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

 

FORM 10-Q

 

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number 0-50271

 

ORION FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

 

 

c/o Ceres Managed Futures LLC
522 Fifth Avenue – 14th Floor
New York, New York 10036

(Address of principal executive offices) (Zip Code)

 

(212) 296-1999

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes X  No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes    No  

 

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

 

 

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

 

Yes    No X

 

As of July 31, 2010, 395,168.4536 Limited Partnership Redeemable Units were outstanding.

ORION FUTURES FUND L.P.

 

FORM 10-Q

 

INDEX

 

Orion Futures Fund L.P.
Statements of Financial Condition
(Unaudited)

 

 

See accompanying notes to financial statements.

4

		Number of								% of Partners’
		Contracts				Fair Value				Capital
Futures Contracts Purchased
Currencies			254			$	419,773				0.05	%
Energy			364				129,842				0.02
Grains			402				91,185				0.01
Interest Rates Non-U.S.			127				(21,825	)			(0.00	)*
Livestock			84				38,440				0.00	*
Metals			222				(140,327	)			(0.02	)
Softs			342				560,264				0.07
Total futures contracts purchased							1,077,352				0.13
Futures Contracts Sold
Currencies			635				1,761,778				0.22
Energy			5				10,950				0.00	*
Interest Rates U.S.			381				438,625				0.05
Interest Rates Non-U.S.			413				61,615				0.01
Metals			58				(294,513	)			(0.04	)
Total futures contracts sold							1,978,455				0.24
Unrealized Appreciation on Open Forward Contracts
Metals			287				3,563,843				0.44
Total unrealized appreciation on open forward contracts							3,563,843				0.44
Unrealized Depreciation on Open Forward Contracts
Metals			222				(2,613,668	)			(0.32	)
Total unrealized depreciation on open forward contracts							(2,613,668	)			(0.32	)
Investment in Funds
AAA Master Fund LLC							284,764,800				34.91
CMF Willowbridge Argo Master Fund LP							135,945,983				16.66
CMF Winton Master LP							293,399,613				35.97
Total investment in Funds							714,110,396				87.54
Total fair value						$	718,116,378				88.03	%

5

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Income:
Net gains on trading of commodity interests and investment in Funds:
Net realized gains (losses) on closed contracts		$	(5,011,612	)		$	3,812,584			$	(10,462,411	)		$	(751,401	)
Net realized gains (losses) on investment in Funds			17,146,045				132,524,196				(6,978,218	)			128,156,562
Change in net unrealized gains (losses) on open contracts			1,876,219				(1,364,015	)			816,104				(1,264,528	)
Change in net unrealized gains (losses) on investment in Funds			(16,038,672	)			(126,151,472	)			5,224,631				(123,406,652	)
Gain (loss) from, trading net			(2,028,020	)			8,821,293				(11,399,894	)			2,733,981
Interest income			53,498				18,382				73,264				38,079
Interest income from investment in Funds			236,448				134,830				341,726				276,123
Total income (loss)			(1,738,074	)			8,974,505				(10,984,904	)			3,048,183
Expenses:
Brokerage commissions, including clearing fees			3,343,016				1,904,782				6,254,200				3,304,933
Management fees			4,533,511				3,186,549				8,528,949				6,259,910
Administrative fees			1,264,277				862,222				2,369,466				1,696,445
Incentive fees			1,888,941				—				1,888,941				3,102,122
Other			223,256				126,022				439,363				249,952
Total expenses			11,253,001				6,079,575				19,480,919				14,613,362
Net income (loss)			(12,991,075	)			2,894,930				(30,465,823	)			(11,565,179	)
Additions — Limited Partner			134,253,000				78,779,000				288,432,330				134,732,000
Additions — General Partner			1,275,000				—				2,975,000				—
Redemptions — Limited Partners			(32,346,547	)			(40,765,633	)			(59,035,643	)			(87,393,640	)
Net increase (decrease) in Partners’ Capital			90,190,378				40,908,297				201,905,864				35,773,181
Partners’ Capital, beginning of period			927,502,040				643,751,737				815,786,554				648,886,853
Partners’ Capital, end of period		$	1,017,692,418			$	684,660,034			$	1,017,692,418			$	684,660,034
Net asset value per unit (390,952.2079 and 245,627.9662 units outstanding at June 30, 2010 and 2009, respectively)		$	2,603.11			$	2,787.39			$	2,603.11			$	2,787.39
Net income (loss) per Redeemable Unit and General Partner unit equivalent		$	(33.04	)		$	11.53			$	(90.07	)		$	(49.54	)
Weighted average units outstanding			384,455.1375				246,776.1915				360,606.6129				241,280.3379
See Accompanying Notes to Financial Statements.

