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Table of Contents

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, 2011
 
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 000-54284
 
BHM DISCRETIONARY FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
 
     
Delaware   27-3371689
 
 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
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 the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes X  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):
 
Large accelerated filer     Accelerated filer     Non-accelerated filer X   Smaller reporting company  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes    No X
 


 

BHM DISCRETIONARY FUTURES FUND L.P.
FORM 10-Q
INDEX
         
    Page  
    Number  
       
       
    3  
    4  
    5  
    6-20  
    21-22  
    23-24  
    25  
    26-27  
       
Exhibit 31.1 Certification
       
Exhibit 31.2 Certification
       
Exhibit 32.1 Certification
       
Exhibit 32.2 Certification
       
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

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PART I
Item 1. Financial Statements
BHM Discretionary Futures Fund L.P.
Statements of Financial Condition
                 
    (Unaudited)        
    June 30,     December 31,  
    2011     2010  
Assets:
               
Investment in Trading Company, at fair value
  $ 247,995,469     $ 57,170,009  
Subscriptions receivable
          32,140,809  
 
           
Total assets
  $ 247,995,469     $ 89,310,818  
 
           
Liabilities and Partners’ Capital
               
Liabilities:
               
Payable to Trading Company
  $     $ 31,929,508  
Accrued expenses:
               
Organizational costs due to MS&Co.
    32,301       80,756  
Redemptions payable
    3,505,106        
 
           
Total liabilities
    3,537,407       32,010,264  
 
           
Partners’ Capital:
               
General Partner, Class A, (0 and 562.789 units at June 30, 2011 and December 31, 2010, respectively)
        606,777    
General Partner, Class D, (2,857.475 and 0 units at June 30, 2011 and December 31, 2010, respectively)
    2,601,531        
Limited Partners, Class A, (230,610.166 and 52,488.504 units at June 30, 2011 and December 31, 2010, respectively)
    230,679,773       56,693,777  
Limited Partners, Class D, (12,276.423 and 0 units at June 30, 2011 and December 31, 2010, respectively)
    11,176,758        
 
           
Total Partners’ Capital
    244,458,062       57,300,554  
 
           
Total liabilities and Partners’ Capital
  $ 247,995,469     $ 89,310,818  
 
           
Class A, net asset value per redeemable unit
  $ 1,000.30     $ 1,078.16  
 
           
Class D, net asset value per redeemable unit
  $ 910.43     $  
 
           
The accompanying notes are an integral part of these financial statements.

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BHM Discretionary Futures Fund L.P.
Statements of Income and Expenses
(Unaudited)
                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2011  
Investment income:
               
Interest income allocated from Trading Company
  $ (6,785 )     (6,402 )
 
           
Expenses:
               
Expenses allocated from Trading Company
    1,258,103       1,806,717  
Ongoing placement agent fees
    1,640,462       2,348,581  
Administrative fees
    570,195       815,185  
Other
    91,497       152,744  
 
           
Total expenses
    3,560,257       5,123,227  
 
           
Net investment income (loss)
    (3,567,042 )     (5,129,629 )
 
           
Trading Results:
               
Net realized gains on closed contracts allocated from Trading Company
    (7,823,198 )     179,392  
Change in net unrealized gains (losses) on open contracts allocated from Trading Company
    (10,116,658 )     (18,040,665 )
 
           
Total trading results allocated from Trading Company
    (17,939,856 )     (17,861,273 )
 
           
Net income (loss)
    (21,506,898 )     (22,990,902 )
 
           
 
               
Net income (loss) allocation from Trading Company
               
Class A
  $ (20,337,550 )   $ (21,710,532 )
 
           
Class D
  $ (1,169,348 )   $ (1,280,370 )
 
           
Net asset value per redeemable unit
               
Class A
  $ 1,000.30     $ 1,000.30  
 
           
Class D
  $ 910.43     $ 910.43  
 
           
Net income (loss) per redeemable unit*
               
Class A
  $ (86.86 )   $ (77.86 )
 
           
Class D
  $ (73.28 )   $ (89.57 )
 
           
Weighted average units outstanding
               
Class A
    199,082.359       141,639.869  
 
           
Class D
    12,689.009       10,464.403  
 
           
 
*   Based on change in net asset value per unit.
 
    The accompanying notes are an integral part of these financial statements.

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Table of Contents

BHM Discretionary Futures Fund L.P.
Statement of Changes in Partners’ Capital
For the six months ended June 30, 2011
(Unaudited)
                         
    Class A     Class D     Total  
Partners’ Capital, December 31, 2010.
  $ 57,300,554     $     $ 57,300,554  
Subscriptions — General Partner
    1,250,000       2,838,254       4,088,254  
Subscriptions — Limited Partners
    205,487,941       12,220,405       217,708,346  
Net income (loss)
    (21,710,532 )     (1,280,370 )     (22,990,902 )
Redemptions — General Partner
    (1,863,254 )           (1,863,254 )
Redemptions — Limited Partners
    (9,784,936 )           (9,784,936 )
 
                 
Partners’ Capital, June 30, 2011
  $ 230,679,773     $ 13,778,289     $ 244,458,062  
 
                 

