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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarter 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:		000-51651

WORLD MONITOR TRUST III – SERIES J

 

(Exact name of registrant as specified in its charter)

 

Delaware		20-2446281
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

900 King Street, Suite 100, Rye Brook, New York		10573
(Address of principal executive offices)		(Zip Code)

(914) 307-7000

 

(Registrant’s telephone number, including area code)

N/A

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

 

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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 definition of “accelerated filer”, “large 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 Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

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WORLD MONITOR TRUST III – SERIES J

INDEX TO QUARTERLY REPORT ON FORM 10-Q

JUNE 30, 2011

 

				Page
PART I – FINANCIAL INFORMATION					4
Item 1.		Financial Statements			5
		World Monitor Trust III - Series J
		Condensed Statements of Financial Condition as of June 30, 2011 (Unaudited) and December 31, 2010			6
		Condensed Schedules of Investments as of June 30, 2011 (Unaudited) and December 31, 2010			7-8
		Condensed Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2011 and 2010			9
		Condensed Statements of Changes in Unitholders’ Capital (Unaudited) for the Six Months Ended June 30, 2011 and 2010			10
		Notes to Condensed Financial Statements (Unaudited)			11
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			41
Item 4.		Controls and Procedures			44
PART II – OTHER INFORMATION					44
Item 1.		Legal Proceedings			44
Item 1.A.		Risk Factors			45
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3.		Defaults Upon Senior Securities			45
Item 5.		Other Information			45
Item 6.		Exhibits:			46

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;

FINANCIAL STATEMENTS TO FOLLOW]

 

 

 

 

 

 

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED FINANCIAL STATEMENTS

June 30, 2011

 

 

 

 

 

 

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF FINANCIAL CONDITION

June 30, 2011 (Unaudited) and December 31, 2010

 

 

 

		June 30, 2011				December 31, 2010
ASSETS
Cash and cash equivalents (See Note 2)		$	33,772,225			$	47,172,056
Net unrealized gain on open futures contracts			0				3,214,311
Commodity options owned, at fair value (premiums paid $1,212,682 and $652,215 at June 30, 2011 and December 31, 2010, respectively)			1,694,471				454,809
Net unrealized gain on open forward contracts			159,968				1,842,652
Investment in affiliated investment funds, at fair value (cost $5,826,095 and $0 at June 30, 2011 and December 31, 2010, respectively)			6,329,329				0
Investments in securities, at fair value (cost $116,213,302 and $103,338,919 at June 30, 2011 and December 31, 2010, respectively)			115,303,688				101,683,079
Total assets		$	157,259,681			$	154,366,907
LIABILITIES
Accrued expenses payable		$	123,932			$	195,998
ClariTy Managed Account fees payable			337				0
Management fees payable to affiliate			0				31,846
Trading advisors’ incentive fees payable			440,478				1,035,898
Trading advisors’ management fees payable			117,773				201,680
Offering costs payable			22,671				52,859
Net unrealized loss on open futures contracts			963,504				0
Commodity options written, at fair value (premiums received $203,966 and $21,840 at June 30, 2011 and December 31, 2010, respectively)			479,364				13,020
Service fees payable (See Note 5)			244,926				201,001
Redemptions payable			4,260,881				898,839
Subscriptions received in advance			3,333,120				2,046,733
Total liabilities			9,986,986				4,677,874
UNITHOLDERS’ CAPITAL (Net Asset Value)
Class I Units:
Unitholders’ Units – 1,059,979.554 and 1,033,469.123 Units outstanding at June 30, 2011 and December 31, 2010, respectively			129,617,670				132,255,516
Managing Owner’s Units – none and none Units outstanding at June 30, 2011 and December 31, 2010, respectively			0				0
Class II Units:
Unitholders’ Units – 133,576.139 and 125,308.427 Units outstanding at June 30, 2011 and December 31, 2010, respectively			17,606,279				17,110,868
Managing Owner’s Units – 369.827 and 2,362.860 Units outstanding at June 30, 2011 and December 31, 2010, respectively			48,746				322,649
Total unitholders’ capital (Net Asset Value)			147,272,695				149,689,033
Total liabilities and unitholders’ capital		$	157,259,681			$	154,366,907
NET ASSET VALUE PER UNIT
Class I		$	122.28			$	127.97
Class II		$	131.81			$	136.55

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED SCHEDULES OF INVESTMENTS

June 30, 2011 (Unaudited) and December 31, 2010

 

 

 

