards. The Codification is the single source of
authoritative accounting principles generally accepted in the
United States and applies to all financial statements issued
after September 15, 2009.
2. | Accounting Policies: |
a. | 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. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Masters Statements of Financial Condition through the date the financial statements were issued. As a result, actual results could differ from these estimates. | |
b. | Statement of Cash Flows. The Master is not required to provide a Statement of Cash Flows as permitted by ASC 230, 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). | |
c. | Masters 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. |
Masters Fair Value Measurements. The
Master adopted ASC 820, Fair Value Measurements and Disclosures
(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 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 for nonfinancial
assets and nonfinancial liabilities measured at fair value on a
nonrecurring basis.
F-32
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
In 2009, the Master adopted amendments to ASC 820, Fair Value
Measurements and Disclosures (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) which
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. These amendments to ASC 820
also reaffirm 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. These
amendments to ASC 820 are 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 Masters Level 2 assets and
liabilities. The adoption of the amendments to ASC 820 had no
effect on the Masters Financial Statements.
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 years ended December 31,
2009 and 2008, the Master did not hold any derivative
instruments that are priced at fair value using unobservable
inputs through the application of managements assumptions
and internal valuation pricing models (Level 3).
Quoted Prices in |
||||||||||||||||
Active Markets for |
Significant Other |
Significant |
||||||||||||||
Identical Assets |
Observable Inputs |
Unobservable Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 406,652 | $ | 406,652 | $ | | $ | | ||||||||
Forwards
|
1,562,793 | 1,309,482 | 253,311 | | ||||||||||||
Total assets
|
1,969,445 | 1,716,134 | 253,311 | | ||||||||||||
Total fair value
|
$ | 1,969,445 | $ | 1,716,134 | $ | 253,311 | $ | | ||||||||
Quoted Prices in |
||||||||||||||||
Active Markets for |
Significant Other |
Significant |
||||||||||||||
Identical Assets |
Observable Inputs |
Unobservable Inputs |
||||||||||||||
12/31/2008 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 1,162,793 | $ | 1,162,793 | $ | | $ | | ||||||||
Forwards
|
86,222 | 86,222 | | | ||||||||||||
Total assets
|
1,249,015 | 1,249,015 | | | ||||||||||||
Liabilities
|
||||||||||||||||
Forwards
|
$ | 366,179 | $ | | $ | 366,179 | $ | | ||||||||
Total liabilities
|
366,179 | | 366,179 | | ||||||||||||
Total fair value
|
$ | 882,836 | $ | 1,249,015 | $ | (366,179 | ) | $ | | |||||||
d. | Futures Contracts. The Master trades 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 the 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 |
F-33
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
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. |
e. | Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Masters net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses. |
The Master does not isolate that portion of the results of
operations arising from the effect of changes in foreign
exchange rates on investments from fluctuations from changes in
market prices of investments held. Such fluctuations are
included in net gain (loss) on investments in the Statements of
Income and Expenses.
f. | 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. | |
g. | Income and Expenses Recognition. All of the income and expenses and realized and unrealized gains and losses on trading of commodity interests are determined on each valuation day and allocated pro rata among the Funds at the time of such determination. | |
h. | Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Masters income and expenses. |
In 2007, the Master adopted ASC 740, Income Taxes (formerly,
FAS No. 48, Accounting for Uncertainty in Income
Taxes). ASC 740 provides guidance for how uncertain tax
positions should be recognized, measured, presented and
disclosed in the financial statements. ASC 740 requires the
evaluation of tax positions taken or expected to be taken in the
course of preparing the Masters 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 Master 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 concluded that no provision for income tax is required
in the Masters financial statements.