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
1. General:
     BHM Discretionary Futures Fund L.P. (the “Partnership”) is a limited partnership organized on August 23, 2010 under the partnership laws of the State of Delaware to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The Partnership commenced trading on November 1, 2010. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership is authorized to sell an unlimited number of redeemable units of limited partnership interest (“Units”) on a continuous basis.
     In 2009 Morgan Stanley and Citigroup Inc. combined certain assets of the Global Wealth Management Group of Morgan Stanley & Co. Incorporated including Demeter Management LLC (“Demeter”), the former general partner of the Partnership and the Smith Barney division of Citigroup Global Markets Inc., into a new joint venture, Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). As part of that transaction, Ceres Managed Futures LLC (“Ceres”) and Demeter were contributed to Morgan Stanley Smith Barney LLC (“MSSB” or the “Placement Agent”), and each became a wholly-owned subsidiary of MSSBH.
     Effective December 1, 2010, together with the unanimous support of the Boards of Directors of Demeter and Ceres, combined the assets of Demeter and Ceres into a single commodity pool operator, Ceres (the “General Partner”). Ceres will continue to be wholly-owned by MSSBH and will act as the general partner for the Partnership.
     On November 1, 2010, the Partnership allocated substantially all of its capital to the Morgan Stanley Smith Barney BHM I LLC (the “Trading Company”), a limited liability company organized under the Delaware Limited Liability Company Law. The Trading Company was formed in order to permit accounts managed by Blenheim Capital Management LLC (“Blenheim” or the “Advisor”) using Blenheim’s Global Markets Strategy-Futures/FX program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the trading manager of the Trading Company. Individual and pooled accounts currently managed by the General Partner, including the Partnership, are permitted to be members of the Trading Company. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process.
     On February 1, 2011, the Units currently offered pursuant to the Limited Partnership Agreement are deemed “Class A Units.” The rights, liabilities, risks, and fees associated with investment in the Class A Units will not be changed. In addition, beginning on February 1, 2011, Class D Units were offered. Class A and Class D will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Units that a Limited Partner receives upon a subscription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer Units to investors at its discretion. Class A Units and Class D Units will be identical, except that Class D Units will be subject to a monthly ongoing placement agent fee equal to 1/12th of 0.75% (a 0.75% annual rate) of the Net Assets of Class D as of the beginning of each month, which differs from the Class A monthly ongoing placement agent fee of 1/12th of 3.0% (a 3.0% annual rate) of the net assets of Class A.
     The non-clearing broker for the Trading Company is MSSB. The clearing commodity brokers for the Trading Company are Morgan Stanley & Co. Incorporated (“MS&CO.”) and Morgan Stanley & Co. International plc (“MSIP”).
     At June 30, 2011, the Partnership owned approximately 60.0% of the Trading Company. At December 31, 2010, the Partnership owned approximately 27.4% of the Trading Company. The Partnership intends to continue to invest substantially all of its assets in the Trading Company. The performance of the Partnership is directly affected by the performance of the Trading Company. The Trading Company’s trading of futures, forwards, and options contracts, as applicable, is done primarily on U.S. and foreign commodity exchanges. The Trading Company’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Members’ Capital are included herein.
     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 its capital contribution and profits, if any, net of distributions.
     The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at June 30, 2011 and December 31, 2010, and the results of its operations for the three and six months ended June 30, 2011. These financial statements present

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
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 the Form 10 filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2010.
     The preparation of financial statements in 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, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates.
     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.

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
     The Trading Company’s Statements of Financial Condition and Condensed Schedules of Investments as of June 30, 2011 and December 31, 2010 and Statements of Income and Expenses and Changes in Members’ Capital for the three and six months ended June 30, 2011 and 2010 are presented below:
BHM I, LLC
Statements of Financial Condition
                 
    (Unaudited)         
    June 30,      December 31,   
    2011      2010   
Assets:
               
Equity in trading account:
               
Unrestricted cash
  $ 390,909,105     $ 158,507,875  
Restricted cash
    34,928,878       1,734,854  
 
           
Total cash
    425,837,983       160,242,729  
 
           
Net unrealized gain (loss) on open contracts (MS&Co.)
    (12,019,276     15,322,971  
Net unrealized gain (loss) on open contracts (MSIP)
    (2,501,344 )     3,077,405  
 
           
Total net unrealized gain (loss) on open contracts
    (14,520,620     18,400,376  
 
           
Options purchased, (premiums paid $11,630,368 and $4,623,417, respectively)
    7,861,876       6,144,949  
 
           
Total trading equity
    419,179,239       184,788,054  
Expense reimbursements
    18,153       13,347  
Interest receivable (MSSB)
          365  
Contributions receivable
          31,929,508  
 
           
Total assets
  $ 419,197,392     $ 216,731,274  
 
           
Liabilities and Members’ Capital:
               
Liabilities:
               
Options written (premiums received $7,851,225 and $3,883,588, respectively)
  $ 5,251,498     $ 3,209,454  
Accrued management fees
    595,892       132,313  
Interest payable (MSSB)
    4,895        
Accrued administrative fees
    2,722       16,453  
Accrued incentive fees
          2,684,680  
Withdrawals payable
          2,035,496  
 
           
Total liabilities
    5,855,007       8,078,396  
 
           
Members’ Capital:
               
Non-Managing Members
    413,342,385       208,652,878  
 
           
Total members’ capital
    413,342,385       208,652,878  
 
           
Total liabilities and members’ capital
  $ 419,197,392     $ 216,731,274  
 
           

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
BHM I, LLC
Condensed Schedule of Investments
June 30, 2011
(Unaudited)
                 
            % of  
    Fair Value     Members’ Capital  
Futures and Forward Contracts Purchased
               
Commodity
  $ (9,384,859 )     (2.27 )%
Equity
    685,350       0.17  
Foreign currency
    448,897       0.11  
Interest rate
    (26,010 )     (0.01 )
 
           
Total futures and forward contracts purchased
    (8,276,622 )     (2.00 )
 
           
 
               
Futures and Forward Contracts Sold
               
Commodity
    (4,299,488 )     (1.04 )
Equity
           
Foreign currency
           
Interest rate
    (1,198,854 )     (0.29 )
 
           
Total futures and forward contracts sold
    (5,498,342 )     (1.33 )
 
           
Unrealized currency loss
    (745,656 )     (0.18 )
 
           
Net fair value
  $ (14,520,620 )     (3.51 )%
 
           
 