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

 

Orion Futures Fund L.P., (the “Partnership”), is a limited partnership organized on March 22, 1999 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including futures contracts, options, swaps and forward contracts on United States exchanges and certain foreign exchanges. The Partnership and the Funds, (as defined in Note 5 “Investment in Funds”) engaged in such trading through a brokerage account maintained with CGM (defined below). The sectors traded include currencies, energy, grains, livestock, indices, U.S. and non-U.S. interest rates, softs and metals. The Partnership commenced trading on June 10, 1999. The Partnership and the Funds may trade futures, forwards and options contracts of any kind. In addition, the Partnership may enter into swap contracts on energy-related products. The Partnership privately and continuosly offers up to 600,000 redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership. The commodity interests that are traded by the Partnership and the Funds, are volatile and involve a high degree of market risk.

 

Ceres 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 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.

 

As of June 30, 2010, all trading decisions are made by Willowbridge Associates Inc., (“Willowbridge”), Winton Capital Management Limited (“Winton”) and AAA Capital Management Advisors, Ltd. (successor to AAA Capital Management, Inc.) (“AAA”) (each an “Advisor” and, collectively, the “Advisors”) each of which is a registered commodity trading advisor.

 

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

 

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at June 30, 2010 and December 31, 2009, and the results of its operations and changes in partners’ capital for the three and six months ended June 30, 2010 and 2009. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2009.

 

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

 

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 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.

 

 

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

 

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

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

 

Changes in the net asset value per Redeemable Unit for the three and six months ended June 30, 2010 and 2009 were as follows:

		Three Months Ended								Six Months Months
		June 30,								June 30,
		2010				2009				2010				2009
Net realized and unrealized gains (losses) *		$	(13.21	)		$	27.89			$	(54.81	)		$	(3.57	)
Interest income			0.76				0.62				1.13				1.30
Expenses **			(20.59	)			(16.98	)			(36.39	)			(47.27	)
Increase (decrease) for the period			(33.04	)			11.53				(90.07	)			(49.54	)
Net asset value per Redeemable Unit, beginning of period			2,636.15				2,775.86				2,693.18				2,836.93
Net asset value per Redeemable Unit, end of period		$	2,603.11			$	2,787.39			$	2,603.11			$	2,787.39

Ratios to Average Net Assets:***
Net investment loss before incentive fees****			(3.7)	%			(3.6	)%			(3.8	)%			(3.4	)%
Operating expense			3.8	%			3.7	%			3.9	%			3.5	%
Incentive fees			0.2				—				0.2				0.5
Total expenses			4.0	%			3.7	%			4.1	%			4.0	%
Total return:
Total return before incentive fees			(1.1)	%			0.4	%			(3.2	)%			(1.3	)%
Incentive fees			(0.2	)			—				(0.1	)			(0.5	)
Total return after incentive fees			(1.3)	%			0.4	%			(3.3	)%			(1.8	)%

 

 

 

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

 

 

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

The customer agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures and forward contracts. The Partnership 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, has been met.