		June 30, 2011								December 31, 2010
		Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)				Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)
Futures and Forward Contracts
Futures contracts purchased:
Commodities			(0.34	)%		$	(509,541	)			1.15	%		$	1,716,193
Currencies			0.00	%			0				0.35	%			521,182
Energy			(0.06	)%			(91,701	)			0.25	%			380,376
Interest rates			(0.12	)%			(171,748	)			0.08	%			121,121
Metals			0.07	%			99,460				4.42	%			6,613,151
Stock indices			0.09	%			138,160				0.11	%			161,174
Net unrealized gain (loss) on futures contracts purchased			(0.36	)%			(535,370	)			6.36	%			9,513,197
Futures contracts sold:
Commodities			0.21	%			307,264				(0.21	)%			(320,244	)
Currencies			0.00	%			0				0.00	%			4,434
Energy			(0.08	)%			(123,741	)			(0.10	)%			(145,739	)
Interest rates			0.00	%			0				(0.06	)%			(92,295	)
Metals			(0.17	)%			(246,844	)			(3.81	)%			(5,698,325	)
Stock indices			(0.25	)%			(364,813	)			(0.03	)%			(46,717	)
Net unrealized loss on futures contracts sold			(0.29	)%			(428,134	)			(4.21	)%			(6,298,886	)
Net unrealized gain (loss) on open futures contracts			(0.65	)%		$	(963,504	)			2.15	%		$	3,214,311
Forward currency contracts purchased:
Net unrealized gain on forward contracts purchased			0.40	%		$	593,707				0.27	%		$	409,220
Forward currency contracts sold:
Net unrealized gain (loss) on forward contracts sold			(0.29	)%			(433,739	)			0.96	%			1,433,432
Net unrealized gain on open forward contracts			0.11	%		$	159,968				1.23	%		$	1,842,652
		Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)				Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)
Purchased Options on Futures Contracts
Fair value of options purchased:
Commodities			0.92	%		$	1,361,968				0.21	%		$	317,319
Energy			0.15	%			213,910				0.09	%			137,490
Metals			0.04	%			65,350				0.00	%			0
Stock indices			0.04	%			53,243				0.00	%			0
Total commodity options owned, at fair value (premiums paid $1,212,682 and $652,215 at June 30, 2011 and December 31, 2010, respectively)			1.15	%		$	1,694,471				0.30	%		$	454,809
Written Options on Futures Contracts
Fair value of options written:
Commodities			(0.31	)%		$	(451,120	)			0.00	%		$	0
Energy			0.00	%			0				(0.01	)%			(13,020	)
Metals			(0.02	)%			(28,244	)			0.00	%			0
Total commodity options written, at fair value (premiums received $203,966 and $21,840 at June 30, 2011 and December 31, 2010, respectively)			(0.33	)%		$	(479,364	)			(0.01	)%		$	(13,020	)

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED SCHEDULES OF INVESTMENTS (CONTINUED)

June 30, 2011 (Unaudited) and December 31, 2010

 

 

 

		June 30, 2011								December 31, 2010
		Fair Value as a % of Unitholders’ Capital				Fair Value				Fair Value as a % of Unitholders’ Capital				Fair Value
Investment in Securities
Fair value of investment in Mutual Funds:
JPMorgan Short Duration Bond (shares 4,177,655.14 and 3,711,465.20 at June 30, 2011 and December 31, 2010, respectively)			31.20	%		$	45,954,210				27.20	%		$	40,714,773
Pimco Low Duration Fund (shares 4,404,131.51 and 3,907,428.57 and June 30, 2011 and December 31, 2010, respectively)			31.40	%			46,243,373				27.12	%			40,598,183
Wells Fargo Adv Short Term Bond (shares 2,631,675.93 and 2,336,023.26 at June 30, 2011 and December 31, 2010, respectively)			15.69	%			23,106,105				13.61	%			20,370,123
Total investments in securities, at fair value (cost $116,213,302 and $103,338,919 at June 30, 2011 and December 31, 2010, respectively)			78.29	%		$	115,303,688				67.93	%		$	101,683,079
		Fair Value as a % of Unitholders’ Capital				Fair Value				Fair Value as a % of Unitholders’ Capital				Fair Value
Investments in Affiliated Investment Funds
Total investment in affiliated investment funds, at fair value (cost $5,826,095 and $0 at June 30, 2011 and December 31, 2010, respectively)			4.30	%		$	6,329,329				0.00	%		$	0

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months and Six Months Ended June 30, 2011 and 2010

(Unaudited)

 