               
Options Contracts
               
Options purchased on Futures Contracts
  $ 7,861,876       1.90 %
Options written on Futures Contracts
  $ (5,251,498 )     (1.27 )%

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
BHM I, LLC
Condensed Schedule of Investments
December 31, 2010
                 
            % of  
    Fair Value     Members’ Capital  
Futures and Forward Contracts Purchased
               
Commodity
  $ 22,721,930       10.89 %*
Equity
    3,128        
Foreign currency
    374,853       0.18  
Interest rate
    185,208       0.09  
 
           
Total futures and forward contracts purchased
    23,285,119       11.16  
 
           
 
               
Futures and Forward Contracts Sold
               
Commodity
    (4,367,221 )     (2.10 )
Foreign currency
    (148,064 )     (0.07 )
Interest rate
    368,241       0.18  
 
           
Total futures and forward contracts sold
    (4,147,044 )     (1.99 )
 
           
Unrealized currency loss
    (737,699 )     (0.35 )
 
           
Net fair value
  $ 18,400,376       8.82 %
 
           
 
               
Options Contracts
               
Options purchased on Futures Contracts
  $ 6,144,949       2.95 %
Options written on Futures Contracts
  $ (3,209,454 )     (1.54 )%
 
*   No single contract’s value exceeds 5% of the Member’s Capital.

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
BHM I, LLC
Statements of Income and Expenses and Changes in Members’ Capital
(Unaudited)
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
Investment income:
                               
Interest income (MSSB)
  $ (9,126 )   $ (3,362 )   $ (8,477 )   $ (6,150 )
 
                       
 
                               
Expenses:
                               
Management fees
    1,529,091       222,654       2,334,070       441,348  
Brokerage, clearing and transaction fees
    207,448       130,462       365,637       229,425  
Administrative fees
    22,583       38,965       78,003       77,236  
Incentive fees
                245,858        
 
                       
Total expenses
    1,759,122       392,081       3,023,568       748,009  
 
                               
Expense reimbursements
    (43,815 )     (84,582 )     (101,438 )     (153,257 )
 
                       
Net expenses
    1,715,307       307,499       2,922,130       594,752  
 
                       
Net investment loss
    (1,724,433 )     (310,861 )     (2,930,607 )     (600,902 )
 
                       
Trading results
                               
Trading profit (loss):
                               
Realized
    (12,543,734 )     (5,056,601 )     11,255,819       6,042,823  
Net change in unrealized
    (16,698,641 )     (7,831,734 )     (36,285,427 )     (23,618,539 )
 
                       
Total trading results
  $ (29,242,375 )   $ (12,888,335 )   $ (25,029,608 )   $ (17,575,716 )
 
                       
 
                               
Net loss
  $ (30,966,808 )   $ (13,199,196 )   $ (27,960,215 )   $ (18,176,618 )
 
                       
Net loss allocation
                               
Non-managing members
  $ (30,966,808 )   $ (13,199,196 )   $ (27,960,215 )   $ (18,176,618 )
 
                       
                         
    Managing     Non-Managing        
    Member     Members     Total  
Members’ Capital, December 31, 2010
  $     $ 208,652,878     $ 208,652,878  
Capital contributions
          243,902,714       243,902,714  
Net loss
          (27,960,215 )     (27,960,215 )
Capital withdrawals
          (11,252,992 )     (11,252,992 )
 
                 
Members’ Capital, June 30, 2011
          413,342,385       413,342,385  
 
                 
Members’ Capital, December 31, 2009
          154,003,687       154,003,687  
Capital contributions
          9,401,868       9,401,868  
Net loss
          (18,176,618 )     (18,176,618 )
Capital withdrawals
          (23,598,526 )     (23,598,526 )
 
                 
Members’ Capital, June 30, 2010
  $     $ 121,630,411     $ 121,630,411  
 
                 

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Table of Contents

BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
2. Financial Highlights:
     Changes in the net asset value per redeemable unit for the three and six months ended June 30, 2011 were as follows:
                                 
                        For the period  
                        February 1, 2011  
                        (commencement  
    Three Months Ended     Six Months Ended     of operations) to  
    June 30, 2011     June 30, 2011     June 30, 2011  
    Class A     Class D     Class A     Class D  
Net realized and unrealized gains (losses) *
  $ (77.71 )   $ (65.06 )   $ (56.99 )   $ (77.42 )
Expenses **
    (9.15 )     (8.22 )     (20.87 )     (12.15 )
 
                       
Increase (decrease) for the period
    (86.86 )     (73.28 )     (77.86 )     (89.57 )
Net asset value per Unit, beginning of period
    1,087.16       983.71       1,078.16       1,000.00  
 
                       
Net asset value per Unit, end of period
  $ 1,000.30     $ 910.43     $ 1,000.30     $ 910.43  
 
                       
Redemption/subscription value per Unit, end of period***
  $ 1,000.43     $ 910.61     $ 1,000.43     $ 910.61  
 
                       
 
*   Includes brokerage fees.
 
**   Excludes brokerage fees.
 
***   GAAP net asset value per unit adjusted for the remaining accrued liability for reimbursement of organizational costs (Note 3).
                                 