F-34
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
The following is the major tax jurisdiction for the Master and
the earliest tax year subject to examination: United
States 2006.
i. | Subsequent Events. In 2009, the Master adopted ASC 855, Subsequent Events (formerly, FAS No. 165, Subsequent Events). The objective of ASC 855 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. Management has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements. | |
j. | Recent Accounting Pronouncements. In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Improving Disclosures about Fair Value Measurements, which, among other things, amends ASC 820 to require entities to separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such items on a gross basis rather than on a net basis), and which clarifies existing disclosure requirements provided by ASC 820 regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements (which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years). Management is currently assessing the impact that the adoption of ASU 2010-06 will have on the Masters financial statements disclosures. |
In February 2010, the FASB issued Accounting Standards Update
No. 2010-09
(ASU
2010-09),
Subsequent Events (Topic 855): Amendments to Certain
Recognition and Disclosure Requirements, which among other
things amended ASC 855 to remove the requirement for an SEC
filer to disclose the date through which subsequent events have
been evaluated. This change alleviates potential conflicts
between ASC 855 and the SECs requirements. All of the
amendments in this update are effective upon issuance of this
update. Management has included the provisions of these
amendments in the financial statements.
k. | Certain prior period amounts have been reclassified to conform to current year presentation. | |
l. | Net Income (Loss) per Redeemable Unit. Net income (loss) per Redeemable Unit is calculated in accordance with investment company guidance. See footnote 6 for Financial Highlights. |
3. | Agreements: |
a. | Limited Partnership Agreement: |
The General Partner administers the business and affairs of the
Master including selecting one or more advisors to make trading
decisions for the Master.
b. | Management Agreement: |
The General Partner, on behalf of the Master, has entered into a
management agreement (the Management Agreement) with
the Advisor, a registered commodity trading advisor. The Advisor
is not affiliated with the General Partner or CGM and is not
responsible for the organization or operation of the Master. The
Management Agreement provides that the Advisor has sole
discretion in determining the investment of the assets of the
Master. All management fees in connection with the Management
Agreement are borne by the Funds. The Management Agreement may
be terminated upon notice by either party.
F-35
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
c. | Customer Agreement: |
The Master has entered into a customer agreement (the
Customer Agreement) with CGM whereby CGM provides
services which include, among other things, the execution of
transactions for the Masters account in accordance with
orders placed by the Advisor. All exchange, clearing, user,
give-up,
floor brokerage and NFA fees (collectively the clearing
fees) are borne by the Master. All other fees including
CGMs direct brokerage commission shall be borne by the
Funds. All of the Masters assets are deposited in the
Masters account at CGM. The Masters cash is
deposited by CGM in segregated bank accounts to the extent
required by Commodity Futures Trading Commission regulations. At
December 31, 2009 and 2008, the amounts of cash held by the
Master for margin requirements was $15,503,558 and $9,073,580,
respectively. The Customer Agreement may be terminated upon
notice by either party.
4. | Trading Activities: |
The Master was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial
instruments and derivative commodity interests. The results of
the Masters trading activities are shown in the Statements
of Income and Expenses.
The Customer Agreement between the Master and CGM gives the
Master 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, Balance Sheet
(formerly, FASB Interpretation 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 number of futures and metal
forward contracts traded for the year ended December 31,
2009 based on a quarterly calculation, was 6,966. The average
notional values of currency forward contracts for the year ended
December 31, 2009 based on a quarterly calculation, was
$944,178,446.
The Master adopted ASC 815, Derivatives and Hedging (formerly,
FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities) as of January 1,
2009 which requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. ASC 815 only
expands the disclosure requirements for derivative instruments
and related hedging activities and has no impact on the
Statements of Financial Condition, Statements of Income and
Expenses and Statements of Changes in Partners Capital.
The following table indicates the fair values of derivative
instruments of futures and forward contracts as separate assets
and liabilities.