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Gain (loss) on investments:
Realized		$	3,901,589			$	6,179,200			$	5,676,631			$	3,925,964
Change in unrealized			(1,904,905	)			(3,700,052	)			(4,719,296	)			(1,672,528	)
Dividend income			588,742				0				1,188,424				0
Interest income			748				25,002				5,083				45,467
Net gain from trading investments			2,586,174				2,504,150				2,150,842				2,298,903
Net change in unrealized depreciation on investment in affiliated investment funds			(2,918,470	)			0				(3,392,177	)			0
Total gain (loss) on investments			(332,296	)			2,504,150				(1,241,335	)			2,298,903
EXPENSES
Brokerage commissions			116,294				172,156				251,885				405,869
Management fees			194,213				171,605				384,775				335,159
ClariTy Managed Account fees to affiliate			97,443				0				192,724				0
Managing Owner fees earned on investment funds			129,351				0				319,913				0
Trading Advisors’ management fees			385,769				664,459				818,441				1,315,136
Trading Advisors’ incentive fees			440,478				460,510				846,099				717,365
Service fees – Class I Units (See Note 5)			688,246				584,736				1,358,226				1,277,478
Sales commission			388,427				343,210				769,550				670,318
Offering costs			76,215				72,817				169,957				93,198
Operating expenses			193,807				183,558				385,204				350,536
Total expenses			2,710,243				2,653,051				5,496,774				5,165,059
NET LOSS		$	(3,042,539	)		$	(148,901	)		$	(6,738,109	)		$	(2,866,156	)
NET INCOME (LOSS) PER WEIGHTED AVERAGE UNITHOLDER AND MANAGING OWNER UNIT
Net income (loss) per weighted average Unitholder and Managing Owner Unit
Class I		$	(2.61	)		$	(0.21	)		$	(5.82	)		$	(2.79	)
Class II		$	(1.87	)		$	0.40			$	(4.73	)		$	(1.62	)
Weighted average number of Units outstanding – Class I			1,069,066				983,576				1,050,255				954,813
Weighted average number of Units outstanding – Class II			133,890				130,481				133,301				126,846

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF CHANGES IN UNITHOLDERS’ CAPITAL

For the Six Months Ended June 30, 2011 and 2010

(Unaudited)

 

 

 

		Class I																Class II
		Unitholders								Managing Owner Interests								Unitholders								Managing Owner Interests								Total
		Units				Amount				Units				Amount				Units				Amount				Units				Amount				Units				Amount
Six Months Ended June 30, 2011
Unitholders’ capital at December 31, 2010			1,033,469.123			$	132,255,516				0.000			$	0				125,308.427			$	17,110,868				2,362.860			$	322,649				1,161,140.410			$	149,689,033
Subscriptions			99,185.189				12,532,439				0.000				0				18,906.388				2,573,756				0.000				0				118,091.577				15,106,195
Redemptions			(72,674.758	)			(9,062,400	)			0.000				0				(10,638.676	)			(1,452,569	)			(1,993.033	)			(269,455	)			(85,306.467	)			(10,784,424	)
Net loss							(6,107,885	)							0								(625,776	)							(4,448	)							(6,738,109	)
Unitholders’ capital at June 30, 2011			1,059,979.554			$	129,617,670				0.000			$	0				133,576.139			$	17,606,279				369.827			$	48,746				1,193,925.520			$	147,272,695
Six Months Ended June 30, 2010
Unitholders’ capital at December 31, 2009			895,406.461			$	111,649,834				0.000			$	0				111,441.024			$	14,529,426				10,560.643			$	1,376,873				1,017,408.128			$	127,556,133
Subscriptions			132,197.915				16,003,677				0.000				0				11,869.801				1,510,600				0.000				0				144,067.716				17,514,277
Redemptions			(36,378.926	)			(4,416,830	)			0.000				0				(3,258.783	)			(415,753	)			0.000				0				(39,637.709	)			(4,832,583	)
Net loss							(2,660,705	)							0								(186,588	)							(18,863	)							(2,866,156	)
Unitholders’ capital at June 30, 2010			991,225.450			$	120,575,976				0.000			$	0				120,052.042			$	15,437,685				10,560.643			$	1,358,010				1,121,838.135			$	137,371,671

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Note 1.

ORGANIZATION

 

A.

General Description of the Trust

World Monitor Trust III (the “Trust”) is a business trust organized under the laws of Delaware on September 28, 2004. The Trust consisted of four separate and distinct series (“Series”): Series G, H, I and J. Series G, H, I and J commenced trading operations on December 1, 2005. As of December 31, 2007, Series G, H and I were no longer offered and had been dissolved. Series J will continue to exist unless terminated pursuant to the provisions of Article XIII of the Trust’s Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). The assets of each Series have been segregated from those of the other Series, separately valued and independently managed, and separate financial statements have been prepared for each Series. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts and may, from time to time, engage in cash and spot transactions. The fiscal year end of Series J is December 31.

As the Managing Owner of the Trust and of each Series, Kenmar Preferred Investments Corp. (“Kenmar Preferred” or the “Managing Owner”) conducts and manages the business of the Trust and each Series.

From January 1, 2008 through June 30, 2009, Series J allocated its assets to three managed accounts separately managed by the following trading advisors: Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program, Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program, and Graham Capital Management, L.P. (“Graham”) pursuant to its K4D-15V Program. Effective July 1, 2009, Series J entered into trading agreements with an additional three trading advisors: GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Commodity Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus Program (See Note 12). The Managing Owner terminated the managed account agreements with GLC, Graham and Eagle effective March 31, 2010, December 31, 2010 and April 30, 2011, respectively.

