Attached files
| file | filename |
|---|---|
| EX-31.03 - EXHIBIT 31.03 - NESTOR PARTNERS | v229260_ex31-03.htm |
| EX-31.02 - EXHIBIT 31.02 - NESTOR PARTNERS | v229260_ex31-02.htm |
| EX-32.03 - EXHIBIT 32.03 - NESTOR PARTNERS | v229260_ex32-03.htm |
| EX-32.02 - EXHIBIT 32.02 - NESTOR PARTNERS | v229260_ex32-02.htm |
| EX-32.01 - EXHIBIT 32.01 - NESTOR PARTNERS | v229260_ex32-01.htm |
| EX-31.01 - EXHIBIT 31.01 - NESTOR PARTNERS | v229260_ex31-01.htm |
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
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For the Quarterly Period Ended: June 30, 2011
Or
Commission File Number: 000-50725
NESTOR PARTNERS
(Exact name of registrant as specified in its charter)
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NEW JERSEY
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22-2149317
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|
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State or other jurisdiction of
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(I.R.S. Employer
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|
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incorporation or organization)
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Identification No.)
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c/o MILLBURN RIDGEFIELD CORPORATION
411 West Putnam Avenue
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (203) 625-7554
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 “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
ITEM 1. FINANCIAL STATEMENTS
Nestor Partners
Financial statements
For the three and six months ended June 30, 2011 and 2010 (unaudited)
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Statements of Financial Condition (a)
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1
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Condensed Schedules of Investments (a)
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2
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Statements of Operations (b)
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6
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Statements of Changes in Partners' Capital (c)
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8
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Statements of Financial Highlights (b)
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9
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Notes to Financial Statements
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11
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(a)
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At June 30, 2011 and December 31, 2010
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(b)
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For the three and six months ended June 30, 2011 and 2010
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(c)
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For the six months ended June 30, 2011 and 2010
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Statements of Financial Condition (UNAUDITED)
See notes to financial statements
1
Condensed Schedule of Investments (UNAUDITED)
June 30, 2011
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Futures and Forward Currency Contracts
|
Net Unrealized
Appreciation/
(Depreciation)
as a % of
Partners' Capital
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Net
Unrealized
Appreciation/
(Depreciation)
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||||||
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FUTURES CONTRACTS:
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||||||||
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Long futures contracts:
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||||||||
|
Energies
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(0.06 | )% | $ | (91,481 | ) | |||
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Grains
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(0.36 | ) | (550,290 | ) | ||||
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Interest rates
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||||||||
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2 Year U.S. Treasury Note (469 contracts, settlement date 09/30/2011)
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0.14 | 206,500 | ||||||
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5 Year U.S. Treasury Note (269 contracts, settlement date 09/30/2011)
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(0.05 | ) | (74,664 | ) | ||||
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10 Year U.S. Treasury Note (152 contracts, settlement date 09/30/2011)
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(0.10 | ) | (149,438 | ) | ||||
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30 Year U.S. Treasury Bond (79 contracts, settlement date 09/30/2011)
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(0.12 | ) | (188,813 | ) | ||||
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Other
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0.07 | 106,988 | ||||||
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Total interest rates
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(0.06 | ) | (99,427 | ) | ||||
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Metals
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(0.02 | ) | (23,877 | ) | ||||
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Softs
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0.02 | 30,791 | ||||||
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Stock indices
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0.67 | 1,028,957 | ||||||
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Total long futures contracts
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0.19 | 294,673 | ||||||
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Short futures contracts:
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||||||||
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Energies
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0.10 | 150,050 | ||||||
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Grains
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0.20 | 299,375 | ||||||
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Interest rates
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0.05 | 81,279 | ||||||
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Livestock
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(0.07 | ) | (103,600 | ) | ||||
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Metals
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(0.28 | ) | (433,038 | ) | ||||
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Stock indices
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(0.12 | ) | (179,414 | ) | ||||
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Total short futures contracts
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(0.12 | ) | (185,348 | ) | ||||
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TOTAL INVESTMENTS IN FUTURES CONTRACTS-Net
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0.07 | 109,325 | ||||||
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FORWARD CURRENCY CONTRACTS:
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||||||||
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Total long forward currency contracts
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0.37 | 574,854 | ||||||
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Total short forward currency contracts
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(0.65 | ) | (999,001 | ) | ||||
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TOTAL INVESTMENTS IN FORWARD CURRENCY
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||||||||
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CONTRACTS-Net
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(0.28 | ) | (424,147 | ) | ||||
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TOTAL
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(0.21 | )% | $ | (314,822 | ) | |||
| (Continued) | ||||||||
2
Condensed Schedule of Investments (UNAUDITED)
June 30, 2011
U.S. Treasury Notes
3
Nestor Partners
Condensed Schedule of Investments (UNAUDITED)
December 31, 2010
|
Futures and Forward Currency Contracts
|
Net Unrealized
Appreciation/
(Depreciation)
as a % of
Partners' Capital
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Net Unrealized
Appreciation/
(Depreciation)
|
||||||
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|
||||||||
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FUTURES CONTRACTS
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|
|||||||
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Long futures contracts:
|
|
|||||||
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Energies
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0.33 | % | $ | 535,871 | ||||
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Grains
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0.73 | 1,185,251 | ||||||
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Interest rates
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||||||||
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2 Year U.S. Treasury Note (313 contracts, settlement date 03/31/2011)
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(0.03 | ) | (59,531 | ) | ||||
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Other
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0.20 | 328,950 | ||||||
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Total interest rates
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0.17 | 269,419 | ||||||
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Livestock
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0.06 | 102,440 | ||||||
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Metals
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1.18 | 1,917,417 | ||||||
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Softs
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0.32 | 528,094 | ||||||
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Stock indices
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0.57 | 921,935 | ||||||
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Total long futures contracts
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3.36 | 5,460,427 | ||||||
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Short futures contracts:
|
||||||||
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Energies
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(0.15 | ) | (242,600 | ) | ||||
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Grains
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(0.08 | ) | (127,613 | ) | ||||
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Interest rates
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(0.01 | ) | (16,482 | ) | ||||
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Livestock
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(0.03 | ) | (53,150 | ) | ||||
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Metals
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(0.13 | ) | (208,450 | ) | ||||
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Softs
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(0.03 | ) | (48,384 | ) | ||||
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Stock indices
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0.06 | 90,872 | ||||||
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Total short futures contracts
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(0.37 | ) | (605,807 | ) | ||||
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TOTAL INVESTMENTS IN FUTURES CONTRACTS-Net
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2.99 | 4,854,620 | ||||||