 

All of the commodity interests owned by the Partnership are held for trading purposes. The average number of futures contracts traded directly by the Partnership for the three months ended June 30, 2010 and 2009 were 6,032 and 2,259, respectively. The average number of futures contracts traded for the six months ended June 30, 2010 and 2009 were 4,637 and 1,935, respectively. The average number of metal forward contracts traded for the three months ended June 30, 2010 and 2009 were 4,610 and 495, respectively. The average number of metal forward contracts traded for the six months ended June 30, 2010 and 2009 were 3,019 and 599, respectively. The average number of option contracts traded for the three months ended June 30, 2010 and 2009 were 360 and 17, respectively. The average number of option contracts traded for the six months ended June 30, 2010 and 2009 were 190 and 8, respectively. The average notional value of currency forward contracts, held by the Partnership, for the three months ended June 30, 2010 and 2009 were $74,751,031 and $44,485, respectively. The average notional value of currency forward contracts, held by the Partnership, for the six months ended June 30, 2010 and 2009 were $38,672,662 and $2,799,441, respectively

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

Brokerage commissions are based on the number of trades executed by the Advisors and the Funds.

 

The Partnership adopted ASC 815, Derivatives and Hedging, 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 derivatives instruments and related hedging activities and has no impact on the Statements of Financial Condition or Statements of Income and Expenses and Changes in Partners’ Capital. The following tables indicate the fair values of derivative instruments of futures, forward and options contracts traded directly by the Partnership as separate assets and liabilities as of June 30, 2010 and December 31, 2009.

		June 30, 2010
Assets
Futures Contracts
Currencies		$	1,100,994
Energy			18,811
Grains			9,517
Indices			2,347
Interest Rates U.S.			1,365,736
Interest Rates Non-U.S.			885,464
Metals			416,263
Softs			1,425,638
Total unrealized appreciation on open futures contracts		$	5,224,770
Liabilities
Futures Contracts
Currencies		$	(282,181	)
Grains			(499,842	)
Interest Rates Non-U.S.			(22,412	)
Metals			(157,590	)
Softs			(182,376	)
Total unrealized depreciation on open futures contracts		$	(1,144,401	)
Net unrealized appreciation on open futures contracts		$	4,080,369	*

		June 30, 2010
Assets
Forward Contracts
Currencies		$	111,593
Metals			23,182,762
Total unrealized appreciation on open forward contracts		$	23,294,355
Liabilities
Forward Contracts
Currencies		$	(111,553	)
Metals			(22,212,550	)
Total unrealized depreciation on open forward contracts		$	(22,324,103	)
Net unrealized appreciation on open forward contracts		$	970,252	**

		June 30, 2010
Assets
Options Purchased
Energy		$	67,000
Metals			470,190
Options purchased		$	537,190	***

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

 

 

 

 

 

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

The following tables indicate the Partnership’s trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the three and six months ended June 30, 2010 and 2009.

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2010				June 30, 2009				June 30, 2010				June 30, 2009
Sector		Gain (loss) from trading				Gain (loss) from trading				Gain (loss) from trading				Gain (loss) from trading
Currencies		$	1,413,937			$	161,082			$	1,884,659			$	(261,735	)
Energy			(7,119,232	)			1,034,011				(10,350,020	)			75,171
Grains			(2,674,113	)			1,611,216				(2,998,726	)			1,036,465
Indices			4,723				—				4,723				—
Interest Rates U.S.			3,162,908				(67,923	)			1,209,089				(1,458,775	)
Interest Rates Non-U.S.			4,592,457				(317,714	)			4,702,420				(884,257	)
Livestock			(516,630	)			68,520				(517,050	)			(1,230	)
Metals			(1,079,819	)			269,310				(4,600,702	)			284,815
Softs			(919,624	)			(309,933	)			1,019,300				(806,383	)
Total		$	(3,135,393	)		$	2,448,569			$	(9,646,307	)		$	(2,015,929	)

 

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

 

Partnership’s and the Funds’ Fair Value Measurements.  The Partnership and the Funds adopted ASC 820, Fair Value Measurements and Disclosures, 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 and the Funds 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 and the Funds adopted amendments to ASC 820, which reaffirm 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, that 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 Partnership’s Financial Statements.