F-36
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
December 31, 2009 | ||||
Assets
|
||||
Futures Contracts
|
||||
Currencies
|
$ | 29,498 | ||
Energy
|
357,695 | |||
Grains
|
223,296 | |||
Indices
|
871,966 | |||
Interest Rates U.S.
|
10,273 | |||
Interest Rates
Non-U.S.
|
169,828 | |||
Livestock
|
20,482 | |||
Metals
|
93,687 | |||
Softs
|
810,673 | |||
Total unrealized appreciation on open futures contracts
|
$ | 2,587,398 | ||
Liabilities
|
||||
Futures Contracts
|
||||
Currencies
|
$ | (17,658 | ) | |
Energy
|
(155,804 | ) | ||
Grains
|
(131,463 | ) | ||
Indices
|
(231,926 | ) | ||
Interest Rates U.S.
|
(104,941 | ) | ||
Interest Rates
Non-U.S.
|
(1,108,842 | ) | ||
Metals
|
(175,760 | ) | ||
Softs
|
(254,352 | ) | ||
Total unrealized depreciation on open futures contracts
|
$ | (2,180,746 | ) | |
Net unrealized appreciation on open futures contracts
|
$ | 406,652 | * | |
Assets
|
||||
Forward Contracts
|
||||
Currencies
|
$ | 7,739,782 | ||
Metals
|
2,324,147 | |||
Total unrealized appreciation on open forward contracts
|
$ | 10,063,929 | ||
Liabilities
|
||||
Forward Contracts
|
||||
Currencies
|
$ | (7,486,471 | ) | |
Metals
|
(1,014,665 | ) | ||
Total unrealized depreciation on open forward contracts
|
$ | (8,501,136 | ) | |
Net unrealized appreciation on open forward contracts
|
$ | 1,562,793 | ** | |
* | This amount is in Net unrealized appreciation on open futures contracts on the Statements of Financial Condition. | |
** | This amount is in Net unrealized appreciation on open forward contracts on the Statements of Financial Condition. |
F-37
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
The following table indicates the trading gains and losses, by
market sector, on derivative instruments for the period ended
December 31, 2009.
December 31, 2009 |
||||||||
Sector
|
Gain (loss) from Trading | |||||||
Currencies
|
$ | 3,111,674 | ||||||
Energy
|
(3,297,102 | ) | ||||||
Grains
|
(1,460,464 | ) | ||||||
Indices
|
15,480,005 | |||||||
Interest Rates U.S.
|
(3,698,764 | ) | ||||||
Interest Rates
Non-U.S.
|
(2,767,757 | ) | ||||||
Livestock
|
21,968 | |||||||
Softs
|
1,832,133 | |||||||
Metals
|
3,246,372 | |||||||
Total
|
$ | 12,468,065 | *** | |||||
*** | This amount is in Gain (loss) from trading, net on the Statements of Income and Expenses. |
5. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors and they
become Limited Partners on the first day of the month after
their subscription is processed. A Limited Partner may withdraw
all or part of their capital contribution and undistributed
profits, if any, from the Master in multiples of the Net Asset
Value per Redeemable Unit of Limited Partnership Interest as of
the end of any day (the Redemption Date) after
a request for redemption has been made to the General Partner at
least 3 days in advance of the Redemption Date. The
Redeemable Units are classified as a liability when the Limited
Partner elects to redeem and informs the Master.