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FORWARD CURRENCY CONTRACTS
|
||||||||
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Total long forward currency contracts
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1.61 | 2,617,508 | ||||||
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Total short forward currency contracts
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(0.38 | ) | (612,569 | ) | ||||
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TOTAL INVESTMENTS IN FORWARD CURRENCY CONTRACTS-Net
|
1.23 | 2,004,939 | ||||||
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TOTAL
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4.22 | % | $ | 6,859,559 | ||||
(Continued)
4
Nestor Partners
Condensed Schedule of Investments (UNAUDITED)
December 31, 2010
U.S. Treasury Notes
|
Face Amount
|
Description
|
Fair Value as a
% of Partners'
Capital
|
Fair Value
|
||||||||
| $ | 36,640,000 |
U.S. Treasury notes, 0.875%, 03/31/2011
|
22.58 | % | $ | 36,702,975 | |||||
| 36,640,000 |
U.S. Treasury notes, 0.875%, 05/31/2011
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22.61 | 36,748,775 | ||||||||
| 36,640,000 |
U.S. Treasury notes, 1.000%, 08/31/2011
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22.66 | 36,828,925 | ||||||||
| 36,640,000 |
U.S. Treasury notes, 0.750%, 11/30/2011
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22.64 | 36,788,850 | ||||||||
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Total investments in U.S. Treasury notes
(amortized cost $146,995,932) |
90.49 | % | $ | 147,069,525 | |||||||
|
See notes to financial statements
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(Concluded)
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||||||||||
5
Statements of Operations (UNAUDITED)
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For the three months ended
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||||||||
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June 30
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June 30
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|||||||
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2011
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2010
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|||||||
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INVESTMENT INCOME:
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||||||||
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Interest income
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$ | 101,786 | $ | 146,588 | ||||
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EXPENSES:
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||||||||
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Brokerage fees
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818,590 | 816,678 | ||||||
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Administrative expenses
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100,857 | 95,609 | ||||||
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Custody fees and other expenses
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7,015 | 6,780 | ||||||
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Total expenses
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926,462 | 919,067 | ||||||
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NET INVESTMENT LOSS
|
(824,676 | ) | (772,479 | ) | ||||
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NET REALIZED AND UNREALIZED GAINS (LOSSES):
|
||||||||
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Net realized gains (losses) on closed positions:
|
||||||||
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Futures and forward currency contracts
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(1,114,992 | ) | 656,328 | |||||
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Foreign exchange translation
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20,077 | 58,702 | ||||||
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Net change in unrealized:
|
||||||||
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Futures and forward currency contracts
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(2,556,870 | ) | (8,806,822 | ) | ||||
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Foreign exchange translation
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(6,107 | ) | (149,392 | ) | ||||
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Net gains (losses) from U.S. Treasury notes:
|
||||||||
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Net change in unrealized
|
31,252 | (5,133 | ) | |||||
|
Total net realized and unrealized losses
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(3,626,640 | ) | (8,246,317 | ) | ||||
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NET LOSS
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(4,451,316 | ) | (9,018,796 | ) | ||||
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LESS PROFIT SHARE TO GENERAL PARTNER
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5,435 | (8,190 | ) | |||||
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NET LOSS AFTER PROFIT SHARE TO GENERAL PARTNER
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$ | (4,456,751 | ) | $ | (9,010,606 | ) | ||
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(Continued)
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||||||||
6
Nestor Partners
Statements of Operations (UNAUDITED)
7
Nestor Partners
Statements of Changes in Partners' Capital (UNAUDITED)
For the six months ended June 30, 2011:
For the six months ended June 30, 2010:
|
Limited
Partners
|
Special
Limited
Partners
|
New Profit
Memo
Account
|
General
Partner
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Total
|
||||||||||||||||
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PARTNERS' CAPITAL-
|
||||||||||||||||||||
|
January 1, 2010
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$ | 81,832,304 | $ | 61,688,413 | $ | - | $ | 3,732,571 | $ | 147,253,288 | ||||||||||
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Contributions
|
805,000 | 579,103 | - | - | 1,384,103 | |||||||||||||||
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Withdrawals
|
(1,700,674 | ) | (40,000 | ) | - | - | (1,740,674 | ) | ||||||||||||
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Net income (loss)
|
(759,623 | ) | 317,177 | - | 23,946 | (418,500 | ) | |||||||||||||
|
General Partner's allocation:
|
||||||||||||||||||||
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New Profit-Accrued
|
(2,074 | ) | - | 2,074 | - | - | ||||||||||||||
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PARTNERS' CAPITAL-
|
||||||||||||||||||||
|
June 30, 2010
|
$ | 80,174,933 | $ | 62,544,693 | $ | 2,074 | $ | 3,756,517 | $ | 146,478,217 | ||||||||||
See notes to financial statements
8
|
Nestor Partners
|
||||||||||||||||
|
Statements of Financial Highlights (UNAUDITED)
|
||||||||||||||||
|
For the three months ended June 30, 2011 and 2010
|
Limited Partners
|
Special Limited
Partners
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Ratios to average capital:
|
||||||||||||||||
|
Net investment loss (a)
|
(3.43 | )% | (3.39 | )% | (0.45 | )% | (0.38 | )% | ||||||||
|
Total expenses (a)
|
3.68 | % | 3.77 | % | 0.70 | % | 0.76 | % | ||||||||
|
Profit share allocation (b)
|
0.01 | % | (0.01 | )% | 0.00 | % | 0.00 | % | ||||||||
|
Total expenses and profit share allocation
|
3.69 | % | 3.76 | % | 0.70 | % | 0.76 | % | ||||||||
|
Total return before profit share allocation (b)
|
(3.15 | )% | (6.10 | )% | (2.43 | )% | (5.39 | )% | ||||||||
|
Less: Profit share allocation (b)
|
0.01 | % | (0.01 | )% | 0.00 | % | 0.00 | % | ||||||||
|
Total return after profit share allocation
|
(3.16 | )% | (6.09 | )% | (2.43 | )% | (5.39 | )% | ||||||||
|
(a) annualized
|
|
|
(b) not annualized
|
|
|
See notes to financial statements
|
(Continued)
|
9
|
Nestor Partners
|
||||||||||||||||
|
Statements of Financial Highlights (UNAUDITED)
|
||||||||||||||||
|
For the six months ended June 30, 2011 and 2010
|
Limited Partners
|
Special Limited
Partners
|
||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
Ratios to average capital:
|
||||||||||||||||
|
Net investment loss (a)
|
(3.40 | )% | (3.39 | )% | (0.45 | )% | (0.38 | )% | ||||||||
|
Total expenses (a)
|
3.68 | % | 3.79 | % | 0.73 | % | 0.78 | % | ||||||||
|
Profit share allocation (b)
|
0.01 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
|
Total expenses and profit share allocation
|
3.69 | % | 3.79 | % | 0.73 | % | 0.78 | % | ||||||||
|
Total return before profit share allocation (b)
|
(4.70 | )% | (1.00 | )% | (3.29 | )% | 0.51 | % | ||||||||
|
Less: Profit share allocation (b)
|
0.01 | % | (0.01 | )% | 0.00 | % | 0.00 | % | ||||||||
|
Total return after profit share allocation
|
(4.71 | )% | (0.99 | )% | (3.29 | )% | 0.51 | % | ||||||||
|
(a) annualized
|
|
|
(b) not annualized
|
|
|
See notes to financial statements
|
(Concluded)
|
10
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Nestor Partners’ (the “Partnership”) financial condition at June 30, 2011 and December 31, 2010 and the results of its operations for the three and six months ended June 30, 2011 and 2010. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes included in the Partnership's annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010. The December 31, 2010 information has been derived from the audited financial statements as of December 31, 2010.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (the “U.S.”) requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Actual results could differ from these estimates.
The Partnership enters into contracts that contain a variety of indemnification provisions. The Partnership’s maximum exposure under these arrangements is unknown. The Partnership does not anticipate recognizing any loss related to these arrangements.
The Income Taxes topic of the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”) clarifies the accounting for uncertainty in tax positions. This requires that the Partnership recognize in its financial statements the impact of any uncertain tax positions. Based on a review of the Partnership’s open tax years, 2007 to 2010, for the U.S. Federal jurisdiction, the New York, Connecticut and New Jersey state jurisdictions and the New York City jurisdiction, there are no uncertain tax positions. The Partnership is treated as a limited partnership for federal and state income tax reporting purposes and therefore the limited partners of the Partnership (the "Limited Partners") are responsible for the payment of taxes.
There have been no material changes with respect to the Partnership's critical accounting policies, off-balance sheet arrangements or disclosure of contractual obligations as reported in the Partnership's Annual Report on Form 10-K for fiscal year 2010.
2. FAIR VALUE
The Fair Value Measurements and Disclosures topic of the Codification defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
In determining fair value, the Partnership separates its investments into two categories: cash instruments and derivative contracts.
Cash Instruments – The Partnership’s cash instruments are generally classified within Level 1 of the fair value hierarchy because they are typically valued using quoted market prices. The types of instruments valued based on quoted market prices in active markets include U.S. government obligations and a short-term U.S. government money market fund. Millburn Ridgefield Corporation (the "General Partner") does not adjust the quoted price for such instruments even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.
Derivative Contracts – Derivative contracts can be exchange-traded or over-the-counter (“OTC”). Exchange-traded futures contracts are valued based on quoted closing settlement prices and typically fall within Level 1 of the fair value hierarchy.