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

The Partnership and the Funds consider prices for exchange-traded commodity futures, forward and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forward, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers that derive fair values for those assets from observable inputs (Level 2). Investments in the Funds (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the periods ended June 30, 2010 and December 31, 2009, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

 

On September 1, 2001, the assets allocated to AAA for trading were invested in AAA Master Fund LLC, (“AAA Master”), a limited liability company organized under the limited liability company laws of the State of New York. The Partnership purchased 5,173.4381 units of AAA Master with cash equal to $5,173,438. AAA Master was formed in order to permit accounts managed now or in the future by AAA using the Energy Program – Futures and Swaps, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the managing member of AAA Master. Individual and pooled accounts currently managed by AAA, including the Partnership, are permitted to be non-managing members of AAA Master. The General Partner and AAA believe that trading through this structure should promote efficiency and economy in the trading process.

 

On November 1, 2004, the assets allocated to Winton for trading were invested in CMF Winton Master L.P. (“Winton Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 35,389.8399 units of Winton Master with cash equal to $33,594,083 and a contribution of open commodity futures and forward contracts with a fair value of $1,795,757. Winton Master was formed in order to permit accounts managed now or in the future by Winton using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership, are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure should promote efficiency and economy in the trading process.

 

On July 1, 2005, a portion of the assets allocated to Willowbridge for trading were invested in CMF Willowbridge Argo Master Fund L.P. (“Willowbridge Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 33,529.1186 units of Willowbridge Master with cash equal to $29,866,194 and a contribution of open commodity futures and forward contracts with a fair value of $3,662,925. Willowbridge Master was formed in order to permit accounts managed now or in the future by Willowbridge using the Argo Trading System, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts managed by Willowbridge, including the Partnership are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process.

 

Additional assets allocated to Willowbridge are not invested in a separate limited partnership established by the General Partner, but are held and traded by Willowbridge directly in separate managed accounts in the Partnership’s name. Willowbridge trades the Partnership’s assets directly, pursuant to its Vulcan Trading System, the Consolidated Commodities Technical and Consolidated Commodities Fundamental Trading Programs.

 

The General Partner is not aware of any material changes to the trading programs discussed above during the fiscal quarter ended June 30, 2010.

 

AAA Master’s, Willowbridge Master’s and Winton Master’s (the “Funds”) and the Partnership’s trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on U.S. commodity exchanges and foreign commodity exchanges. The Funds and the Partnership engage in such trading through commodity brokerage accounts maintained with CGM.

 

A limited partner/non-managing member of the Funds may withdraw all or part of its capital contribution and undistributed profits, if any, from the Funds in multiples of the net asset value per unit

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the general partner/managing member at least 3 days in advance of the Redemption Date. The units are classified as a liability when the limited partner/non-managing member elects to redeem and informs the Funds.

 

Management, administrative and incentive fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and NFA fees are borne by the Partnership directly and through its investments in the Funds. All other fees, including CGM’s direct brokerage commission, are charged at the Partnership level.

 

At June 30, 2010, the Partnership owned approximately 25.8% of AAA Master, 65.0% of Willowbridge Master and 57.8% of Winton Master. At December 31, 2009, the Partnership owned approximately 23.2% of AAA Master, 58.8% of Willowbridge Master and 51.1% of Winton Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of the investment in the Funds are approximately the same and redemption rights are not affected.

 

Summarized information reflecting the Total Assets, Liabilities and Capital of the Funds are shown in the following tables.