6. | Financial Highlights: |
Changes in the Net Asset Value per Redeemable Unit of
Partnership Interest for the years ended December 31, 2009,
2008 and 2007 were as follows:
2009 | 2008 | 2007 | ||||||||||
Net realized and unrealized gains (losses)*
|
$ | 111.45 | $ | 383.27 | $ | 150.83 | ||||||
Interest income
|
1.08 | 12.97 | 36.54 | |||||||||
Expenses**
|
(0.43 | ) | (0.17 | ) | (0.15 | ) | ||||||
Increase (decrease) for the period
|
112.10 | 396.07 | 187.22 | |||||||||
Distribution of interest income to feeder funds
|
(1.08 | ) | (12.97 | ) | (36.54 | ) | ||||||
Net Asset Value per Redeemable Unit, beginning of year
|
1,529.39 | 1,146.29 | 995.61 | |||||||||
Net Asset Value per Redeemable Unit, end of year
|
$ | 1,640.41 | $ | 1,529.39 | $ | 1,146.29 | ||||||
Ratios to Average Net Assets:
|
||||||||||||
Net investment income (loss)***
|
(0.3 | )% | 0.6 | % | 3.0 | % | ||||||
Operating expenses
|
0.4 | % | 0.4 | % | 0.4 | % | ||||||
Total return
|
7.3 | % | 34.6 | % | 18.8 | % | ||||||
* | Includes clearing fees. | |
** | Excludes clearing fees. | |
*** | Interest income less total expenses. |
F-38
Table of Contents
CMF Graham
Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2009
Notes to Financial Statements
December 31, 2009
The above ratios may vary for individual investors based on the
timing of capital transactions during the year. Additionally,
these ratios are calculated for the Limited Partner class using
the Limited Partners share of income, expenses and average
net assets.
7. | Financial Instrument Risks: |
In the normal course of its business, 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 Masters risk of loss in the event of
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 Masters 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 Masters assets is CGM or a
CGM affiliate. Credit risk with respect to exchange-traded
instruments is reduced to the extent that through CGM, the
Masters counterparty is an exchange or clearing
organization.
The General Partner monitors and attempts to control the
Masters 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 may be
subject. These monitoring systems generally 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 Masters
business, these instruments may not be held to maturity.
F-39
Table of Contents
Selected unaudited quarterly financial data for Graham Capital Master for the years ended December 31, 2009 and 2008 are summarized below: | ||||||||||||||||
For the period from | For the period from | For the period | For the period from | |||||||||||||
October 1, 2009 to | July 1, 2009 to | from April 1, 2009 | January 1, 2009 to | |||||||||||||
December 31, 2009 | September 30, 2009 | to June 30, 2009 | March 31, 2009 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of brokerage commissions and
clearing fees
including interest
income |
$ | 1,522,383 | $ | 14,250,196 | $ | (2,335,820 | ) | $ | (1,457,890 | ) | ||||||
Net income (loss) |
$ | 1,502,514 | $ | 14,240,193 | $ | (2,344,541 | ) | $ | (1,465,945 | ) | ||||||
Increase (decrease)
in Net Asset Value
per Redeemable Unit |
$ | 13.91 | $ | 135.03 | $ | (21.43 | ) | $ | (15.41 | ) | ||||||
For the period from | For the period from | For the period | For the period from | |||||||||||||
October 1, 2008 to | July 1, 2008 to | from April 1, 2008 | January 1, 2008 to | |||||||||||||
December 31, 2008 | September 30, 2008 | to June 30, 2008 | March 31, 2008 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of brokerage commissions and
clearing fees
including interest
income |
$ | 34,035,718 | $ | (8,466,890 | ) | $ | 18,680,824 | $ | 20,142,305 | |||||||
Net income (loss) |
$ | 34,029,127 | $ | (8,473,481 | ) | $ | 18,672,387 | $ | 20,133,868 | |||||||
Increase (decrease)
in Net Asset Value
per Redeemable Unit |
$ | 224.58 | $ | (52.04 | ) | $ | 112.99 | $ | 110.54 |
F-40
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
KPMG LLP (KPMG) was previously the principal accountant for the Partnership through June 26,
2008. On June 27, 2008, KPMG was dismissed as principal accountant and PricewaterhouseCoopers LLP
(PwC) was engaged as the independent registered public accounting firm. From June 27, 2008
through July 22, 2009, PwC was the principal accountant for the Partnership. On July 22, 2009,
PwC was dismissed as principal accountant and on July 23, 2009 Deloitte & Touche LLP (Deloitte)
was engaged as the independent registered public accounting firm. The decision to change
accountants was approved by the General Partner of the Partnership.