OTC derivatives, or forward currency contracts, are valued based on pricing models that consider the current market prices plus the time value of money (“forward points”) and contractual prices of the underlying financial instruments. The forward points from the quotation service providers are generally in periods of one month, two months, three months and six months forward while the contractual forward delivery dates for the foreign forward currency contracts traded by the Partnership may be in between these periods. The General Partner’s policy is to calculate the forward points for each contract being valued by determining the number of days from the date the forward currency contract is being valued to its maturity date and then using straight-line interpolation to calculate the valuation of forward points for the applicable forward currency contract. Model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.
11
During the six months ended June 30, 2011 and 2010, there were no transfers of assets or liabilities between Level 1 and Level 2. The following tables set forth by level and major category within the fair value hierarchy. At June 30, 2011 and December 31, 2010, the Partnership held no assets or liabilities in Level 3.
|
Level 1
|
Level 2
|
Total
|
||||||||||
|
U.S. Treasury notes (1)
|
$ | 141,889,415 | $ | - | $ | 141,889,415 | ||||||
|
Cash and cash equivalents
|
||||||||||||
|
Cash
|
160,000 | - | 160,000 | |||||||||
|
Short-term money market fund
|
15,902,042 | - | 15,902,042 | |||||||||
|
Total cash and cash equivalents
|
16,062,042 | - | 16,062,042 | |||||||||
|
Exchange-traded futures contracts
|
||||||||||||
|
Energies
|
58,569 | - | 58,569 | |||||||||
|
Grains
|
(250,915 | ) | - | (250,915 | ) | |||||||
|
Interest rates
|
(18,148 | ) | - | (18,148 | ) | |||||||
|
Livestock
|
(103,600 | ) | - | (103,600 | ) | |||||||
|
Metals
|
(456,915 | ) | - | (456,915 | ) | |||||||
|
Softs
|
30,791 | - | 30,791 | |||||||||
|
Stock indices
|
849,543 | - | 849,543 | |||||||||
|
Total exchange-traded futures contracts
|
109,325 | - | 109,325 | |||||||||
|
Over-the-counter forward currency contracts
|
- | (424,147 | ) | (424,147 | ) | |||||||
|
Total futures and forward currency contracts (2)
|
109,325 | (424,147 | ) | (314,822 | ) | |||||||
|
Total financial assets at fair value
|
$ | 158,060,782 | $ | (424,147 | ) | $ | 157,636,635 | |||||
|
Per line item in Statements of Financial Condition:
|
||||||||||||
|
(1)
|
||||||||||||
|
Investments in U.S. Treasury notes held in brokers’ trading accounts as collateral
|
$ | 34,597,289 | ||||||||||
|
Investments in U.S. Treasury notes held in custody
|
107,292,126 | |||||||||||
|
Total investments in U.S. Treasury notes
|
$ | 141,889,415 | ||||||||||
|
(2)
|
||||||||||||
|
Net unrealized appreciation on futures and forward currency contracts
|
$ | 1,894,524 | ||||||||||
|
Net unrealized depreciation on futures and forward currency contracts
|
(2,209,346 | ) | ||||||||||
|
Total unrealized appreciation and depreciation on futures and forward currency contracts
|
$ | (314,822 | ) | |||||||||
12
Financial assets and liabilities at fair value as of December 31, 2010
|
Level 1
|
Level 2
|
Total
|
||||||||||
|
U.S. Treasury notes
|
$
|
147,069,525
|
$
|
-
|
$
|
147,069,525
|
||||||
|
Cash and cash equivalents
|
||||||||||||
|
Cash
|
160,000
|
-
|
160,000
|
|||||||||
|
Short-term money market fund
|
7,567,993
|
-
|
7,567,993
|
|||||||||
|
Total cash and cash equivalents
|
7,727,993
|
-
|
7,727,993
|
|||||||||
|
Exchange-traded futures contracts
|
||||||||||||
|
Energies
|
293,271
|
-
|
293,271
|
|||||||||
|
Grains
|
1,057,638
|
-
|
1,057,638
|
|||||||||
|
Interest rates
|
252,937
|
-
|
252,937
|
|||||||||
|
Livestock
|
49,290
|
-
|
49,290
|
|||||||||
|
Metals
|
1,708,967
|
-
|
1,708,967
|
|||||||||
|
Softs
|
479,710
|
-
|
479,710
|
|||||||||
|
Stock indices
|
1,012,807
|
-
|
1,012,807
|
|||||||||
|
Total exchange-traded futures contracts
|
4,854,620
|
-
|
4,854,620
|
|||||||||
|
Over-the-counter forward currency contracts
|
-
|
2,004,939
|
2,004,939
|
|||||||||
|
Total futures and forward currency contracts
|
4,854,620
|
2,004,939
|
6,859,559
|
|||||||||
|
Total financial assets and liabilities at fair value
|
$
|
159,652,138
|
$
|
2,004,939
|
$
|
161,657,077
|
||||||
|
Per line item in Statments of Financial Condition
|
||||||||||||
|
(1)
|
||||||||||||
|
Investments in U.S. Treasury notes held in brokers’ trading accounts as collateral
|
$
|
26,694,380
|
||||||||||
|
Investments in U.S. Treasury notes held in custody
|
120,375,145
|
|||||||||||
|
Total investments in U.S. Treasury notes
|
$
|
147,069,525
|
||||||||||
|
(2)
|
||||||||||||
|
Net unrealized appreciation on futures and forward currency contracts
|
$
|
6,859,559
|
||||||||||
|
Net unrealized depreciation on futures and forward currency contracts
|
-
|
|||||||||||
|
Net unrealized appreciation and depreciation on futures and forward currency contracts
|
$
|
6,859,559
|
||||||||||
The Derivatives and Hedging topic of the Codification requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.
The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which it trades.
The Partnership engages in the speculative trading of futures and forward contracts on currencies, energies, grains, interest rates, livestock, metals, softs and stock indicies. The following were the primary trading risk exposures of the Partnership at June 30, 2011, by market sector:
Agricultural (grains, livestock and softs) – The Partnership’s primary exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions as well as supply and demand factors.
Currencies – Exchange rate risk is a principal market exposure of the Partnership. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. The fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Partnership trades in a large number of currencies, including cross-rates—e.g., positions between two currencies other than the U.S. dollar.
Energies – The Partnership’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Interest rates – Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership 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 may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in countries or regions including Australia, Canada, Japan, Switzerland, the United Kingdom, the U.S. and the Eurozone. However, the Partnership also may take positions in futures contracts on the government debt of other nations. The General Partner anticipates that interest rates in the industrialized countries, both long-term and short-term, will remain the primary interest rate market exposure of the Partnership for the foreseeable future.
13
Metals – The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, platinum, silver, tin and zinc.
Stock Indices – The Partnership’s equity exposure, through stock index futures, is to equity price risk in the major industrialized countries as well as other countries.
The Derivatives and Hedging topic of the Codification requires entities to recognize in the Statements of Financial Condition all derivative contracts as assets or liabilities. Fair values of futures and forward currency contracts in an asset position by counterparty, respectively are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair value of futures and forward currency contracts in a liability position by counterparty, respectively are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.” The Partnership’s policy regarding fair value measurement is discussed in the Fair Value and Disclosures note, contained herein.
Since the derivatives held or sold by the Partnership are for speculative trading purposes, the derivative instruments are not designated as hedging instruments under the provisions of the Derivatives and Hedging guidance. Accordingly, all realized gains and losses, as well as any change in net unrealized gains or losses on open positions from the preceding period, are recognized as part of the Partnership’s trading gains and losses in the Statements of Operations.
The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at June 30, 2011 and December 31, 2010. Fair value is presented on a gross basis even though the contracts are subject to master netting agreements and qualify for net presentation in the Statements of Financial Condition.