		June 30, 2010
		Total Assets				Total Liabilities				Total Capital
AAA Master		$	1,486,228,848			$	448,966,232			$	1,037,262,616
Willowbridge Master			227,833,325				18,921				227,814,404
Winton Master			768,235,393				7,689,883				760,545,510
Total		$	2,482,297,566			$	456,675,036			$	2,025,622,530

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

Summarized information reflecting the net gain (loss) from trading, total income (loss) and net income (loss) for the Funds are shown in the following tables.

		For the three months ended June 30, 2010
		Gain(loss) from				Total Income
		Trading, net				(loss)				Net income (loss)
AAA Master		$	(11,161,933	)		$	(10,953,005	)		$	(11,973,145	)
Willowbridge Master			(13,357,029	)			(13,290,137	)			(13,408,093	)
Winton Master			22,166,459				22,374,065				22,152,876
Total		$	(2,352,503	)		$	(1,869,077	)		$	(3,228,362	)
		For the three months ended June 30, 2009
		Gain(loss) from				Total Income
		Trading, net				(loss)				Net income (loss)
AAA Master		$	12,126,968			$	12,322,200			$	11,401,249
Willowbridge Master			32,063,426				32,119,971				32,025,897
Winton Master			(31,836,606	)			(31,722,305	)			(31,818,295	)
Total		$	12,353,788			$	12,719,866			$	11,608,851
		For the six months ended June 30, 2010
		Gain(loss) from				Total Income
		Trading, net				(loss)				Net income (loss)
AAA Master		$	(43,998,970	)		$	(43,689,800	)		$	(45,830,616	)
Willowbridge Master			(33,883,661	)			(33,783,707	)			(34,002,324	)
Winton Master			54,470,081				54,768,462				54,360,064
Total		$	(23,412,550	)		$	(22,705,045	)		$	(25,472,876	)
		For the six months ended June 30, 2009
		Gain(loss) from				Total Income
		Trading, net				(loss)				Net income (loss)
AAA Master		$	103,523,329			$	103,926,147			$	102,137,732
Willowbridge Master			(3,716,380	)			(3,595,592	)			(3,755,988	)
Winton Master			(36,632,514	)			(36,383,251	)			(36,556,338	)
Total		$	63,174,435			$	63,947,304			$	61,825,406

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

Summarized information reflecting the Partnership’s investments in, and the operations of, the Funds are as shown in the following tables.

		June 30, 2010								For the three months ended June 30, 2010
		% of
		Partnership’s				Fair				Income				Expenses								Net			Investment			Redemption
Investment		Net Assets				Value				(Loss)				Commissions				Other				Income (loss)			Objective			Permitted
AAA Master			26.32	%		$	267,888,543			$	(2,853,406	)		$	216,102			$	46,103			$	(3,115,611	)		Energy Markets		Monthly
Willowbridge Master			14.55	%			148,056,757				(8,550,462	)			62,093				13,931				(8,626,486	)		Commodity Portfolio		Monthly
Winton Master			43.21	%			439,777,058				12,747,689				105,904				20,055				12,621,730			Commodity Portfolio		Monthly
Total						$	855,722,358			$	1,343,821			$	384,099			$	80,089			$	879,633
		June 30, 2010								For the six months ended June 30, 2010
		% of
		Partnership’s				Fair				Income				Expenses								Net				Investment		Redemption
Investment		Net Assets				Value				(Loss)				Commissions				Other				Income (loss)				Objective		Permitted
AAA Master			26.32	%		$	267,888,543			$	(10,948,024	)		$	450,245			$	89,522			$	(11,487,791	)		Energy Markets		Monthly
Willowbridge Master			14.55	%			148,056,757				(21,052,587	)			112,362				26,087				(21,191,036	)		Commodity Portfolio		Monthly
Winton Master			43.21	%			439,777,058				30,588,750				197,182				29,362				30,362,206			Commodity Portfolio		Monthly
Total						$	855,722,358			$	(1,411,861	)		$	759,789			$	144,971			$	(2,316,621	)
		December 31, 2009								For the three months ended June 30, 2009
		% of												Expenses
		Partnership’s				Fair				Income												Net				Investment		Redemption
Investment		Net Assets				Value				(Loss)				Commissions				Other				income (loss)				Objective		Permitted
AAA Master			34.91	%		$	284,764,800			$	2,441,424			$	156,330			$	37,090			$	2,248,004			Energy Markets		Monthly
Willowbridge Master			16.66	%			135,945,983				17,254,325				43,857				6,592				17,203,876			Commodity Portfolio		Monthly
Winton Master			35.97	%			293,399,613				(13,188,195	)			36,200				3,945				(13,228,340	)		Commodity Portfolio		Monthly
Total						$	714,110,396			$	6,507,554			$	236,387			$	47,627			$	6,223,540
		December 31, 2009								For the six months ended June 30, 2009
		% of												Expenses
		Partnership’s				Fair				Income												Net				Investment		Redemption
Investment		Net Assets				Value				(Loss)				Commissions				Other				Income (loss)				Objective		Permitted
AAA Master			34.91	%		$	284,764,800			$	20,454,616			$	292,049			$	71,980			$	20,090,587			Energy Markets		Monthly
Willowbridge Master			16.66	%			135,945,983				(342,072	)			72,403				10,751				(425,226	)		Commodity Portfolio		Monthly
Winton Master			35.97	%			293,399,613				(15,086,511	)			62,420				7,488				(15,156,419	)		Commodity Portfolio		Monthly
Total						$	714,110,396			$	5,026,033			$	426,872			$	90,219			$	4,508,942