In connection with the audit of the fiscal year ended December 31, 2008, and through July 22, 2009,
and the audit of the fiscal year ended December 31, 2007, and through June 26, 2008, there were no
disagreements with PwC or KPMG, respectively, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference thereto in their report on
the financial statements for the corresponding year.
The respective audit report of PwC and KPMG on the financial statements of the Partnership as of
and for the years ended December 31, 2008 and 2007, respectively, did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope,
or accounting principle.
Item 9A(T). Controls and Procedures.
The Partnerships disclosure controls and procedures are designed to ensure that information
required to be disclosed under the Exchange Act 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 Partnerships
external disclosures.
The General Partners CEO and CFO have evaluated the effectiveness of the Partnerships
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2009 and, based on that evaluation, the CEO and CFO have concluded that at
that date the Partnerships disclosure controls and procedures were effective.
The Partnerships internal control over financial reporting is a process under the supervision
of the General Partners 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:
| pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; | ||
| provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnerships receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and | ||
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnerships assets that could have a material effect on the financial statements. |
The report included in Item 8. Financial Statements and Supplementary Data. includes
managements report on internal control over financial reporting (Managements Report) and an
attestation report of the Partnerships registered public accounting firm regarding internal
control over financial reporting. Managements Report was not required to be audited by the
Partnerships registered public accounting firm pursuant to
temporary rules of the SEC that permit the Partnership to provide only managementss report in this annual
report. Management elected to have its internal control over financial reporting audited.
There were no changes in the Partnerships internal control over financial reporting during
the fiscal quarter ended December 31, 2009 that materially affected, or are reasonably likely to
materially affect, the Partnerships internal control over financial reporting.
Item 9B. Other Information.
None.
19
Table of Contents
PART III
Item 10. | Directors and Executive Officers of the Registrant. |
The
Partnership has no officers, directors or significant employees and its affairs are
managed by its General Partner, Ceres Managed Futures LLC. Investment decisions are made by the
Advisor.
The officers and directors of the General Partner are Jerry Pascucci (President, Chief
Investment Officer and Director), Jennifer Magro (Chief Financial Officer, Vice President and
Director), Daryl Dewbrey (Secretary and Director), Shelley Deavitt Ullman (Senior Vice President
and Director) and Raymond Nolte (Director). Each director holds office until his or her successor
is elected, or until his or her earlier death, resignation or removal. Vacancies on the board of
directors may be filled by appointment by the sole member of the General Partner, Morgan Stanley
Smith Barney Holdings LLC which wholly owns the General Partner, or by unanimous vote of the
remaining directors, depending on the circumstances of the vacancy. The officers of the General
Partner are designated by the General Partners board of directors. Each officer holds office
until his or her death, resignation or removal.
Mr. Pascucci, age 40, is President, Chief Investment Officer and Director of the General
Partner (since March 2007, May 2005 and June 2005, respectively). Mr. Pascuccis principal status
was approved by the National Futures Association (NFA) in June 2005. He is also registered as an
associated person of the General Partner (since June 2009) and of Morgan Stanley Smith Barney LLC
(Morgan Stanley Smith Barney) (since August 2009). From March 2007 to July 2009, Mr. Pascucci
was a Managing Director of Citigroup Alternative Investments LLC (CAI), a division of Citigroup
Inc. (Citigroup) that administers its hedge fund and fund of funds businesses, and until July
2009, its commodity pool business. He was also Chief Investment Officer of CAIs Hedge Fund
Management Group from March 2007 to July 2009. He was registered as an associated person of
Citigroup Global Markets Inc. (Citigroup Global Markets) from February 2006 to July 2009. Mr.
Pascucci has been responsible for trading advisor selection, due diligence and portfolio
construction for managed futures funds and accounts since May 1999. Between May 1996 and May 1999,
Mr. Pascucci served as a Senior Credit Risk Officer for Citigroup Global Markets, focused primarily
on market and counterparty risks associated with Citigroup Global Markets commodity pool and hedge
fund clients. Prior to joining Citigroup Global Markets in May 1996, Mr. Pascucci was employed
(from October 1992) by ABN AMRO North America at its European American Bank subsidiary as a
corporate banking officer where he facilitated the establishment of credit lines and other loan
facilities for corporate clients.