Fair value of futures and forward currency contracts at June 30, 2011
|
Net Unrealized
|
||||||||||||||||||||
|
Fair Value - Long Positions
|
Fair Value - Short Positions
|
Gain (Loss) on
|
||||||||||||||||||
|
Sector
|
Gains
|
Losses
|
Gains
|
Losses
|
Open Positions
|
|||||||||||||||
|
Futures contracts:
|
||||||||||||||||||||
|
Energies
|
$ | 72,283 | $ | (163,764 | ) | $ | 157,600 | $ | (7,550 | ) | $ | 58,569 | ||||||||
|
Grains
|
- | (550,290 | ) | 299,375 | - | (250,915 | ) | |||||||||||||
|
Interest rates
|
702,726 | (802,153 | ) | 89,828 | (8,549 | ) | (18,148 | ) | ||||||||||||
|
Livestock
|
- | - | - | (103,600 | ) | (103,600 | ) | |||||||||||||
|
Metals
|
293,432 | (317,309 | ) | 1,694 | (434,732 | ) | (456,915 | ) | ||||||||||||
|
Softs
|
81,743 | (50,952 | ) | - | - | 30,791 | ||||||||||||||
|
Stock indices
|
1,061,985 | (33,028 | ) | 11,650 | (191,064 | ) | 849,543 | |||||||||||||
|
Total futures contracts:
|
2,212,169 | (1,917,496 | ) | 560,147 | (745,495 | ) | 109,325 | |||||||||||||
|
Forward currency contracts
|
1,496,763 | (921,909 | ) | 554,394 | (1,553,395 | ) | (424,147 | ) | ||||||||||||
|
Total futures and forward currency contracts
|
$ | 3,708,932 | $ | (2,839,405 | ) | $ | 1,114,541 | $ | (2,298,890 | ) | $ | (314,822 | ) | |||||||
Fair value of futures and forward currency contracts at December 31, 2010
|
Net Unrealized
|
||||||||||||||||||||
|
Fair Value - Long Positions
|
Fair Value - Short Positions
|
Gain on
|
||||||||||||||||||
|
Sector
|
Gains
|
Losses
|
Gains
|
Losses
|
Open Positions
|
|||||||||||||||
|
Futures contracts:
|
||||||||||||||||||||
|
Energies
|
$
|
648,021
|
$
|
(112,150
|
)
|
$
|
-
|
$
|
(242,600
|
)
|
$
|
293,271
|
||||||||
|
Grains
|
1,185,251
|
-
|
-
|
(127,613
|
)
|
1,057,638
|
||||||||||||||
|
Interest rates
|
350,149
|
(80,730
|
)
|
16,584
|
(33,066
|
)
|
252,937
|
|||||||||||||
|
Livestock
|
102,440
|
-
|
-
|
(53,150
|
)
|
49,290
|
||||||||||||||
|
Metals
|
1,917,417
|
-
|
-
|
(208,450
|
)
|
1,708,967
|
||||||||||||||
|
Softs
|
529,281
|
(1,187
|
)
|
3,046
|
(51,430
|
)
|
479,710
|
|||||||||||||
|
Stock indices
|
1,116,187
|
(194,252
|
)
|
91,892
|
(1,020
|
)
|
1,012,807
|
|||||||||||||
|
Total futures contracts:
|
5,848,746
|
(388,319
|
)
|
111,522
|
(717,329
|
)
|
4,854,620
|
|||||||||||||
|
Forward currency contracts
|
3,159,489
|
(541,981
|
)
|
896,617
|
(1,509,186
|
)
|
2,004,939
|
|||||||||||||
|
Total futures and forward currency contracts
|
$
|
9,008,235
|
$
|
(930,300
|
)
|
$
|
1,008,139
|
$
|
(2,226,515
|
)
|
$
|
6,859,559
|
||||||||
14
The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the three and six months ended June 30, 2011 and 2010 as “Net realized gains (losses) on closed positions, futures and forward currency contracts” and “Net change in unrealized futures and forward currency contracts.” These trading gains and losses are detailed below.
Trading gains (losses) of futures and forward currency contracts for the three and six months ended June 30, 2011 and 2010
|
Sector
|
Three months ended:
June 30, 2011
|
Three months ended:
June 30, 2010
|
Six months ended:
June 30, 2011
|
Six months ended:
June 30, 2010
|
||||||||||||
|
Futures contracts:
|
||||||||||||||||
|
Energies
|
$ | (2,570,341 | ) | $ | (3,070,302 | ) | $ | 1,870,281 | $ | (2,059,862 | ) | |||||
|
Grains
|
(734,807 | ) | (306,252 | ) | (1,327,642 | ) | 242,136 | |||||||||
|
Interest rates
|
2,798,919 | 8,944,989 | 826,746 | 14,167,897 | ||||||||||||
|
Livestock
|
(448,590 | ) | (129,660 | ) | (278,130 | ) | (270,980 | ) | ||||||||
|
Metals
|
(1,145,955 | ) | (1,363,889 | ) | (558,953 | ) | (1,199,876 | ) | ||||||||
|
Softs
|
(496,932 | ) | (324,055 | ) | (132,184 | ) | (749,900 | ) | ||||||||
|
Stock indices
|
(3,955,462 | ) | (7,853,443 | ) | (7,542,426 | ) | (7,902,191 | ) | ||||||||
|
Total futures contracts:
|
(6,553,168 | ) | (4,102,612 | ) | (7,142,308 | ) | 2,227,224 | |||||||||
|
Forward currency contracts
|
2,881,306 | (4,047,882 | ) | 2,273,824 | (1,045,429 | ) | ||||||||||
|
Total futures and forward currency contracts
|
$ | (3,671,862 | ) | $ | (8,150,494 | ) | $ | (4,868,484 | ) | $ | 1,181,795 | |||||
The following table presents average notional value by sector of open futures and forward currency contracts for the six months ending June 30, 2011 and 2010 in U.S. dollars. The Partnership’s average net asset value for the six months ending June 30, 2011 and 2010 was approximately $161,000,000 and $150,000,000, respectively.
Average notional value by sector of futures and forward currency contracts for the six months ended June 30, 2011 and 2010
|
2011
|
2010
|
|||||||||||||||
|
Sector
|
Long positions
|
Short positions
|
Long positions
|
Short positions
|
||||||||||||
|
Futures contracts:
|
||||||||||||||||
|
Energies
|
$ | 30,186,015 | $ | 9,562,287 | $ | 33,447,827 | $ | 23,045,802 | ||||||||
|
Grains
|
14,608,126 | 4,507,988 | 3,031,187 | 9,575,772 | ||||||||||||
|
Interest rates
|
159,068,695 | 16,143,373 | 253,216,527 | 10,114,916 | ||||||||||||
|
Livestock
|
1,782,843 | 916,037 | 4,294,685 | 3,917,770 | ||||||||||||
|
Metals
|
23,441,796 | 2,347,960 | 18,747,158 | 5,665,859 | ||||||||||||
|
Softs
|
4,792,463 | 444,448 | 5,103,514 | 1,186,636 | ||||||||||||
|
Stock indices
|
73,605,589 | 4,697,888 | 83,938,462 | 1,991,335 | ||||||||||||
|
Total futures contracts:
|
307,485,527 | 38,619,981 | 401,779,360 | 55,498,090 | ||||||||||||
|
Forward currency contracts
|
196,402,862 | 38,437,826 | 103,722,514 | 38,635,478 | ||||||||||||
|
Total futures and forward currency contracts
|
$ | 503,888,389 | $ | 77,057,807 | $ | 505,501,874 | $ | 94,133,568 | ||||||||
Notional values in the interest rate sector were calculated by converting the notional value in local currency of open interest rate futures positions with maturities less than 10 years to 10-year equivalent fixed income instruments and translated to U.S. dollars at June 30, 2011 and 2010. The 10-year note is often used as a benchmark for many types of fixed-income instruments and the General Partner believes it is a more meaningful representation of notional values of the Partnership’s open interest rate positions.
CONCENTRATION OF CREDIT RISK
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. Credit risk is normally reduced to the extent that an exchange or clearing organization acts as a counterparty to futures transactions since typically the collective credit of the members of the exchange is pledged to support the financial integrity of the exchange.
15
The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and trading counterparties which the General Partner believes to be creditworthy. In addition, for OTC forward currency contracts, the Partnership enters into master netting agreements with its counterparties. Collateral posted at the various counterparties for trading of futures and forward currency contracts includes cash and U.S. Treasury notes.