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

6. Financial Instrument Risks:

 

In the normal course of its business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forward, 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 on 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 option contracts. OTC contracts are negotiated between contracting parties and include swaps and certain forward 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.

 

 

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds 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/Funds are 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 Partnership’s and the Funds’ 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 Partnership’s and the Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership and the Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership and the Funds have credit risk and concentration risk because the sole counterparty or broker with respect to the Partnership’s and the Funds’ assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s and the Funds’ counterparty is an exchange or clearing organization.

 

As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Funds do not consider these contracts to be guarantees as described in ASC 460, Guarantees.

 

The general partner/managing member monitors and attempts to control the Partnership’s/Funds’ 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/Funds may be subject. These monitoring systems generally allow the general partner/managing member to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online 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 Partnership’s/Funds’ businesses, these instruments may not be held to maturity.

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

7. 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 the Partnership’s 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.

 

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

 

Partnership’s and the Fund’s Fair Value Measurements.  The Partnership and the Funds adopted ASC 820 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 Funds 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 and the Funds consider prices for exchange traded commodity futures, forward and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forward, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in partnerships reflects its proportional interest in the partnerships. As of and for the periods ended June 30, 2010 and December 31, 2009, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

Orion Futures Fund L.P.
Notes to Financial Statements
June 30, 2010
(Unaudited)

 

Futures Contracts.  The Partnership and the Funds trade futures contracts and exchange cleared swaps. Exchange cleared swaps are swaps that are traded as futures. The Partnership considers exchange cleared swaps to be 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 Partnership and the Funds 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 Partnership and Funds. When the contract is closed, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Partnership and the Funds agree 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 Partnership’s and the Funds 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 and Changes in Partners’ Capital.

 

The Partnership and the Funds do 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 and Changes in Partners’ Capital.

 

London Metals Exchange Forward Contracts.  Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds 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 Partnership and the Funds. 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 Partnership and the Funds record 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. 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. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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

 

Brokerage Commissions.  Commission charges to open and closed futures and exchange traded swap contracts are expensed at the time the positions are opened. Commission charges on option contracts are expensed at the time the position is established and when the option contract is closed.

 

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

 

ASC 740, Income Taxes, 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 Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has concluded that no provision for income tax is required in the Partnership’s 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. 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 filed. 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 guidance, which, among other things, amends ASC 820, Fair Value Measurements and Disclosures, 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 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. This guidance 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. The adoption of this guidance did not have a material impact on the Partnership’s financial statements.