Beginning April 1, 2010, Series J entered into trading advisory agreements with Tudor Investment Corporation (“Tudor”), pursuant to its Tudor Quantitative Commodities Strategy, and Paskewitz Asset Management, LLC (“Paskewitz”), pursuant to its Contrarian Stock Index Program) Paskewitz, together with Graham, Eagle, Ortus, Krom, Crabel and Tudor are each referred to herein as a “Trading Advisor” and collectively referred to herein as the “Trading Advisors.” Beginning April 1, 2010, Series J allocated approximately one-seventh of its net assets to each Trading Advisor’s managed account (each a “Managed Account” and collectively, the “Managed Accounts”), with such allocations to be re-balanced quarterly.

Effective January 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice GRM (“GRM”), a series of CTA Choice Fund LLC (the “Company”), a Delaware limited liability company organized in series. Graham is the Trading Advisor for GRM and will manage the assets pursuant to its K4D-15V Program.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

A.

General Description of the Trust (Continued)

 

Effective May 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice EAGL (“EAGL”), a series of the Company. Eagle Trading Systems Inc is the Trading Advisor for EAGL and will manage the assets pursuant to the Eagle Momentum Program.

ClariTy Managed Account & Analytics Platform LLC (“ClariTy”) serves as the managing member for the Company. The Company consists of multiple series, each established pursuant to a separate Certificate of Designation prepared by the Company’s managing member. Each series maintains separate and distinct records. The assets associated with each series, and the liabilities and obligations incurred with respect to a particular series are enforceable only against the assets of that series.

Kenmar Global Investment Management LLC (“Asset Allocator”), an affiliate of the Managing Owner, is the Asset Allocator of the Company. Pursuant to the Asset Allocation Agreements between the managing owner, the Asset Allocator, and each interestholder, the Asset Allocator determines the trading level of each interestholder’s assets and reallocates among the separate series of the Company as agreed upon with the trading advisors. While the Asset Allocator receives no fees for such services from the Fund, the Asset Allocator is paid management and incentive fees directly from the interestholders pursuant to each interestholder’s Asset Allocation Agreement.

GRM and EAGL, segregated series of the Company, were formed to engage in the speculative trading of exchange-traded futures contracts, forwards and option contracts. The managing member of the Company charges GRM and EAGL a monthly managed account fee of 25 basis points of the beginning of month allocated assets for providing certain administrative services.

 

B.

Regulation

As a registrant with the Securities and Exchange Commission (“SEC”), the Trust and each Series are subject to the regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.

As a commodity pool, the Trust and each Series are subject to the regulations of the Commodity Futures Trading Commission (“CFTC”), an independent agency of the U.S. government which regulates most aspects of the commodity futures industry; rules of the National Futures Association, an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Trust through the Managed Accounts executes transactions.

 

C.

The Offering

Up to $281,250,000 Series J, Class I and $93,750,000 Series J, Class II Units (the “Units”) are being offered (totaling $375,000,000) (“Subscription Maximum”).

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

C.

The Offering (Continued)

 

Units are being offered to investors who meet certain established suitability standards. Prior to November 30, 2008, investments required a minimum aggregate initial subscription of $5,000 and $2,000 for certain Benefit Plan Investors (including IRAs), although the minimum purchase for any single series was $500. Effective November 30, 2008, the Board of Directors of the Managing Owner of Series J determined that the Units would no longer be publicly offered and would only be available on a private placement basis to “accredited investors” pursuant to Regulation D under the Securities Act of 1933.

For new subscribers, the minimum initial investment is $25,000 ($10,000 for benefit plan investors (including IRAs)). The minimum additional subscription amount for current investors is $5,000.

Initially, the Units were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Unit.

The subscription minimum of $30,000,000 for Series J was reached during the Initial Offering Period permitting all Series G, H, I and J to commence trading operations. Series J completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443. Until the Subscription Maximum for Series J is reached, Series J’s Units will continue to be offered on a monthly basis at the then current net asset value per Unit.

 

D.

Exchanges, Redemptions and Termination

Redemptions from Series J are permitted on a monthly basis. For Class I Units issued from July 1, 2008 through June 1, 2009, Kenmar Securities Inc. was entitled to a redemption charge for Class I Units redeemed prior to the first anniversary of their purchase of up to 2% of the net asset value per Unit at which they were redeemed. Class I Units issued beginning July 1, 2009 were not subject to a redemption charge. There is no redemption charge associated with the Class II Units.