The Partnership’s forward currency trading activities are cleared by Barclays Bank PLC (“BC”), Deutsche Bank AG (“DB”) and Morgan Stanley & Co. Inc. (“MS”) The Partnership began trading at BC on June 2, 2011. The Partnership’s concentration of credit risk associated with BC, DB and MS nonperformance includes unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition plus the value of margin or collateral held by BC, DB and MS. The amount of such credit risk was $19,014,190 and $16,420,836 at June 30, 2011 and December 31, 2010, respectively.
4. PROFIT SHARE
The following table indicates the total profit share earned and accrued during the three and six months ended June 30, 2011 and 2010. Profit share earned (from Limited Partners’ redemptions) is credited to the New Profit memo account as defined in the Partnership’s Agreement of Limited Partnership.
|
Three months ended:
|
||||||||
|
June 30, 2011
|
June 30, 2010
|
|||||||
|
Profit share earned
|
$ | 5,435 | $ | - | ||||
|
Reversal of profit share(1)
|
- | (10,264 | ) | |||||
|
Profit share accrued (2)
|
- | 2,074 | ||||||
|
Total profit share
|
$ | 5,435 | $ | (8,190 | ) | |||
|
Six months ended:
|
||||||||
|
June 30, 2011
|
June 30, 2010
|
|||||||
|
Profit share earned
|
$ | 7,415 | $ | - | ||||
|
Profit share accrued (2)
|
- | 2,074 | ||||||
|
Total profit share
|
$ | 7,415 | $ | 2,074 | ||||
|
|
(1)
|
At April 1
|
|
|
(2)
|
At June 30
|
5. RELATED PARTY TRANSACTIONS
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. A portion of such expenses are paid to an affiliate of the General Partner, The Millburn Corporation (“TMC”), for providing accounting services to the Partnership. The Partnership incurred administrative expenses of $100,857 and $95,609 during the three months ended June 30, 2011 and 2010, respectively and $202,742 and $188,543 during the six months ended June 30, 2011 and 2010 respectively, of which $110,115 and $89,235, respectively, relates to legal and accounting services provided to the Partnership by TMC. The General Partner pays all administrative expenses in excess of 0.25 of 1% per annum of the Partnership's average month-end net assets.
Interests sold through Selling Agents engaged by the General Partner are generally subject to a 2.5% redemption charge for redemptions made prior to the end of the twelfth month following their sale. All redemption charges will be paid to the General Partner. There were no charges due to the General Partner at June 30, 2011.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Item 1, "Financial Statements." The information contained therein is essential to, and should be read in connection with, the following analysis.
OPERATIONAL OVERVIEW
Due to the nature of the Partnership's business, its results of operations depend on the General Partner's ability to recognize and capitalize on trends and other profit opportunities in different sectors of the global capital and commodity markets. The General Partner's trading methods are confidential so that substantially the only information that can be furnished regarding the Partnership's results of operations is contained in the performance record of its trading. Unlike operating businesses, general economic or seasonal conditions do not directly affect the profit potential of the Partnership and its past performance is not necessarily indicative of future results. The General Partner believes, however, that there are certain market conditions, for example, markets with strong price trends, in which the Partnership has a better likelihood of being profitable than in others.
16
LIQUIDITY AND CAPITAL RESOURCES
Interests (“Interests”) may be offered for sale as of the beginning, and may be redeemed as of the end, of each month.
The amount of capital raised for the Partnership should not have a significant impact on its operations, as the Partnership has no significant capital expenditure or working capital requirements other than for monies to pay trading losses, brokerage commissions and charges. Within broad ranges of capitalization, the General Partner’s trading positions should increase or decrease in approximate proportion to the size of the Partnership.
The Partnership raises additional capital only through the sale of Interests and capital is increased through trading profits (if any). The Partnership does not engage in borrowing.
The Partnership trades futures contracts on interest rate instruments, agricultural commodities, currencies, metals, energy and stock indices, and forward contracts on currencies, and may trade options on the foregoing and swaps thereon. Risk arises from changes in the value of these contracts (market risk) and the potential inability of counterparties or brokers to perform under the terms of their contracts (credit risk). Market risk is generally to be measured by the face amount of the futures positions acquired and the volatility of the markets traded. The credit risk from counterparty non-performance associated with these instruments is the net unrealized gain, if any, on these positions plus the value of the margin or collateral held by the counterparty. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with OTC transactions because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In OTC transactions, on the other hand, traders must rely (typically but not universally) solely on the credit of their respective individual counterparties. Margins which may be subject to loss in the event of a default are generally required in exchange trading and counterparties may require margin or collateral in the OTC markets.
The General Partner has procedures in place to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures primarily focus on (1) real time monitoring of open positions; (2) diversifying positions among various markets; (3) limiting the assets committed as margin, generally within a range of 5% to 35% of an account’s net assets at exchange minimum margins (including imputed margins on forward and swap positions) although the amount committed to margin at any time may be higher; (4) prohibiting pyramiding (that is, using unrealized profits in a particular market as margin for additional positions in the same market); and (5) changing the equity utilized for trading by an account solely on a controlled periodic basis rather than as an automatic consequence of an increase in equity resulting from trading profits. The Partnership controls credit risk by dealing exclusively with large, well capitalized financial institutions as brokers and counterparties.
The financial instruments traded by the Partnership contain varying degrees of off-balance sheet risk whereby changes in the market values of the futures and forward contracts or the Partnership’s satisfaction of the obligations may exceed the amount recognized in the statement of financial condition of the Partnership.
Due to the nature of the Partnership’s business, substantially all its assets are represented by cash, cash equivalents and U.S. government obligations while the Partnership maintains its market exposure through open futures and forward currency contract positions.
The Partnership’s futures contracts are settled by offset and are cleared by the exchange clearinghouse function. Open futures positions are marked to market each trading day and the Partnership’s trading accounts are debited or credited accordingly. Options on futures contracts are settled either by offset or by exercise. If an option on a future is exercised, the Partnership is assigned a position in the underlying future which is then settled by offset. The Partnership’s spot and forward currency transactions conducted in the interbank market are settled by netting offsetting positions or payment obligations and by cash payments.
The value of the Partnership’s cash and financial instruments is not materially affected by inflation. Changes in interest rates, which are often associated with inflation, could cause the value of certain of the Partnership’s debt securities to decline, but only to a limited extent. More important, changes in interest rates could cause periods of strong up or down market price trends during which the Partnership’s profit potential generally increases. However, inflation can also give rise to markets which have numerous short price trends followed by rapid reversals, markets in which the Partnership is likely to suffer losses.
The Partnership’s assets are generally held as cash or cash equivalents, including U.S. government securities or securities issued by federal agencies (or, to a limited extent, foreign government securities in connection with trading on non-U.S. exchanges), other CFTC-authorized investments or held in bank or certain other money market instruments (e.g., bankers acceptances and Eurodollar or other time deposits), which are used to margin the Partnership’s futures and forward currency positions and withdrawn, as necessary, to pay redemptions and expenses. Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Partnership’s futures and forward trading, the Partnership’s assets are highly liquid and are expected to remain so.
During its operations for the three and six months ending June 30, 2011, the Partnership experienced no meaningful periods of illiquidity in any of the numerous markets traded by the General Partner.
17
CRITICAL ACCOUNTING ESTIMATES
The Partnership records its transactions in futures and forward currency contracts, including related income and expenses, on a trade date basis. Open futures contracts traded on an exchange are valued at fair value, which is based on the closing settlement price on the exchange where the futures contract is traded by the Partnership on the day with respect to which net assets are being determined. Open forward currency contracts are recorded at fair value, based on pricing models that consider the current market prices (“Spot Prices”) plus the time value of money (“Forward Points”) and contractual prices of the underlying financial instruments. The Spot Prices and Forward Points for open forward currency contracts are generally based on the 3:00 P.M. New York time prices provided by widely used quotation service providers on the day with respect to which net assets are being determined. The Forward Points from the quotation service providers are generally in periods of one month, two months, three months and six months forward while the contractual forward delivery dates for the foreign currency contracts traded by the Partnership may be in between these periods.
The General Partner’s policy is to calculate the Forward Points for each contract being valued by determining the number of days from the date the forward currency contract is being valued to its maturity date and then using straight-line interpolation to calculate the valuation of Forward Points for the applicable forward currency contract. The General Partner will also compare the calculated price to the forward currency prices provided by dealers to determine whether the calculated price is fair and reasonable.