    Class A     Class D     Class A     Class D  
Ratios to average net assets:****
                               
Net investment income (loss) *****
    (7.4 )%     (4.4 )%     (7.4 )%     (4.0 )%
 
                       
Operating expenses
    7.4 %     4.4 %     7.4 %     4.0 %
Incentive fees
    %******     (0.1 )%     %******     (0.2 )%
 
                       
Total expenses
    7.4 %     4.3 %     7.4 %     3.8 %
 
                       
 
                               
Total return:
                               
Total return before incentive fees
    (8.0 )%     (7.5 )%     (7.2 )%     (9.1 )%
Incentive fees
    %******     %******     %******     0.1 %
 
                       
Total return after incentive fees
    (8.0 )%     (7.5 )%     (7.2 )%     (9.0 )%
 
                       
 
 
****   Annualized.
 
*****   Interest income less operating expenses which exclude incentive fees allocated from the Trading Company.
 
******   Due to rounding.
     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.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
Financial Highlights of the Trading Company:
                                 
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
    2011   2010   2011   2010
Ratios to average members’ capital: (1)
                               
Net investment loss(2)
    (1.77 )     (0.98 )     (1.76 )     (0.90 )
Expenses before incentive fees(2)
    1.76       0.97       1.68       0.89  
Expenses after incentive fees(2)
    1.76       0.97       1.75       0.89  
Net loss
    (7.92 )     (10.42 )     (8.69 )     (13.47 )
Total return before incentive fees
    (6.90 )     (10.19 )     (4.92 )     (13.02 )
Total return after incentive fees
    (6.87 )     (10.19 )     (4.70 )     (13.02 )
 
(1)    The calculation is based on non-managing Members’ allocated income and expenses and average non-managing Members’ Capital.
 
(2)    Annualized except for incentive fees.
3. Organizational Costs:
     Organizational costs of $96,931 relating to the issuance and marketing of the Partnership’s Units offered were initially paid by MS&Co. These costs have been recorded as due to MS&Co. in the Statement of Financial Condition. These costs are being reimbursed to MS&Co. by the Partnership in twelve monthly installments.
     As of June 30, 2011, $64,630 of these costs have been reimbursed to MS&Co by the Partnership. The remaining liability due to MS&Co of $32,301 will not reduce net asset value per Unit for any purpose other than financial reporting, including calculation of administrative and brokerage fees and the redemption value of Units.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
4. Trading Activities:
     The Partnership’s pro rata share of the results of the Trading Company’s trading activities are shown in the Statement of Income and Expenses and Changes in Partners’ Capital.
     The Partnership and Trading Company in the normal course of business, enter into various contracts with MSSB, MS&Co., and MSIP acting as their commodity brokers. Pursuant to the brokerage agreement with MSSB, MS&Co., gives the Partnership and the Trading Company, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Trading Company nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition.
     The following tables summarize the valuation of the Trading Company’s investments as of June 30, 2011 and December 31, 2010, respectively.
June 30, 2011
                                                 
                                            Average  
                                            number of  
                                            contracts  
                                            outstanding  
                                            for  
    Long     Long     Short     Short     Net     six months  
    Unrealized     Unrealized     Unrealized     Unrealized     Unrealized     (absolute  
Futures and Forward Contracts   Gain     Loss     Gain     Loss     Gain/(Loss)     quantity)  
Commodity
  $ 11,002,023     $ (20,386,882 )   $ 3,375,939     $ (7,675,427 )   $ (13,684,347 )     6,124  
Equity
    685,350                         685,350       49  
Foreign currency
    487,010       (38,113 )               448,897       555  
Interest rate
    46,840       (72,850 )     698,618       (1,897,472 )     (1,224,864 )     2,840  
 
                                     
Total
  $ 12,221,223     $ (20,497,845 )   $ 4,074,557     $ (9,572,899 )   $ (13,774,964 )        
 
                                       
Unrealized currency loss
                                    (745,656 )        
 
                                             
Total net unrealized loss on open contracts
                                  $ (14,520,620 )*        
 
                                             
                 
            Average number of  
            contracts outstanding  
            for six months  
            (absolute quantity)  
Option Contracts at Fair Value
               
Options purchased
  $ 7,861,876 **     2,640  
Options written
  $ (5,251,498 )***     2,012  
 
*   This amount is in “Net unrealized gain (loss) on open contracts” on the Trading Company’s Statements of Financial Condition.
 
**   This amount is in “Options purchased,” on the Trading Company’s Statements of Financial Condition.
 
***   This amount is in “Options written,” on the Trading Company’s Statements of Financial Condition.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
December 31, 2010
                                                 
                                            Average number of  
                                            contracts  
                    Short             Net     outstanding for the  
    Long Unrealized     Long Unrealized     Unrealized     Short Unrealized     Unrealized     year (absolute  
Futures and Forward Contracts   Gain     Loss     Gain     Loss     Gain/(Loss)     quantity)  
Commodity
  $ 27,015,590     $ (4,293,660 )   $ 2,332,149     $ (6,699,370 )   $ 18,354,709       2,653  
Equity
    3,128                         3,128       25  
Foreign currency
    380,069       (5,216 )           (148,064 )     226,789       446  
Interest rate
    206,346       (21,138 )     697,388       (329,147 )     553,449       1,112  
 
                                     
Total
  $ 27,605,133     $ (4,320,014 )   $ 3,029,537     $ (7,176,581 )   $ 19,138,075          
 
                                       
 
                                               
Unrealized currency loss
                                    (737,699 )        
 
                                             
 
                                               
Total net unrealized gain on open contracts
                                    18,400,376 *        
 
                                             
                 
            Average number of    
            contracts    
            outstanding for the    
            year (absolute    
Option Contracts at Fair Value           quantity)    
Options purchased
  $ 6,144,949 **     1,791  
Options written
  $ (3,209,454) ***     1,275  
 
*   This amount is in “Net unrealized gain on open contracts” on the Trading Company’s Statements of Financial Condition.
 
**   This amount is in “Options purchased,” on the Trading Company’s Statements of Financial Condition.
 
***   This amount is in “Options written,” on the Trading Company’s Statements of Financial Condition.
     The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and six months ended June 30, 2011.
                                 