Ms. Magro, age 38, is Chief Financial Officer, Director and Vice President of the General
Partner (since October 2006, May 2005 and August 2001, respectively). Ms. Magros principal status
was approved by the NFA in June 2005. She was also a Managing Director of CAI and Chief Operating
Officer of CAIs Hedge Fund Management Group from October 2006 to July 2009. Ms. Magro is
responsible for the financial, administrative and operational functions of the General Partner.
She is also responsible for the accounting and financial and regulatory reporting of the General
Partners managed futures funds. From March 1999 to July 2009, Ms. Magro was responsible for the
accounting and financial and regulatory reporting of Citigroups managed futures funds. She had
similar responsibilities with CAIs Hedge Fund Management Group (from October 2006 to July 2009). Prior to joining Citigroup Global Markets
in January 1996, Ms. Magro was employed by Prudential Securities Inc. (from July 1994) as a staff
accountant whose duties included the calculation of net asset values for commodity pools and real
estate investment products.
Mr. Dewbrey, age 39, is Secretary and Director of the General Partner (since July 2009 and
March 2007, respectively). He registered as an associated person of the General Partner in January
2004 and became a principal of the General Partner in March 2007. He is also registered as an
associated person of Morgan Stanley Smith Barney (since August 2009). He was registered as an
associated person of Citigroup Global Markets from March 1998 to July 2009. Mr. Dewbrey has worked
with the General Partner in varying capacities since April 2001, and, since May 2005, Mr. Dewbrey
has been head of managed futures product development. Mr. Dewbrey was a director of CAI
responsible for marketing and client services for CAIs Hedge Fund Management Group from February
2007 to July 2009. From October 1997 to September 2000, Mr. Dewbrey was head of Citigroup Global
Markets managed futures trading desk. In September 2000, Mr. Dewbrey was selected for the Salomon
Smith Barney Sales and Trading Training Program. Mr. Dewbrey began his career in the futures
markets with Rosenthal Collins Group, a futures brokerage firm, where he worked from May 1990 to
October 1997 in varying capacities on the trading floors of the Chicago Board of Trade, COMEX and
the New York Mercantile Exchange. Mr. Dewbrey is a member of the Managed Funds Association and the
Futures Industry Association.
Ms. Ullman, age 51, is a Managing Director of Citigroup Global Markets Futures Division and a
Senior Vice President and Director of the General Partner (since May 1997 and April 1994,
respectively). Ms. Ullmans principal status was approved by the NFA in June 1994. She was
registered as an associated person of the General Partner from January 2004 to July 2009. Ms.
Ullman is registered as an associated person of Citigroup Global Markets (since July 1993). She is
also the branch manager of the Citigroup Global Markets branch that supports the General Partner
(since January 2002). Previously, Ms. Ullman was a Vice President of Lehman Brothers (October 1985
to July 1993), with responsibility for execution, administration, operations and performance
analysis for managed futures funds and accounts. She was registered as an associated person of
Lehman Brothers Inc. (from February 1983 to July 1993) and was principal of Lehman Brothers Capital
Management Corp. (from April 1989 to July 1993).