 

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 SEC’s requirements. All of the amendments in this update were effective upon issuance of this update. Management has included the provisions of these amendments in the financial statements.

 

Net income (loss) per Redeemable Unit. Net Income (loss) per Redeemable Unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.

 

 

Liquidity and Capital Resources

 

The Partnership does not engage in sales of goods or services. The Partnership’s assets are its (i) investment in partnerships, (ii) equity in its commodity futures trading account, consisting of cash and cash equivalents, net unrealized appreciation on open futures and forward contracts, and (iii) interest receivables. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the second quarter of 2010.

 

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

 

For the six months ended June 30, 2010, Partnership capital increased 24.7% from $815,786,554 to $1,017,692,418. This increase was attributable to the addition of 109,434.7743 Redeemable Units totalling $288,432,330 and 1,134.0389 General Partner unit equivalents totaling $2,975,000, which was partially offset by a net loss from operations of $30,465,823, coupled with the redemptions of 22,525.0281 Redeemable Units totaling $59,035,643. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

 

Critical Accounting Policies

 

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

 

Partnership’s and the Funds’ Fair Value Measurements.  The Partnership and the Funds adopted ASC 820 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 Funds 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 and the Funds consider prices for exchange traded commodity futures, forward and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forward, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets from observable inputs (Level 2). Investments in the Funds (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in partnerships reflects its proportional interest in the Funds. As of and for the periods ended June 30, 2010 and December 31, 2009, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

 

Futures Contracts.  The Partnership and the Funds trade futures contracts and exchange-cleared swaps. Exchange-cleared swaps are swaps that are traded as futures. The Partnership considers exchange-cleared swaps to be 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 Partnership and the Funds 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 Partnership and Funds. When the contract is closed, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Partnership and the Funds agree 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 Partnership’s and the Funds 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 and Changes in Partners’ Capital.

 

The Partnership and the Funds do 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 and Changes in Partners’ Capital.

 

London Metals Exchange Forward Contracts.  Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds 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 Partnership and the Funds. 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 Partnership and the Funds record 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. 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. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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

 

Brokerage Commissions.  Commission charges to open and closed futures and exchange-traded swap contracts are expensed at the time the positions are opened. Commission charges on option contracts are expensed at the time the position is established and when the option contract is closed.

 

 

Results of Operations

 

During the Partnership’s second quarter of 2010 the net asset value per Redeemable Unit decreased 1.3% from $2,636.15 to $2,603.11 as compared to an increase of 0.4% in the second quarter of 2009. The Partnership experienced a net trading loss before brokerage commissions and related fees in the second quarter of 2010 of $2,028,020. Losses were primarily attributable to the Partnership’s/Funds’ trading of energy, grains, livestocks, metals, indices and softs and were partially offset by gains in currencies, and U.S. and non-U.S. interest rates. The Partnership experienced a net trading gain before brokerage commissions and related fees in the second quarter of 2009 of $8,821,293. Gains were primarily attributable to the Partnership’s/Funds’ trading of currencies, energy, grains and livestock and were partially offset by losses in U.S. and non-U.S. rates, metals, indices, lumber and softs.

 

The equity markets sold off sharply during the second quarter of 2010, as the global economic recovery decelerated and investors began to worry about a “double dip” recession. In Europe, the global credit crisis continued to morph into a sovereign debt crisis, placing significant constraints on governments’ ability to maintain unprecedented deficit spending programs. Losses were accumulated for the quarter as sharp price reversals in energy, equity indices and grains proved difficult for trading.