    For the Three Months     For the Six Months     For the Three Months     For the Six Months  
Sector   Ended June 30, 2011     Ended June 30, 2011     Ended June 30, 2010     Ended June 30, 2010  
Commodity
  $ (19,839,836 )   $ (14,755,458 )   $ (10,347,186 )   $ (12,547,080 )
Equity
    2,886,367       5,087,324       (20,456     (12,245
Foreign currency
    623,332       650,606       1,022,770       1,945,928  
Interest rate
    (12,901,567 )     (16,004,123 )     (2,755,502 )     (5,076,165 )
Unrealized currency loss
    (10,671 )     (7,957 )     (787,961 )     (1,886,154 )
 
                       
Total
  $ (29,242,375 )****   $ (25,029,608 )****   $ (12,888,335 )****   $ (17,575,716 )****
 
                       
 
****   This amount is in “Total trading results” on the Trading Company’s Statements of Income and Expenses and Changes in Members’ Capital.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
5. Fair Value Measurements:
     Partnership’s Investments. The Partnership values its investment in the Trading Company at its net asset value per unit as calculated by the Trading Company. The Trading Company values its investments as described in note 2 of the Trading Company’s notes to the annual financial statements as of December 31, 2010.
     Partnership’s Fair Value Measurements. Fair value is defined 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 under current market conditions. 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.
     GAAP also requires 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. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets.
     The Partnership will separately present purchases, sales, issuances, and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures 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 as required under GAAP.
     The Partnership values investments in the Trading Company where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Trading Company (Level 2). The value of the Partnership’s investment in the Trading Company reflects its proportional interest in the Trading Company. As of and for the periods ended June 30, 2011 and December 31, 2010, the Partnership did not hold any derivative instruments that are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
                                 
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable Inputs  
    June 30, 2011     (Level 1)     (Level 2)     (Level 3)  
Assets                                
Investment in Trading Company
  $ 247,995,469     $     $ 247,995,469     $  
 
                       
Net fair value
  $ 247,995,469     $     $ 247,995,469     $  
 
                       
                                 
            Quoted Prices in              
            Active Markets for     Significant Other     Significant  
            Identical Assets     Observable Inputs     Unobservable Inputs  
    December 31, 2010     (Level 1)     (Level 2)     (Level 3)  
Assets                                
Investment in Trading Company
  $ 57,170,009     $     $ 57,170,009     $  
 
                       
Net fair value
  $ 57,170,009     $     $ 57,170,009     $  
 
                       
     Trading Company’s Investments. All commodity interests of the Trading Company (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. Net 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 Members’ Capital.
     Trading Company’s Fair Value Measurements. Fair value is defined 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 under current market conditions. 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

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
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.
     GAAP also requires 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. Management has concluded that based on available information in the marketplace, the Trading Company’s Level 1 assets and liabilities are actively traded.
     The Trading Company will separately present purchases, sales, issuances, and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures 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 as required under GAAP.
     The Trading Company considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended June 30, 2011 and December 31, 2010, the Trading Company did not hold any derivative instruments for which market quotations are not readily available and which are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
                                 
    Quoted Prices in     Significant Other     Significant        
    Active Markets for     Observable     Unobservable        
    Identical Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     June 30, 2011  
Assets
                             
Futures
  $ 15,980,684      $       n/a     $ 15,980,684  
 
Forwards
          315,096       n/a       315,096  
Options purchased
    7,861,876             n/a       7,861,876  
 
                         
Total assets
  $ 23,842,560     $ 315,096       n/a     $ 24,157,656  
 
                         
Liabilities
                               
Futures
  $ 30,070,744     $       n/a     $ 30,070,744  
 
Forwards
                       
Options written
    5,251,498             n/a       5,251,498  
 
                         
Total liabilities
  $ 35,322,242     $       n/a     $ 35,322,242  
 
                         
Unrealized currency loss
                          $ (745,656 )
 
                             
*Net fair value
  $ (11,479,682   $ 315,096       n/a     $ (11,910,242
 
                         
                                 
    Quoted Prices in     Significant Other     Significant        
    Active Markets for     Observable     Unobservable        
    Identical Assets     Inputs     Inputs        
    (Level 1)     (Level 2)     (Level 3)     December 31, 2010  
Assets
                               
Futures
  $ 30,296,863     $       n/a     $ 30,296,863  
 
Forwards
          337,807       n/a       337,807  
Options purchased
    6,144,949             n/a       6,144,949  
 
                         
Total assets
  $ 36,441,812     $ 337,807       n/a     $ 36,779,619  
 
                         
Liabilities
                               
Futures
  $ 11,373,915     $       n/a     $ 11,373,915  
 
Forwards
          122,680       n/a       122,680  
Options written
    3,209,454             n/a       3,209,454  
 
                         
Total liabilities
  $ 14,583,369     $ 122,680       n/a     $ 14,706,049  
 
                         
Unrealized currency loss
                          $ (737,699 )
 
                             
*Net fair value
  $ 21,858,443     $ 215,127       n/a     $ 21,335,871  
 
                         
 