RESULTS OF OPERATIONS
Due to the nature of the Partnership’s trading, the results of operations for the interim period presented should not be considered indicative of the results that may be expected for the entire year.
Periods ended June 30, 2011
|
Total
|
||||
|
Partners'
|
||||
|
Month Ending:
|
Capital
|
|||
|
June 30, 2011
|
$ | 153,283,474 | ||
|
March 31, 2011
|
157,871,884 | |||
|
December 31, 2010
|
162,521,888 | |||
|
Three months
|
Six Months
|
|||||||
|
Change in Partners' Capital
|
$ | (4,588,410 | ) | $ | (9,238,414 | ) | ||
|
Percent Change
|
(2.91 | )% | (5.68 | )% | ||||
THREE MONTHS ENDED JUNE 30, 2011
The decrease in the Partnership’s net assets of $4,588,410 was attributable to a net loss (before profit share) of $4,451,316 and withdrawals of $1,037,094, which was partially offset by contributions of $900,000.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the three months ended June 30, 2011 increased $1,912 relative to the corresponding period in 2010. The increase was due primarily to an increase in the average net assets of the Partnership during the three months ended June 30, 2011 relative to the corresponding period in 2010.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership’s average month-end net assets. Administrative expenses for the three months ended June 30, 2011 increased $5,248 relative to the corresponding period in 2010. The increase was due mainly to an increase in the Partnership’s average net assets during the three months ended June 30, 2011, relative to the corresponding period in 2010.
18
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership’s brokers and custodian. Interest income for the three months ended June 30, 2011 decreased $44,802 relative to the corresponding period in 2010. This decrease was due to a decrease in short-term Treasury yields during the three months ended June 30, 2011 relative to the corresponding period in 2010.
During the three months ended June 30, 2011, the Partnership experienced net realized and unrealized losses of $3,626,640 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $818,590, administrative expenses of $100,857, custody fees and other expenses of $7,015 and an accrued profit share allocation to the General Partner of $5,435 were incurred. Interest income of $101,786 partially offset the Partnership's expenses resulting in a net loss after profit share to the General Partner of $4,456,751. An analysis of the trading gain (loss) by sector is as follows:
|
Sector
|
% Gain
(Loss)
|
|||
|
Currencies
|
1.86 | % | ||
|
Energies
|
(1.56 | )% | ||
|
Grains
|
(0.49 | )% | ||
|
Interest rates
|
1.64 | % | ||
|
Livestock
|
(0.32 | )% | ||
|
Metals
|
(0.70 | )% | ||
|
Softs
|
(0.34 | )% | ||
|
Stock indices
|
(2.45 | )% | ||
|
Trading loss
|
(2.36 | )% | ||
SIX MONTHS ENDED JUNE 30, 2011
The decrease in the Partnership’s net assets of $9,238,414 was attributable to a net loss (before profit share) of $6,499,620 and withdrawals of $4,103,794, which was partially offset by contributions of $1,365,000.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the six months ended June 30, 2011 increased $19,301 relative to the corresponding period in 2010. The increase was due primarily to an increase in the average net assets of the Partnership during the six months ended June 30, 2011 relative to the corresponding period in 2010.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership’s average month-end net assets. Administrative expenses for the six months ended June 30, 2011 increased $14,199 relative to the corresponding period in 2010. The increase was due mainly to an increase in the Partnership’s average net assets during the six months ended June 30, 2011, relative to the corresponding period in 2010.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership’s brokers and custodian. Interest income for the six months ended June 30, 2011 decreased $71,819 relative to the corresponding period in 2010. This decrease was due to a decrease in short-term Treasury yields during the six months ended June 30, 2011 relative to the corresponding period in 2010.
During the six months ended June 30, 2011, the Partnership experienced net realized and unrealized losses of $4,854,428 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $1,655,206, administrative expenses of $202,742, custody fees and other expenses of $14,743 and an accrued profit share allocation to the General Partner of $7,415 were incurred. Interest income of $227,499 partially offset the Partnership's expenses resulting in a net loss after profit share to the General Partner of $6,507,035. An analysis of the trading gain (loss) by sector is as follows:
|
Sector
|
% Gain
(Loss)
|
|||
|
Currencies
|
1.47 | % | ||
|
Energies
|
1.13 | % | ||
|
Grains
|
(0.86 | )% | ||
|
Interest rates
|
0.39 | % | ||
|
Livestock
|
(0.23 | )% | ||
|
Metals
|
(0.35 | )% | ||
|
Softs
|
(0.12 | )% | ||
|
Stock indices
|
(4.59 | )% | ||
|
Trading loss
|
(3.16 | )% | ||
19
Three months ended June 30, 2011
While growth oriented trades produced gains early in the quarter, market sentiment toward these “risk on” positions deteriorated during May and June and the Partnership registered a decline for the three months. Losses from trading of equity, energy, metal and agricultural commodity futures outdistanced gains from currency and interest rate futures trading.
Manufacturing activity, as evidenced by weakening purchasing manager surveys and employment statistics, slowed worldwide during the quarter. In the developed economies, the continued depression in the housing markets and the knock-on effects of the Japan crisis added to the negative sentiment as did the coming end of the second round of quantitative easing (“QE2”) in the U.S. and the increase in bank regulations worldwide. Meanwhile, in the developing economies, more moves toward tighter monetary policy to contain inflation, led by China, reined in “animal spirits.” Combining this worsening growth outlook with the Greek debt drama and the U.S. debt ceiling imbroglio served to undermine the long equity and commodity trades in the Partnership.
Against this background, long equity futures positions produced losses and were reduced significantly and in some instances closed or reversed to short trades. Losses were registered on long equity positions in the U.S., Chinese, Hong Kong, Korean, Taiwanese, Canadian, Australian, South African and European—especially Italian, Spanish and Dutch—equity futures. There was a bounce in equity markets near quarter-end as the Greek austerity approval triggered some short covering and perhaps due to quarter-end window dressing purchases.
A steadying dollar, slowing growth and news that the International Energy Agency would release 60 million barrels of oil from strategic reserves to compensate for the Libyan shortfall pushed energy prices lower and led to losses on long positions in crude and related products. Trading of natural gas also resulted in a loss.
Diminishing industrial activity and global economic growth produced losses from long positions in industrial metals, especially aluminum, lead, zinc and nickel. A long gold position was profitable, although the gains were pared back as the U.S. dollar stabilized after April. Silver trading was highly volatile with gains in April offset by losses in May and June.
Turning to agricultural commodities, long positions in the soybean complex, corn, cotton, coffee, and cattle were unprofitable, while a short wheat trade was profitable in June.
Interest rate trading was profitable during April and May but in June sovereign debt concerns and inflation worries undermined some long note and bond trades. For the quarter, long positions in the U.S., Australian, Canadian and Japanese long-term futures, and a long position in short-term sterling were profitable. Meanwhile, short trades in European interest rate futures produced losses.
The Federal Reserves’s policy of miniscule interest rates and quantitative easing caused the U.S. dollar to take a significant dip in April. During May and June, the U.S. dollar partially recovered as the end of QE2 approached and as growth and debt concerns outside the U.S. caused market participants to trim back short U.S. dollar positions. Still, on balance, short U.S. dollar positions versus emerging market, high yield and safe haven currencies like the Swiss franc were profitable. Meanwhile, non-U.S. dollar trading lost money from long positions in the Australian dollar, Norwegian kroner and Swedish krona. On the other hand, a short British pound/long Australian dollar trade was profitable.
Three months ended March 31, 2011
Trading during the quarter was volatile largely as a result of the Japan disaster. There was a loss for the period as profits from energy, U.S. dollar currency, metal and soft commodity trading were outweighed by losses from equity, interest rate and currency cross rate trading.
Through the first two and one-third months of the quarter, generous liquidity creation by developed country central banks, especially the Federal Reserve, led to a weakening U.S. dollar, and rising equity and commodity prices. Meanwhile, inflation concerns, monetary policy tightening in emerging economies, and persistent worry about government debt problems encouraged interest rates on government securities to rise.