Mr. Nolte, age 48, is the Chief Executive Officer and the Chairman of the Investment Committee
of CAIs Hedge Fund Management Group. He registered as an associated person and became a principal
of the General Partner in March 2007. He was appointed a Director of the General Partner in March
2007. He is also registered as an associated person of Citigroup Global Markets (since October
2005). He registered as an associated person and became a principal of CAI in March 2007. Prior
to joining CAI in September 2005, Mr. Nolte worked at Deutsche Bank and its affiliate Deutsche
Asset Management (from June 1999 to September 2005). He was registered as an associated person and
was a principal of DB Capital Advisors Inc. (from July 2000 to May 2005) and DB Investment Managers
Inc. (from May 2002 to June 2005). Prior to that, Mr. Nolte worked for Bankers Trust (from May
1983 until the firm was acquired by Deutsche
Bank in June 1999). During his employment at Deutsche Asset Management, Mr. Nolte served as
the Global Head and Chief Investment Officer of the DB Absolute Return Strategies (DB ARS) Fund
of Funds business, the Chairman of the DB ARS Fund of Funds Investment Committee, the Vice Chairman
of DB ARS and Head of the Single Manager Hedge Fund business. While employed at Deutsche Bank and
Deutsche Asset Management, Mr. Noltes duties included overseeing the firms fund of funds and
hedge fund businesses. Mr. Nolte was the founder and head of the Investment Committee for the
Topiary Fund, Deutsche Banks first fund of hedge funds. The DB ARS Fund of Hedge Funds platform
grew to $7 billion in assets under management during Mr. Noltes tenure. That business was
comprised of several multi-manager, multi-strategy funds as well as single strategy funds and
separate accounts.
The Partnership has not adopted a code of ethics that applies to officers because it has no
officers. In addition, the Partnership has not adopted any procedures by which investors may
recommend nominees to the Partnerships board of directors, and has not established an audit
committee because it has no board of directors.
20
Table of Contents
Item 11. | Executive Compensation. |
The Partnership has no directors or officers. Its affairs are managed by its General Partner. CGM, an affiliate of the General
Partner, is the commodity broker for the
Partnership and receives brokerage commissions for such services, as described under Item 1.
Business. Brokerage commissions and clearing fees of $2,041,895 were earned by CGM for the
year ended December 31, 2009. Management fees of $903,247 were earned by the Advisor for the year
ended December 31, 2009. Administrative fees of $225,812 were earned by the General Partner for the
year ended December 31, 2009. A profit share allocation of $64,276 was earned by the Advisor for
the year ended December 31, 2009.
Item 12. | Security Ownership of Certain Beneficial Owners and Management. |
(a)
Security ownership of certain beneficial owners. As of February 28, 2010, the
Partnership knows of no person who beneficially owns more than five
percent (5%) of the Redeemable Units outstanding.
(b) Security ownership of management. Under the terms of the Limited Partnership
Agreement, the Partnerships affairs are managed by the General Partner. The General Partner owns
units of general partnership interest equivalent to 1,250.2679
Redeemable Units (3.1%) of Limited
Partnership Interest as of December 31, 2009.
Principles
of the General Partner who own Redeemable Units. None.
(c) Changes in control. None.
Item 13. | Certain Relationship and Related Transactions. |
CGM and the General Partner would be considered promoters for purposes of item 404(d) of
Regulation S-K. The nature and the amounts of compensation each promoter will receive, if any, from
the Partnership are set forth under Item 1. Business and Item 11. Executive
Compensation.
Item 14. | Principal Accountant Fees and Services. |
(1) Audit Fees. The aggregate fees billed for each of the last two fiscal years for
professional services rendered by Deloitte in the period from July 23, 2009 through
December 31, 2009, PwC in the period from June 27,
2008 through July 22, 2009 and KPMG in the
period from January 1, 2008 through June
26, 2008 for the audit of the Partnerships annual financial statements, review of financial
statements included in the Partnerships Forms 10-Q and 10-K and other services normally provided
in connection with regulatory filings or engagements were:
Deloitte |
$ | 54,244 | ||
PwC |
$ | 28,921 | ||
KPMG |
$ | 7,083 |
(2) Audit-Related Fees. None
(3) Tax Fees.
In the last two fiscal years, Deloitte did not provide any professional services for tax compliance, tax advice or tax planning.