*   This amount comprises of the net unrealized gain (loss) on open contracts, options purchased and options written on the Statement of Financial Condition.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
6. Financial Instrument Risks:
     In the normal course of business, the Partnership, through its investment in the Trading Company, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.
     The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under applicable law.
     Market risk is the potential for changes in the value of the financial instruments traded by the Trading Company 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 Trading Company is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
     Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Trading Company’s risk of loss in the event of a counterparty default is typically limited to the asset amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Trading Company’s risk of loss is reduced through the use of legally enforceable Trading Company netting agreements with counterparties that permit the Partnership/Trading Company to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Trading Company has credit risk and concentration risk as the sole counterparty or broker with respect to the Partnership’s/Trading Company’s assets is MSSB or a MSSB affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MSSB, the Partnership’s/Trading Company’s counterparty is an exchange or clearing organization.
     As both a buyer and seller of options, the Partnership/Trading Company pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Trading Company 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 General Partner monitors and attempts to control the Partnership’s/Trading Company’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Trading Company may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.
     The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Trading Company’s business, these instruments may not be held to maturity.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(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. As a result, actual results could differ from these estimates.
     Partnership’s Investments. The Partnership values its investment in the Trading Company at its net asset value per unit as calculated by the Trading Company. The Trading Company values its investments as described in note 2 of the Trading Company’s notes to the annual financial statements as of December 31, 2010.
     Partnership’s and the Trading Company’s Fair Value Measurements. Fair value is defined 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 under current market conditions. 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. Management has concluded that based on available information in the marketplace, the Trading Company Level 1 assets and liabilities are actively traded.
     GAAP also requires 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. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities.
     The Partnership will separately present purchases, sales, issuances, and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures 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 as required under GAAP.
     The Partnership values investments in the Trading Company where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Trading Company (Level 2). The value of the Partnership’s investment in the Trading Company reflects its proportional interest in the Trading Company. As of and for the periods ended June 30, 2011 and December 31, 2010, the Partnership did not hold any derivative instruments that are based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
     The Trading Company considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the periods ended June 30, 2011 and December 31, 2010, the Trading Company did not hold any derivative instruments for which market quotations are not readily available, and are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
     Futures Contracts. The Trading Company trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Trading Company 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 Trading Company. When the contract is closed, the Trading Company records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. 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. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.

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BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
June 30, 2011
(Unaudited)
     Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Trading Company agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Trading Company’s 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. Net realized gains (losses) and changes in net 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 Members’ Capital.
     The Trading Company does not isolate the 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 Members’ Capital.
     Options. The Trading Company may purchase and write (sell) both exchange listed and OTC 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 Trading Company writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Trading Company purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Members’ Capital.
     Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.
     GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and 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 concluded that no provision for income tax is required in the Partnership’s financial statements.
     The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. In general the statute of limitations of the Partnership’s U.S. federal tax returns remains open three years after a tax return is filed. The statutes of limitations on the Partnership’s state and local tax returns may remain open for an additional year depending upon the jurisdiction. Management does not believe that there are any uncertain tax positions that require recognition of a tax liability.
     Subsequent Events. The General Partner evaluates events that occur after the balance sheet date but before financial statements are filed. Beginning August 1, 2011, Class Z units will be offered to certain employees of Morgan Stanley Smith Barney and its affiliates (and their family members). Class A, D and Class Z will each be referred to as a “Class” and collectively referred to as the “Classes”. The Class of Units that a Limited Partner receives upon a subsription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer Units to investors at its discretion.
     Recent Accounting Pronouncements. In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU ”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards” (“ IFRS”). The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The ASU is effective for annual and interim periods beginning after December 15, 2011 for public entities . This new guidance is not expected to have a material impact on the Partnership’s financial statements.
     Net Income (Loss) per Redeemable Unit. Net income (loss) per unit for each class is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
   Liquidity and Capital Resources
     The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Trading Company and cash. The Trading Company does not engage in the sale of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Trading Company. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the second quarter of 2011.
     There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.
     The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by income (loss) from its investment in the Trading Company and by expenses, interest income, subscriptions, redemptions of Units and distributions of profits, if any.
     For the six months ended June 30, 2011, Partnership capital increased 326.6% from $57,300,554 to $244,458,062. This increase was attributable by the subscriptions of 199,583.951 Units totaling $217,708,346 and 3,989.724 General Partner unit equivalents totaling $4,088,254, which was partially offset by redemptions of 9,185.866 Units totaling $9,784,936 and 1,695.038 General Partner unit equivalents totaling $1,863,254, coupled with the net loss from operations of $22,990,902. Future redemptions could impact the amount of funds available for investment in the Trading Company in subsequent periods.
     The Trading Company’s capital consists of the capital contributions of the members as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading and by expenses, interest income, redemptions of units and distributions of profits, if any.
     For the six months ended June 30, 2011, the Trading Company’s capital increased 98.1% from $208,652,878 to $413,342,385. This increase was attributable to the contributions of $243,902,714, which was partially offset by the net loss from operations of $27,960,215, coupled with the withdrawals of $11,252,992. Future withdrawals can impact the amount of funds available for investments in commodity contract positions in subsequent periods.
     There are no known material trends, favorable or unfavorable, that would affect, non any expected material changes to the Partnership’s capital resource arrangement at the present time
   Critical Accounting Policies
     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 7 of the Financial Statements.
     The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Members’ Capital.
   Results of Operations
     During the Partnership’s second quarter of 2011, the net asset value per redeemable unit for Class A decreased 8.0% from $1,087.16 to $1,000.30 as compared to March 31, 2011. During the Partnership’s second quarter of 2011, the net asset value per redeemable unit for Class D decreased 7.4% from $983.71 to $910.43 as compared to March 31, 2011. The Partnership, for its own account, through its investment in the Trading Company experienced a net trading loss in the second quarter of 2011 of $17,939,856. Losses were primarily attributable to the Trading Company’s trading in commodies and interest rates and were partially offset by gains in equities and currencies.
          During the second quarter of 2011, the most significant losses were incurred in the agricultural markets, primarily during May and June, from long futures positions in corn, soybeans and wheat as prices weakened due to speculation that U.S. exports may slow as output rose from South America and higher interest rates may limit demand from China, the world’s biggest importer of soybeans. Within the interest rate sector, losses were recorded primarily during May and June from short futures positions in U.S. 30-year Treasury bonds, U.S. 10-year Treasury notes, and eurodollars as prices rallied throughout May and June amid a “flight to quality” amid fears regarding the Greek credit crisis, as well as a bleaker global economic outlook. In metals, losses were recorded from long positions in aluminum and tin futures as base metals prices fell in May and June amid fears of a slowdown in Chinese growth and demand for the metals. A portion of the Partnership’s losses during the second quarter was offset by gains generated within the currency markets primarily from long positions in the euro, Australian dollar, Brazilian real and Canadian dollar versus the U.S. dollar as the value of the euro and the “commodity currencies” strengthened during the April. Elsewhere during the second quarter, long futures positions in the global stock index sector, specifically in the S&P 500 Index, generated gains by taking advantage of a late month price rally in June. Lastly, modest gains were recorded in the energy complex as a majority of the gains generated from long futures positions in Brent crude oil were offset by losses incurred in WTI crude oil and natural gas.