In the event that the net asset value of a Series, after adjustments for distributions, contributions and redemptions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. Should the Managing Owner make a determination that Series J’s aggregate net assets in relation to its operating expenses make it unreasonable or imprudent to continue the business of Series J, or, in the exercise of its reasonable discretion, if the aggregate net asset value of Series J as of the close of business on any business day declines below $10 million, the Managing Owner may dissolve Series J. In addition, in the event that the net asset value of the allocated assets, after adjustments for distributions, contributions and redemptions, for the Managed Accounts traded by any of the Trading Advisors declines by 40% or more since the commencement of trading activities or the first day of a fiscal year, that Managed Account will automatically terminate.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

E.

Foreign Currency Transactions

Series J’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statements of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently under the caption realized in the statements of operations.

 

F.

Investments in affiliated investment funds

The investments in affiliated investment funds are reported in Series J’s condensed statement of financial condition. Fair value ordinarily is the value determined for the affiliated investment funds in accordance with the fund’s valuation policies and reported at the time of Series J’s valuation by the management of the fund. Generally, the fair value of Series J’s investments in the funds represents the amount that Series J could reasonably expect to receive from the funds if Series J’s investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that Series J believes to be reliable.

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A.

Basis of Accounting

The condensed statements of financial condition, including the condensed schedule of investments, as of June 30, 2011, the condensed statements of operations for the three months ended June 30, 2011 (“Second Quarter 2011”) and for the six months ended June 30, 2011 (“Year-To-Date 2011”) and for the three months ended June 30, 2010 (“Second Quarter 2010”) and for the six months ended June 30, 2010 (“Year-To-Date 2010”), and the condensed statements of changes in unitholders capital for the Year-To-Date 2011 and Year-To-Date 2010, are unaudited. In the opinion of the Managing Owner, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of Series J as of June 30, 2011 and the results of its operations for the Second Quarter 2011, Second Quarter 2010, Year-To-Date 2011 and Year-To-Date 2010. The operating results for these interim periods may not be indicative of the results expected for a full year.

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(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A.

Basis of Accounting (Continued)

 

The financial statements of Series J are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Series J’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010.

Commodity futures, options and foreign exchange forward contracts are reflected in the accompanying financial statements on the trade date basis. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) are offset when reflected in the financial statements since the contracts are executed with the same counterparty under a master netting agreement (See Note 10). The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The values which will be used by Series J for open forward and option positions will be provided by its administrator, who obtains market quotes from independent data vendors and third parties. Any change in net unrealized gain or loss during the current period is reported in the statements of operations. Realized gains and losses on transactions are recognized in the period in which the contracts are closed. Brokerage commissions include other trading fees and are charged to expense when incurred.

The weighted average number of Units outstanding was computed for purposes of disclosing net income (loss) per weighted average Unit. The weighted average number of Units is equal to the number of Units outstanding at year end, adjusted proportionately for Units subscribed and redeemed based on their respective time outstanding during the period.

Investments in investment funds consist of publicly traded mutual funds. Publicly traded mutual funds are valued using the net asset value on the last day of the period provided by a third party pricing service. Realized gains and losses from investment funds are determined using the identified cost method. Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. Dividends are recorded on the ex-dividend date.

Series J has elected not to provide a statement of cash flows since substantially all of Series J’s investments are highly liquid and carried at fair value, Series J has little or no debt and a condensed statement of changes in unitholders’ capital is provided.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A.

Basis of Accounting (Continued)

 

Consistent with standard business practices in the normal course of business, Series J has provided general indemnifications to the Managing Owner, and others when they act, in good faith, in the best interests of Series J. Series J is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.

Series J accounts for financial assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: quoted market prices in active markets for identical assets and liabilities (Level 1), inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (Level 2), and unobservable inputs for the asset or liability (Level 3).

Series J considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by Super Derivatives, Bloomberg, Reuters, and or other independent third party data vendors or pricing services who derive fair values for those assets from observable inputs (Level 2). Series J’s investment in the affiliated investment fund is classified as Level 2 using the fair value hierarchy. The Level 2 investment in the affiliated investment fund is valued at the net asset value as reported by the underlying investment fund’s capital balance using the expedient method. The carrying value of the underlying investment is at fair value. There are no Level 3 investments on June 30, 2011 or December 31, 2010.

The following table summarizes the assets and liabilities measured at fair value using the fair value hierarchy:

 

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(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

B.

Recent Accounting Pronouncement

In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which was effective January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions effective January 1, 2011 will not impact Series J’s financial position or results of operations. The implementation of this guidance, for the provisions effective January 1, 2010, did not have a material impact on Series J’s financial statements.

 

C.

Cash and Cash Equivalents

Cash represents amounts deposited with clearing brokers and a bank, a portion of which is restricted for purposes of meeting margin requirements, which typically range from 0% to 35% of the notional amounts of the derivatives traded. A substantial portion of the cash deposited with a bank is deposited in an off-shore sweep account facility daily. As of June 30, 2011 and December 31, 2010, margin requirements totaled $4,337,302 and $1,934,375, respectively. Series J receives interest on all cash balances held by the clearing brokers and bank at prevailing rates. As of June 30, 2011 and December 31, 2010, $380,904 and ($263,234) are held in various foreign currencies, which are subject to fluctuations based on changes in the foreign exchange rates as compared to the Company’s functional currency.