 

The second quarter 2010 macro environment was marked by two strong opposing forces that created volatile markets for many assets. Strong cyclical data supported the global recovery and growth story, while significant structural problems, primarily in Europe but also affecting most other developed economies, weighed on sentiment. In the energy markets, losses were realized from trading natural gas and refined products primarily in the second half of the quarter. In natural gas, prices unexpectedly moved higher as rising temperatures in the U.S. increased demand for power-plant fuel for air conditioning. The mixed economic data and unexpected rises in petroleum supplies created a difficult trading condition in the petroleum complex. Within the global stock index sector, prices of U.S., European, and Pacific Rim equity index futures trended lower on growing concerns that Greece’s government debt crisis might spread throughout Europe, resulting in losses for the sector. Losses were also realized in the grains sector as wheat prices unexpectedly rose in April amid forecasts for cold weather in the Southern Great Plains, potentially damaging the current U.S. crop. A portion of these losses was offset by gains earned in interest rates as prices moved higher on flight to quality buying.

 

During the Partnership’s six months ended June 30, 2010, the net asset value per Redeemable Unit decreased 3.3% from $2,693.18 to $2,603.11 as compared to a decrease of 1.8% for the six months ended June 30, 2009. The Partnership experienced a net trading loss before brokerage commissions and related fees for the six months ended June 30, 2010 of $11,399,894. Losses were primarily attributable to the Partnership’s/Fund’s trading of energy, grains, livestock, metals and indices and were partially offset by gains in currencies, U.S. and non-U.S. interest rates, and softs. The Partnership experienced a net trading gain before brokerage commissions and related fees for the six months ended June 30, 2009 of $2,733,981. Gains were primarily attributable to the Partnership’s/Fund’s trading of energy, grains and livestock and were partially offset by losses in currencies, U.S. and non-U.S. interest rates, metals, softs, lumber and indices.

 

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

 

Interest income on 100% of the Partnership’s average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s) brokerage account 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 from the date on which such weekly rate is determined. CGM may continue to maintain the Partnership’s assets in cash and/or place up to all of the Partnership’s (or a Fund’s) assets in 90-day Treasury bills and pay the Partnership 100% of the interest earned on the U.S. Treasury bills purchased. Interest income for the three and six months ended June 30, 2010 increased by $136,734 and $100,788 respectively, as compared to the corresponding periods in 2009. The increase in interest income is primarily due to higher average adjusted net assets during the three and six months ended June 30, 2010, as compared to the corresponding periods in 2009. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s and the Fund’s accounts and upon interest rates over which neither the Partnership nor CGM has control.

 

Brokerage commissions are based on the number of trades executed by the Advisors. Accordingly, they must be compared in relation to the number of trades executed during the period. Brokerage commissions and fees for the three and six months ended June 30, 2010 increased by $1,438,234 and $ 2,949,267, respectively, as compared to the corresponding periods in 2009. The increase in brokerage commissions and fees is primarily due to higher average adjusted net assets during the three and six months ended June 30, 2010, as compared to the corresponding periods in 2009.

 

Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and six months ended June 30, 2010 increased by $1,346,962 and $2,269,039, respectively, as compared to the corresponding periods in 2009. The increase of management fees is due to higher average adjusted net assets during the three and six months ended June 30, 2010, as compared to the corresponding periods in 2009.

 

Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. These fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Administrative fees for the three and six months ended June 30, 2010 increased by $402,055 and $673,021, respectively, as compared to the corresponding periods in 2009. The increase in administrative fees is due to higher average adjusted net assets during the three and six months ended June 30, 2010, as compared to the corresponding periods in 2009.

 

Incentive fees paid by the Partnership are based on the new trading profits generated by each Advisor at the end of the quarter, as defined in the management agreements among the Partnership, the General Partner and each Advisor. Trading performance for the three and six months ended June 30, 2010 resulted in incentive fees of $1,888,941. Trading performance for the three and six months ended June 30, 2009 resulted in incentive fees of $0 and $3,102,112, respectively.

 

     In allocating the assets of the Partnership among the trading advisors, the General Partner considers past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among trading advisors and may allocate assets to additional advisors at any time.