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by PwC for tax compliance and tax advice
given in the preparation of the Partnerships Schedule K1s, the preparation of the Partnerships
Form 1065 and preparation of all State Tax Returns were:
2009 |
$ | 15,000 | ||
2008 |
$ | 10,650 |
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
21
Table of Contents
PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) Financial Statements: |
Statements
of Financial Condition at December 31, 2009 and 2008.
Statements
of Income and Expenses for the years ended December 31, 2009,
2008 and 2007.
Statements
of Changes in Partners Capital for the years ended
December 31, 2009, 2008 and 2007.
Notes to Financial Statements.
(2) Exhibits:
3.1 Limited Partnership Agreement (filed as Exhibit 3.2 to the Registration Statement on Form 10
filed on April 29, 2005 and incorporated herein by reference).
3.2 Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary
of State of the State of New York (filed as Exhibit 3.1 to the Registration Statement on Form 10
filed on April 29, 2005 and incorporated herein by reference).
(a) Certificate of Amendment to the Certificate of Limited Partnership as filed in the
office of the Secretary of State of New York, dated September 21, 2005 (filed as Exhibit 3.2A on
Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(b) Certificate of Amendment to the Certificate of Limited Partnership as filed in the
office of the Secretary of State of New York, dated September 19, 2008 (filed as Exhibit 3.2B on
Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(c) Certificate of Amendment to the Certificate of Limited Partnership as filed in the
office of the Secretary of State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to
the Form 8-K filed on September 30, 2009 and incorporated herein by reference).
10.1 Customer Agreement between the Partnership and CGM (filed as Exhibit 10.2 to the
Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).
10.2 Form of Subscription Agreement (filed as Exhibit 10.4 to the Partnerships Form 10 filed on
April 29, 2005 and incorporated herein by reference).
10.3 Agency Agreement among the Partnership, the General Partner and CGM (filed as Exhibit 10.3 to
the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by
reference).
(a) Joinder Agreement among the Partnership, the General Partner, CGM and Morgan Stanley
Smith Barney LLC, dated June 1, 2009 (filed as Exhibit 10 to the Form 10-Q filed on August 14, 2009
and incorporated herein by reference).
10.4 Management Agreement among the Partnership, the General Partner and Graham (filed as Exhibit
10.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by
reference).
(a) Letter extending the Management Agreement between the General Partner and Graham Capital
Management L.P. for 2009 (filed herein).
16.1 Letter dated July 23, 2009 from PricewaterhouseCoopers LLP regarding Change in Certifying
Accountant (filed as Exhibit 16.1 to the Form 8-K filed on July 24, 2009)
16.2 Letter dated June 26, 2008 from KPMG LLP regarding Change in Certifying Accountant (filed as
Exhibit 16.1 to the
Form 8-K filed on July 1, 2008)
Form 8-K filed on July 1, 2008)
The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by
reference
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director)
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer
and Director)
Exhibit 32.1 Section 1350 Certification (Certification of President and Director)
Exhibit 32.2 Section 1350 Certification (Certification of Chief Financial Officer and Director)
22
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 31st day of March 2010.
Fairfield Futures Fund L.P. II
By:
|
Ceres Managed Futures LLC | |||
(General Partner) | ||||
By:
|
/s/ Jerry Pascucci | |||
Jerry Pascucci, | ||||
President & Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/ Jerry Pascucci
|
/s/ Shelley Deavitt Ullman | |||
Jerry Pascucci
|
Shelley Deavitt Ullman | |||
President and Director Ceres Managed Futures LLC |
Director Ceres Managed Futures LLC |
|||
/s/ Jennifer Magro
|
/s/ Daryl Dewbrey | |||
Jennifer Magro |
Daryl Dewbrey | |||
Chief Financial Officer and Director (Principal Accounting Officer) |
Director Ceres Managed Futures LLC |
|||
Ceres Managed Futures LLC |
||||
/s/ Raymond Nolte | ||||
Raymond Nolte | ||||
Director Ceres Managed Futures LLC |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the
Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
Annual Report to Limited Partners
No proxy material has been sent to Limited Partners.
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