 

D.

Income Taxes

Series J is treated as a partnership for U.S. federal income tax purposes. As such, Series J is not required to provide for, or pay, any U.S. federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the individual Unitholders including the Managing Owner. Series J may be subject to other state and local taxes in jurisdictions in which it operates.

Series J recognizes tax benefits or expenses of uncertain tax positions in the year such determination is made when the positions are “more likely than not” to be sustained assuming examination by tax authorities. The Managing Owner has reviewed Series J’s tax positions for all open years (after December 31, 2006) and concluded that no provision for unrecognized tax benefits or expense is required in these financial statements. Series J has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense. The 2008 through 2011 tax years generally remain subject to examination by U.S. federal and most state tax authorities.

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(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

E.

Profit and Loss Allocations and Distributions

Income and expenses (excluding the service fee and upfront sales commissions further discussed in Note 5) are allocated pro rata to the Class I Units and Class II Units monthly based on the Units outstanding during the month. Class I Units are charged with the service fee and upfront sales commission applicable to such Units. Distributions (other than redemptions of Units) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the Unitholders. The Managing Owner has not and does not presently intend to make any distributions.

 

F.

Organization and Offering Costs

In accordance with the Trust’s Agreement and Prospectus, the Managing Owner is responsible for the payment of all offering expenses of Series J incurred after the Initial Offering Period (“ongoing offering costs”), provided that the amount of such ongoing offering costs paid by the Managing Owner are subject to reimbursement by the Trust, without interest, in up to 36 monthly payments during each of the first 36 months following the month in which such expenses were paid by the Managing Owner. Through June 30, 2011, the Managing Owner has paid $2,229,209 in ongoing offering costs, of which $2,172,047 has been allocated to Series J. Ongoing offering costs incurred through November 30, 2006 in the amount of $599,062 will not be reimbursed to the Managing Owner. For the period December 1, 2006 through June 30, 2011, the Managing Owner incurred and Series J was allocated ongoing offering costs in the amount of $1,592,590 and $1,572,984, respectively. Of the $1,572,984, allocated to Series J, $635,144 will not be reimbursable to the Managing Owner.

Series J will only be liable for payment of ongoing offering costs on a monthly basis. If Series J terminates prior to completion of payment of such amounts to the Managing Owner, the Managing Owner will not be entitled to any additional payments, and Series J will have no further obligation to the Managing Owner.

During the Second Quarter 2011 and 2010 and Year-To-Date 2011 and 2010, Series J’s allocable portion of ongoing offering costs did not exceed 0.50% per annum of the net asset value of Series J.

 

G.

Interest and Dividends

Interest is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.

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(Unaudited)

 

 

 

Note 3.

RELATED PARTIES

Series J reimburses the Managing Owner for services it performs for Series J, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, risk management and related services with respect to monitoring the Trading Advisors and the Trust and other administrative services.

The expenses incurred by Series J for services performed by the Managing Owner for Series J were:

 

Expenses payable to the Managing Owner and its affiliates as of June 30, 2011 and December 31, 2010 were $36,989 and $63,346, respectively. Such amounts are included in accrued expenses payable, ClariTy Managed Account fees and Managing Owner fees earned on investment funds on the condensed statements of financial condition.

 

Note 4.

MANAGING OWNER AND AFFILIATES

As of June 30, 2011, the Managing Owner and or its affiliates have purchased and maintained an interest in Series J in an amount less than 1% of the net asset value of Series J. The Managing Owner is no longer required under the terms of the Trust Agreement to maintain a 1% interest.

The Managing Owner is paid a monthly management fee of 1/12 of 0.5% (0.5% annually) of Series J’s net asset value at the beginning of each month (See note 5).

The Managing Owner has determined that it is in the best interest of Series J to invest a portion of non-margin assets, either directly or indirectly through certain investment funds which invest primarily in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rule and regulations. At the end of each month, the Managing Owner will be paid 1/12 of 50% of the first 1% of the returns earned on its investment of non-margin assets. Series J will be credited with all additional returns earned on Series J’s investment of non-margin assets. For the six-month period ended June 30, 2011, Managing Owner fees on investment funds amounted to $319,913.

Effective October 1, 2010, Series J is paying a monthly fee in the amount of 1/12 of 0.25% of Series J’s beginning net asset value to ClariTy for risk management and related services with respect to monitoring the Trading Advisors.

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(Unaudited)

 

 

 

Note 5.