Given the diverse monetary policy stances of the U.S. and emerging economies, capital flowed toward high yield and emerging market exporting countries. Hence, short U.S. dollar positions were profitable as the U.S. dollar fell versus the currencies of Australia, Brazil, Canada, Korea, Mexico, Russia and Scandinavia.
Persistent ease in U.S. monetary policy also led to increasing optimism regarding global economic growth. This environment was favorable to global equities and long positions in index futures in the U.S., Canada, Europe and South Africa were profitable. Asian equities did less well as policy tightening progressed.
The weak U.S. dollar and strong growth outlook supported commodity prices and agricultural commodity, metal and energy trading were all profitable. The agricultural markets were also boosted by supply concerns caused by a variety of weather conditions – too much or too little rain, too hot or not hot enough. Long positions in corn, wheat, cotton, coffee and rubber were profitable.
Energy prices were up on the roiling violence in the Middle East and North Africa, a better economic growth outlook and supply drawdowns. Long positions in crude, heating oil, London gasoil and gasoline (RBOB) were profitable.
Contrary to some expectations, the Federal Reserve’s second foray into quantitative easing failed to keep interest rates low. With market participants worried about massive government borrowing requirements and future inflation, there was a substantial uptick in rates and moderate losses were sustained on long interest rate futures positions.
In mid-March, the Japanese earthquake/tsunami/nuclear disaster had a sizable negative impact on these profitable results as market participants altered their prior views, producing significant price reversals.
A flight to safety triggered a strong move into the U.S. dollar which had been falling because of concern regarding fiscal and monetary problems in the U.S., as well as into the Swiss franc and yen which had been weak due to low interest rates. This flight also led to rising prices for “suddenly safe” government securities which had previously been under pressure due to debt problems and recent signs of tighter monetary policies, particularly in Asia. Given the threat to worldwide growth due the crippling of the Japanese economy, global equity markets, which had weakened noticeably on March 9 in the wake of a Bank of Korea rate hike and further signs of a persistent inflation problem in China, fell sharply as the scale of the disaster expanded. Finally, with Japan’s industrial sector somewhat crippled and global growth now more uncertain, the demands for and prices of metals, energy, and other commodities, which have been experiencing a secular boom, fell, negatively impacting performance.
The increase in volatility led our risk management systems to reduce positions in order to keep risk in line with intended exposures. Also, price changes produced new signals from directional models that led to position adjustments. Equity exposures were reduced about 50% from earlier levels, although the portfolio remained partially long Asian, U.S., and European indices. In Japan, equity positions were reduced close to flat, as were positions in Japanese government bonds, while the portfolio stayed slightly short the U.S. dollar against the yen. Metal and energy positions stayed long though 10-20% under earlier levels. The portfolio also went somewhat long interest rate futures, particularly Canadian, U.S. and British instruments.
Over the final days of the month, earlier trends resurfaced and much of the Japan related loss was recaptured, but with positions lowered, especially in equities, the quarter finished slightly negative.
Periods ended June 30, 2010
20
|
Total
|
||||
|
Partners'
|
||||
|
Month Ending:
|
Capital
|
|||
|
June 30, 2010
|
$ | 146,478,217 | ||
|
March 31, 2010
|
156,293,550 | |||
|
December 31, 2009
|
147,253,288 | |||
|
Three months
|
Six Months
|
|||||||
|
Change in Partners' Capital
|
$ | (9,815,333 | ) | $ | (775,071 | ) | ||
|
Percent Change
|
(6.28 | )% | (0.53 | )% | ||||
THREE MONTHS ENDED JUNE 30, 2010
The decrease in the Partnership’s net assets of $9,815,333 was attributable to a net loss (before profit share) of $9,018,796 and withdrawals of $1,029,356 which was partially offset by contributions of $232,819.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the three months ended June 30, 2010 decreased $19,984 relative to the corresponding period in 2009. The decrease was due primarily to a decrease in the average net assets of the limited partners during the three months ended June 30, 2010 relative to the corresponding period in 2009.
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the three months ended June 30, 2010 increased $262 relative to the corresponding period in 2010. The slight increase was due mainly to an increase in the Partnership's total average net assets during the three months ended June 30, 2010, relative to the corresponding period in 2009.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the three months ended June 30, 2010 decreased $486,409 relative to the corresponding period in 2009. This decrease was due to a decrease in short-term Treasury yields during the three months ended June 30, 2010, relative to the corresponding period in 2009.
During the three months ended June 30, 2010, the Partnership experienced net realized and unrealized losses of $8,246,317 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $816,678, administrative expenses of $95,609 and custody fees of $6,780 were incurred. Interest income of $146,588 and a reduction in the profit share to the General Partner of $8,190 offset the Partnership's expenses resulting in a net loss after profit share to General Partner of $9,010,606. An analysis of the trading gain (loss) by sector is as follows:
|
Sector
|
% Gain
(Loss)
|
|||
|
Currencies
|
(2.77 | )% | ||
|
Energies
|
(2.05 | )% | ||
|
Grains
|
(0.22 | )% | ||
|
Interest Rates
|
6.31 | % | ||
|
Livestock
|
(0.08 | )% | ||
|
Metals
|
(0.92 | )% | ||
|
Softs
|
(0.23 | )% | ||
|
Stock Indices
|
(5.29 | )% | ||
|
Trading Gain/(Loss)
|
(5.25 | )% | ||
SIX MONTHS ENDED JUNE 30, 2010
The decrease in the Partnership’s net assets of $775,071was attributable to a net loss (before profit share) of $418,500 and withdrawals of $1,740,674 which was partially offset by contributions of $1,384,103.
Brokerage fees are calculated on the net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees for the six months ended June 30, 2010 decreased $133,440 relative to the corresponding period in 2009. The decrease was due primarily to a decrease in the average net assets of the special limited partners and limited partners during the six months ended June 30, 2010 relative to the corresponding period in 2009.
21
The Partnership pays administrative expenses for legal, audit and accounting services, up to 0.25 of 1% per annum of the Partnership's average month-end net assets. Administrative expenses for the six months ended June 30, 2010 decreased $11,634 relative to the corresponding period in 2009. The decrease was due mainly to a decrease in the Partnership's average net assets during the six months ended June 30, 2010, relative to the corresponding period in 2009.
Interest income is derived from cash and U.S. Treasury instruments held at the Partnership's brokers and custodian. Interest income for the six months ended June 30, 2010 decreased $1,033,812 relative to the corresponding period in 2009. This decrease was due mainly to a decrease in short-term Treasury yields during the six months ended June 30, 2010, relative to the corresponding period in 2009.
During the six months ended June 30, 2010, the Partnership experienced net realized and unrealized gains of $1,120,178 from its trading operations (including foreign exchange translations and U.S. Treasury notes). Brokerage fees of $1,635,905, administrative expenses of $188,543, custody fees of $13,548 and an accrued profit share of $2,074 were included. Interest income of $299,318 offset the Partnership's expenses resulting in a net loss after profit share to General Partner of $420,574. An analysis of the trading gain (loss) by sector is as follows:
|
Sector
|
% Gain
(Loss)
|
|||
|
Currencies
|
(0.78 | )% | ||
|
Energies
|
(1.37 | )% | ||
|
Grains
|
0.15 | % | ||
|
Interest Rates
|
10.14 | % | ||
|
Livestock
|
(0.18 | )% | ||
|
Metals
|
(0.82 | )% | ||
|
Softs
|
(0.52 | )% | ||
|
Stock Indices
|
(5.89 | )% | ||
|
Trading Gain/(Loss)
|
0.73 | % | ||
MANAGEMENT DISCUSSION – 2010
Three months ended June 30, 2010
The Partnership's Limited Partners and Special Limited Partners had negative returns of 6.09% and 5.39%, respectively for the three months ended June 30, 2010. Losses from trading stock index futures, currency forwards, energy futures and to a lesser extent metal and agricultural commodity futures well outpaced the significant gains from trading interest rate futures.