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     During the six months ended June 30, 2011, the net asset value per redeemable unit for Class A decreased 7.2% from $1,078.16 to $1,000.30 as compared to December 31, 2010. During the six months ended June 30, 2011, the net asset value per redeemable unit for Class D decreased 9.0% from $1,000.00 to $910.43 from February 1, 2011 to June 30, 2011. The Partnership, for its own account, through its investment in the Trading Company experienced a net trading loss in the six months ended June 30, 2011 of $17,861,273. Losses were primarily attributable to the Trading Company’s trading in commodies and interest rates and were partially offset by gains in equities and currencies.
          During the six months ended of 2011, the most significant losses were incurred within the interest rate sector from short futures positions in U.S. 30-year Treasury bonds, U.S. 10-year Treasury notes, and eurodollars as the “risk on/risk off” environment persisted throughout a majority of the first half of the year, resulting in volatile price conditions for most fixed income instruments. Additional losses were experienced within the agricultural markets as gains made earlier in the year from long futures positions in corn, soybeans and wheat were given back as prices fell during May and June. Within the metals sector, losses were recorded primarily from long futures positions in aluminum and tin throughout May and June amid fears of a slowdown in Chinese growth and demand for the metals. Additional losses in metals were recorded from long positions in palladium futures. A portion of the Partnership’s losses during the first half of the year was offset by gains achieved within the currency and global stock index sector. Long positions in the euro, Brazilian real, Australian dollar and Canadian dollar were profitable as the euro and the “commodity currencies” strengthened versus the U.S. dollar during much of the period of January through early May. Additional gains were recorded within the global stock index sector from long futures positions in the S&P 500 Index, which moved sharply higher during the last couple of weeks in June after declining in May and early June.
     Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Trading Company) depends on the Advisor’s ability to forecast price changes in energy and energy-related commodities. Such price changes 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 the Advisor correctly makes such forecasts, the Partnership (and the Trading Company) expects to increase capital through operations.
     Interest expense allocated from the Trading Company for the three and six months ended June 30, 2011 were $6,785 and $6,402, respectively. 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 account and upon interest rates.
     The Partnership will pay the Placement Agent ongoing compensation on a monthly basis of the Net Assets (as defined in the Limited Partnership Agreement) of the Partnership as of the beginning of each month. The placement agent and fees for the three and six months ended June 30, 2011 were $1,640,462 and $2,348,581, respectively.
     Administrative fees are calculated on a monthly basis equal to 1% of the net assets of the Partnership. Administrative fees for the three and six months ended June 30, 2011 were $570,195 and $815,185, respectively.
     All management and incentive fees are borne by the Trading Company.
     In allocating substantially all of the assets of the Partnership to the Trading Company, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.
     Off-Balance Sheet Arrangements and Contractual Obligations
     The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources.

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Item 3.   Quantitative and Qualitative Disclosures about Market Risk
     All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Trading Company. The Trading Company is a speculative commodity pool. The market sensitive instruments held by the Trading Company are acquired for speculative trading purposes, and all or substantially all of the Partnership’s capital is subject to the risk of trading loss through its investment in the Trading Company. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Trading Company’s and the Partnership’s main line of business.
     The risk to the limited partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under applicable law.
     Market movements result in frequent changes in the fair value of the Trading Company’s open positions and, consequently, in their earnings and cash balances. The Trading Company’s and 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 value of financial instruments and contracts, the diversification results among the Trading Company’s open positions and the liquidity of the markets in which the Trading Company trades.
     The Trading Company rapidly acquires and liquidates both long and short positions in a range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Trading Company’s past performance is not necessarily indicative of its future results.
Quantifying the Trading Company Trading Value at Risk
     The following quantitative disclosures regarding the Trading Company market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purpose of the safe harbor, except for the statements of historical fact.
     The Trading Company accounts for open positions on the basis of mark to market accounting principles. Any loss in the market value of the Trading Company open positions is directly reflected in the Trading Company earnings and cash balance.
     The Trading Company Value at Risk computation is based on the risk representation of the underlying benchmark for each instrument or contract and do not distinguish between exchange and non-exchange dealer-based instruments. Its also not based on exchange and/or dealer-based maintenance margin requirements. Value at Risk models, including the models used by Morgan Stanley and Ceres, are continually evolving as trading portfolios become more diverse and modeling techniques and systesms capabilities improve. Please note that the Value at Risk model is used to quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Advisor in its daily risk management activities. Please further note that Value at Risk as described above may not be comparable to similarly-titled measures used by other entities.
Limitations on Value at Risk as an Assessment of Market Risk
     Value at Risk models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of Value at Riskied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, Value at Risk risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
    past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
 
    changes in portfolio value caused by market movements may differ from those of the Value at Risk model;
 
    Value at Risk results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
 
    Value at Risk using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
 
    the historical market risk factor data used for Value at Risk estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