SERVICE FEES AND SALES COMMISSIONS

Through June 30, 2009, Series J paid a service fee with respect to Class I Units, monthly in arrears, equal to 1/12 of 2% (2% per annum) of the Net Asset Value per Unit of the outstanding Class I Units as of the beginning of the month. The service fee was paid directly by Series J to Kenmar Securities Inc. (“Selling Agent”), an affiliate of the Managing Owner. The Selling Agent was responsible for paying all commissions owing to the Correspondent Selling Agents (“CSA”), who were entitled to receive from the Selling Agent an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased.

Commencing with the 13^th month after the purchase of a Class I Unit, the CSA received an ongoing monthly commission equal to 1/12^th of 2% (2% per annum) of the Net Asset Value per Class I Unit as of the beginning of each month of the Class I Units sold by them. Beginning July 1, 2009, Series J (rather than the Selling Agent) pays its service fee on Class I Units directly to the CSA’s.

Starting July 1, 2009, Service Fee – Class I Units (as described below) disclosed on the condensed statements of operations represents the monthly 1/12 of 2% of the net asset value per Class I Unit as of the beginning of each month of the Class I Units. The service fee calculated on all Class I Units is the initial upfront sales commission of 2% and a deduction for Series J’s recapture of the 1/12 of 2% service fee on all Units owned for less than 12 months that have received the 2% upfront sales commission, and a recapture of the service fee on Units held with no CSA.

For the Second Quarter 2011 and 2010 and Year-To-Date 2011 and 2010, the Service Fee – Class I Units is composed of the following:

 

Series J will also pay the Selling Agent a monthly sales commission equal to 1/12th of 1% (1% annually) of the net asset value of the outstanding units as of the beginning of each month.

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(Unaudited)

 

 

 

Note 5.

SERVICE FEES AND SALES COMMISSIONS (CONTINUED)

 

Effective October 1, 2010, Series J has agreed to pay a monthly fee to Wells Fargo for providing continuing due diligence, training, operations, system support, and marketing. For Class I and II Units purchased by clients of Wells Fargo on or prior to October 1, 2010, the fee is 1/12^th of 0.10% (0.10% per annum) of the beginning of the month net asset value. For Class I and II Units purchased subsequent to October 1, 2010 the fee is 1/12^th of 0.30% (0.30% per annum) of the beginning of the month net asset value. These fees will be deducted from the management fee paid to the Managing Owner.

Class II Unitholders are only assessed the Wells Fargo service fee mentioned above.

 

Note 6.

ADMINISTRATOR

Series J has entered into an Administration Agreement and Middle/Back Office Agreement with GlobeOp Financial Services LLC (“GlobeOp”) whereby GlobeOp has begun providing administration services to Series J starting on June 1, 2011.

AlphaMetrix360, LLC (“AlphaMetrix”) provided Series J with administration services pursuant to a Services Agreement dated May 23, 2007 between AlphaMetrix and Series J. Effective May 31, 2011, Series J replaced AlphaMetrix with GlobeOp as administrator and AlphaMetrix’s Services Agreement with Series J was terminated effective close of business on May 31, 2011

For the Second Quarter 2011 and the Second Quarter 2010, Series J paid administration fees $73,167 and $58,346, respectively, of which $7,135 remains payable by Series J at June 30, 2011.

 

Note 7.

INVESTMENTS IN AFFILIATED INVESTMENT FUNDS

Effective January 1, 2011 and May 1, 2011, Series J invested a portion of its assets in affiliated investment funds. Series J’s investments in the affiliated investment funds represents approximately 4.30% of the net asset value of Series J at June 30, 2011. The investments in the affiliated investment funds are reported in Series J’s condensed statements of financial condition at its fair value. The investments are subject to the terms of the organizational and offering documents of the affiliated investment funds.

The following table summarizes the change in fair value of Series J’s Level 2 investments in affiliated funds for the second ended June 30, 2011.

 

Series J may make additional contributions or redemptions from the affiliated investment funds on a monthly basis. The affiliated investment funds engage in trading of commodity futures, forwards and currency contracts.

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(Unaudited)

 

 

 

Note 7.

INVESTMENTS IN AFFILIATED INVESTMENT FUNDS (CONTINUED)

 

Series J records its proportionate share of income or loss in the condensed statements of operations. Through its investments in the affiliated investment funds, Series J pays its pro-rata share of GRM and EAGL’s monthly management fees at the annual rate of 2.0% and 1.5%, respectively, as defined in their respective advisory agreement. Additionally, Series J pays GRM and EAGL a quarterly incentive fee of 20% and 25%, respectively, for achieving “New High Net Trading Profits” as defined in their respective advisory agreement.

Series J’s investments in the affiliated investment funds are notionally funded, and the following table sets out the total capital commitment split between net asset value (amount funded) and the remaining capital commitment. The remaining capital commitment is the amount that can be requested from Series J if requested by the affiliated investment funds to meet margin calls in accordance with the governing documents. However, Series J has no capital commitment to the affiliated investment funds except as disclosed below.