While the quarter started on a positive note, several significant events in May including the European debt crisis, the May 6 “flash crash”, weaker economic data from China, the sinking of a South Korea naval vessel and the BP oil leak triggered abrupt price moves and trend reversals that resulted in a sizable loss for the Partnership and ushered in a plethora of uncertainties that produced further erosion in the NAV during June. Market participants wondered: Is inflation or deflation to be feared? Is growth slowing temporarily or are we facing the second leg of a double-dip recession? Will government fiscal policies focus on supporting aggregate demand or on reducing deficits and borrowing? How will changes in financial regulations worldwide impact business growth potential? How will the developed nations’ sovereign debt crisis play out? In this environment, risk aversion, that had been absent in April, resurfaced unexpectedly in May and June. Consequently, equity prices declined and commodity prices weakened which put pressure on commodity and growth oriented currencies and safe haven funds flowed into precious metals and into U.S., German, British and Japanese government securities.
The Partnership entered the quarter with long positions in most stock index futures and, therefore, suffered losses from the global equity market sell-off as measured by the abrupt 15% drop in the MSCI World Equity Index that occurred between late April and late May. Losses were broad-based and sustained from trading of U.S., European, Asian and South African indices.
Short U.S. dollar positions versus the growth oriented and commodity currencies of Australia, New Zealand, Brazil, Canada, Chile, Russia, India, Mexico, Singapore, Turkey, South Africa and Korea produced losses as traders reduced risky trades and sought safe haven U.S. dollars. A long U.S. dollar position versus the euro was profitable. Non-U.S. dollar cross rate trading was almost flat for the quarter as profits from short euro and Scandinavian currency trades countered losses from other short Swiss, Australian and New Zealand dollar trades.
Long positions in commodities were dealt a blow by weakened worldwide growth prospects. For example, in May alone, the S&P GSCI Total Return Index, an unleveraged long only commodity index, was down 13.2%.
The energy sector was particularly hard hit and long positions in Brent and WTI crude, heating oil, gas oil and reformulated gasoline blendstock (RBOB) were unprofitable. Crude inventories were already high particularly in the U.S. and currency and economic growth problems were enough to trigger a significant price drop.
Except for gold, which benefited from the flight to safety, long positions in metals were unprofitable. Long positions in zinc, copper, nickel, aluminum and platinum (which traded like an industrial metal in May and June) generated losses.
22
Trading of agricultural and soft commodities was fractionally unprofitable as prices of sugar, corn and various categories of wheat found support due to weather developments leading to losses from short positions.
Three months ended March 31, 2010
The Partnership’s Limited Partners and Special Limited Partners had positive returns, net of all fees, of 5.43% and 6.24%, respectively, for the three months ended March 31, 2010. Profits from trading interest rate, energy, grain and metal futures and forward currency contracts well outpaced the fractional losses sustained from trading equity, soft commodity and livestock futures.
At the start of the year the sustainability and robustness of incipient global growth was called into question amid signs that monetary policy was becoming less accommodative in China, India and other countries which had led the recovery. Worries that fiscal stimulus in the developed world was winding down also weighed on growth prospects as did the looming Greek fiscal crisis. Near quarter-end however, a string of positive economic statistics caused the outlook for economic expansion to brighten somewhat.
Against this background, interest rates eased and long positions in U.S., British and European note, bond and short-term interest rate futures were profitable. On the other hand, short positions in Australian interest rate futures were profitable as the Reserve Bank of Australia continued to tighten policy to ward off feared inflation.
The burgeoning budget crisis in Greece weighed on the euro throughout the quarter and short euro positions relative to the Australian and New Zealand dollars, Hungarian forint, Polish zloty and Turkish lira were profitable. More generally, long positions in high yielding and commodity currencies—Australian, New Zealand and Canadian dollars—versus a variety of currencies were profitable. The U.S. dollar was not as weak as the euro but it did lose ground to the currencies of Australia, Canada, India, Colombia, Korea, Mexico and South Africa, producing profits from long positions in these currencies.
Equity trading was marginally negative although performance during the quarter and across countries was quite disparate. Losses in January and February reflected the weaker economic outlook and signs of policy tightening. March gains based on improving economic statistics largely offset those losses. By country, long positions in the U.S., the United Kingdom, Canada and parts of Europe were profitable, while long positions in Asia, Spain, Italy, Australia, Mexico and South Africa were unprofitable.
Natural gas continued to be in a bear market as increasing supplies from shale gas met decreasing demand and short natural gas futures positions were quite profitable. Elsewhere in the energy complex, prices moved higher and long positions in crude oil products were somewhat profitable.
In the metals sector, gains from long nickel and aluminum positions modestly outweighed losses from long copper and zinc positions and a short lead trade.
Deflation was the story in agricultural markets. Profits on short positions in corn and wheat outweighed losses on long positions in the soybean complex, cocoa and sugar where forecasts of large sugar harvests accelerated the down-move from record highs.
OFF-BALANCE SHEET ARRANGEMENTS
The Partnership does not engage in off-balance sheet arrangements with other entities.
CONTRACTUAL OBLIGATIONS
The Partnership does not enter into contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company. The Partnership’s sole business is trading futures and forward contracts, both long (contracts to buy) and short (contacts to sell). All such contracts are settled by offset, not delivery. Substantially all such contracts are for settlement within four months of the trade date and substantially all such contracts are held by the Partnership for less than four months before being offset or rolled over into new contracts with similar maturities. The financial statements present a Condensed Schedule of Investments setting forth the Partnership’s open futures and forward currency contracts, both long and short, at June 30, 2011.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
23
ITEM 4. CONTROLS AND PROCEDURES
The General Partner, with the participation of the General Partner's Co-Chief Executive Officers and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period covered by this quarterly report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. There were no changes in the General Partner's internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the General Partner's internal control over financial reporting with respect to the Partnership.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 1A. Risk Factors
Not required.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Pursuant to the Partnership's Agreement of Limited Partnership, the Partnership may sell Interests at the beginning of each calendar month. On April 1, 2011, May 1, 2011 and June 1, 2011, the Partnership sold Interests to new and existing Limited Partners of $100,000, $500,000 and $300,000, respectively. The Partnership did not sell any Interests to existing Special Limited Partners during the three months ended June 30, 2011. There were no underwriting discounts or commissions in connection with the sales of the Interests described above.
Each of the foregoing Interests were offered and sold only to “accredited investors” as defined in Rule 501(a) under the Securities Act of 1933, as amended (the “1933 Act”), in reliance on the exemption from registration provided by Rule 506 under the 1933 Act.
(c) Pursuant to the Partnership’s Agreement of Limited Partnership, Limited Partners may redeem their Interests at the end of each calendar month at the then current month-end net asset value. The redemption of Interests has no impact on the value of Interests that remain outstanding, and Interests are not reissued once redeemed.
|
Date of
Withdrawal
|
Limited
Partners
|
Special Limited
Partners
|
Total
|
|||||||||
|
April 30, 2011
|
$ | (528,414 | ) | $ | (59,847 | ) | $ | (588,261 | ) | |||
|
May 31, 2011
|
(122,847 | ) | - | (122,847 | ) | |||||||
|
June 30, 2011
|
(52,338 | ) | (273,648 | ) | (325,986 | ) | ||||||
|
Total
|
$ | (703,599 | ) | $ | (333,495 | ) | $ | (1,037,094 | ) | |||
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. (Removed and Reserved)
ITEM 5. Other Information
None.
ITEM 6. (a) Exhibits -
The following exhibits are included herewith:
|
31.01
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Co-Chief Executive Officer
|
|
31.02
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Co-Chief Executive Officer
|
|
31.03
|
Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Financial Officer
|
|
32.01
|
Section 1350 Certification of Co-Chief Executive Officer
|
|
32.02
|
Section 1350 Certification of Co-Chief Executive Officer
|
|
32.03
|
Section 1350 Certification of Chief Financial Officer
|
24
SIGNATURES
Pursuant to the requirements 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.
|
By: Millburn Ridgefield Corporation,
|
|
|
General Partner
|
|
|
Date: August 12, 2011
|
|
|
/s/Tod A. Tanis
|
|
|
Tod A. Tanis
|
|
|
Vice-President
|
|
|
(Principal Accounting Officer)
|
25