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     In addition, the Value at Risk tables above, as well as the past performance of the Partnership and the Trading Companies, give no indication of the Partnership’s potential “risk of ruin.”
     The Value at Risk tables provided present the results of the Partnership’s Value at Risk for each of the Trading Companies’ market risk exposures and on an aggregate basis at June 30, 2011 and December 31, 2010.
     Value at Risk is not necessarily representative of the Trading Companies’ historic risk, nor should it be used to predict the Partnership or the Trading Companies’ future financial performance or their ability to manage or monitor risk. There can be no assurance that the Trading Companies’ actual losses on a particular day will not exceed the Value at Risk amounts indicated above or that such losses will not occur more than once in 100 trading days.
     “Value at Risk” is a measure of the maximum amount which the Trading Company could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Trading Company’s speculative trading and the recurrence in the markets traded by the Trading Company of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Trading Company’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Trading Company’s losses in any market sector will be limited to Value at Risk or by the Trading Company’s attempts to manage its market risk.
     Exchange maintenance margin requirements have been used by the Trading Company as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.
     Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on the Form 10 for the year ended December 31, 2010.
     As of June 30, 2011, the Trading Company’s total capitalization was $413,342,385, and the Partnership owned approximately 60.0% of the Trading Company. The Partnership invests substantially all of its assets in the Trading Company. The Trading Company’s Value at Risk as of June 30, 2011 was as follows:
                                         
June 30, 2011  
 
          Three months ended June 30, 2011  
      % of Total     High     Low     Average  
Market Sector   Value at Risk     Capitalization     Value at Risk     Value at Risk     Value at Risk*  
Commodity
  22,462,119     5.43 %   $ 26,814,523   $ 18,500,234   21,762,309
Currency
    541,857     0.13 %     1,598,805     267,300     739,038
Equity
    1,093,797     0.27 %     1,222,065         287,062
Interest Rate
    4,107,421     0.99 %     6,674,377     3,523,639     5,294,447
                               
Total
  $ 28,205,194     6.82 %                        
                               
 
*     Average of month-end Values at Risk.
     As of December 31, 2010, the Trading Company’s total capitalization was $208,652,878, and the Partnership owned approximately 27.4% of the Trading Company. The Partnership invests substantially all of its assets in the Trading Company. The Trading Company’s Value at Risk as of December 31, 2010 was as follows:
                                         
December 31, 2010  
 
          For the period ended December 31, 2010  
      % of Total     High     Low     Average  
Market Sector   Value at Risk     Capitalization     Value at Risk     Value at Risk     Value at Risk*  
Commodity
  10,120,109     4.85 %   $ 11,143,000   $ 8,811,340   10,079,806
Currency
    204,447     0.10 %     294,115     85,455     165,965
Equity
    7,126     0.00 %**     152,445     7,126     83,306
Interest Rate
    1,728,106     0.83 %     3,477,342     1,013,531     2,063,661
                               
Total
  $ 12,059,788     5.78 %                        
                               
 
*       For the period November 1, 2010 (commencement of trading operations) to December 31, 2010 average of month-end Values at Risk.
**     Due to rounding.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
     The following qualitative disclosures regarding the Partnership’s market risk exposures — except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of these could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.
     Investors must be prepared to lose all or substantially all of their investment in the Partnership.

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Item 4.   Controls and Procedures
     The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
     The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
     The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2011 and, based on that evaluation, the General Partners CEO and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.
     The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:
    pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;
 
    provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and
 
    provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.
     There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended June 30, 2011 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
     Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

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PART II. OTHER INFORMATION
Item 1A.   Risk Factors
     There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on the Form 10 for the fiscal year ended December 31, 2010 and under Part II, Item 1A, “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
     For the three months ended June 30, 2011, there were subscriptions of 122,972.722 Units totaling $133,214,030 and 3,271.215 General Partner units totaling $3,288,254. The Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Units were purchased by accredited investors as described in Regulation D.
     Proceeds from the sale of Units are used in the trading of commodity interests including futures contracts, swaps, options and forward contracts.
     The following chart sets forth the purchases of Units by the Partnership.
                                         
                              (d) Maximum Number
 
                              (or Approximate
 
                      (c) Total Number
      Dollar Value) of
 
      Class A       Class A       of Units
      Units that
 
      (a) Total Number
      (b) Average
      Purchased as Part
      May Yet Be
 
      of Units
      Price Paid per
      of Publicly Announced
      Purchased Under the
 
Period     Purchased*       Unit**       Plans or Programs       Plans or Programs  
April 1, 2011 —
April 30, 2011
      644.490       $ 1,099.24         N/A         N/A  
May 1, 2011 —
May 31, 2011
      188.119       $ 1,065.67         N/A         N/A  
June 1, 2011 —
June 30, 2011
      3,503.599       $ 1,000.43         N/A         N/A  
        4,336.208       $ 1,017.95         N/A         N/A  
                                         
 
*   Generally, limited partners are permitted to redeem their Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner may compel redemption but to date the General Partner has not exercised this right. Purchases of Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.
 
**   Redemptions of Units are effected as of the last day of each month at the net asset value per Unit as of that day.
Item 3.   Other Information
     Beginning August 1, 2011, Class Z units will be offered to certain employees of Morgan Stanley Smith Barney and its affiliates (and their family members). Class A, D and Class Z will each be referred to as a “Class” and collectively referred to as the “Classes”. The Class of Units that a Limited Partner receives upon a subscription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer Units to investors at its discretion.

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Item 6.   Exhibits
Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director).
32.1 Section 1350 Certification (Certification of President and Director).
32.2 Section 1350 Certification (Certification of Chief Financial Officer and Director).
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

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Table of Contents

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.
         
  BHM Discretionary Futures Fund L.P.

By: Ceres Managed Futures LLC
      (General Partner)
 
 
  By:   /s/ Walter Davis    
    Walter Davis   
    President and Director 

 
Date: August 15, 2011    
 
     
  By:   /s/ Jennifer Magro    
    Jennifer Magro   
    Chief Financial Officer and Director
(Principal Accounting Officer) 

 
Date: August 15, 2011    
 

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