 

Series J’s investments in the affiliated investment funds are subject to the market and credit risks of securities held or sold short by this fund. The Investment Manager has established procedures to monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The shareholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.

 

Note 8.

TRUSTEE

The trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The trustee has delegated to the Managing Owner the power and authority to manage the business and affairs of the Trust and has only nominal duties and liabilities with respect to the Trust.

 

Note 9.

COSTS, FEES AND EXPENSES

 

A.

Operating Expenses

Operating expenses of Series J are paid for by Series J.

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Note 9.

COSTS, FEES AND EXPENSES (CONTINUED)

 

B.

Management and Incentive Fees

Series J pays each trading advisor a monthly management fee and a quarterly incentive fee (calculated monthly) pursuant to the applicable managed account advisory agreement.

 

		Prior To October 1, 2010
Trading Advisor		Management Fee(1) (%)				Incentive Fee(2)(4) (%)
Ortus			2.00				20.00
Eagle*			2.00				20.00
Graham*			2.50				20.00
GLC*			2.00				20.00
Krom			2.00				20.00
Paskewitz			2.00				20.00
Crabel			1.00				25.00
Tudor			2.00				20.00

* The Managing Owner terminated the managed account agreements with GLC, Graham, and Eagle effective March 31, 2010, December 31, 2010 and March 31, 2011, respectively.

Effective October 1, 2010, Series J and each of the trading advisors listed below entered into an amendment to change the management fee and incentive fee charged by each trading advisor pursuant to the applicable advisory agreement as indicated below:

 

		Effective October 1, 2010
Trading Advisor		Management Fee(1) (%)				Incentive Fee(2)(4) (%)
Krom			1.50				25.00
Ortus (3)			1.00				25.00
Paskewitz			1.00				25.00

 

 

(1)

The Management Fee is paid monthly at a rate equal to 1/12 of the indicated rate above of the net asset value of Series J accordance with the applicable advisory agreement.

(2)

The Incentive Fee is paid quarterly on the percentage indicated of new net high trading profits of Series J in accordance with the applicable advisory agreement.

(3)

The change in fees for Ortus were not effective until January 1, 2011.

(4)

For the Year-To-Date 2011 and 2010, incentive fees earned by the Trading Advisors were $846,099 and $717,365, respectively, of which $440,478 remains payable by Series J at June 30, 2011.

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Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS

The fair value of Series J’s derivatives by instrument type, as well as the location of those instruments on the statements of financial condition as of June 30, 2011 and December 31, 2010, are included in the condensed schedule of investments, all of which are deemed derivatives not designated as hedging instruments.

The following presents the fair value of derivative contracts at June 30, 2011 and December 31, 2010. The fair value of derivative contracts is presented as an asset if in a gain position and a liability if in a loss position. Fair value is presented on a gross basis in the table below even though the derivative contracts qualify for net presentation in the condensed statement of financial condition.

 

The trading revenue of Series J’s derivatives by instrument type, as well as the location of those gains and losses on the statements of operations, for the Second Quarter 2011 and 2010 and Year-To-Date 2011 and 2010 is as follows:

 

 

*

Excludes income from investments in securities and investment in the affiliated investment funds.

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Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

For the Second Quarter 2011 and 2010, the total number of closed futures contracts was approximately 24,822 and 34,931 respectively, the total number of closed options contracts was approximately 1,057 and 1,486, respectively, and the average monthly notional value of forwards contracts closed was approximately $1,594,652,604 and $1,473,853,035, respectively. For Year-to-date 2011 and 2010, the total number of closed futures contracts was approximately 54,121 and 79,860 respectively, the total number of closed options contracts was approximately 3,534 and 3,711, respectively, and the average monthly notional value of forwards contracts closed was approximately $1,582,875,185 and $2,032,533,714, respectively.

The average monthly notional value of contracts closed represents the average monthly U.S. dollar notional value of future and options contracts closed and settled in cash during the Second Quarter 2011 and 2010 and Year to Date 2011 and 2010.

Series J’s investments in Managed Accounts are subject to the market and credit risks of the futures contracts, options on futures contracts, forward currency contracts and other financial instruments held or sold short by them. Series J bears the risk of loss only to the extent of the market value of its investment and, in certain specific circumstances, distributions and redemptions received.

Series J has cash on deposit with financial institutions and in broker trading accounts. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protection afforded such deposits.

Series J is exposed to various types of risks associated with the derivative instruments and related markets in which it directly invests through its Managed Accounts. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series J’s investment activities (credit risk).

The Managing Owner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Unitholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.

Market Risk

Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series J’s net assets being traded, significantly exceeds Series J’s future cash requirements since Series J intends to close out its open positions prior to settlement. As a result, Series J is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series J considers the fair value of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series J’s commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series J enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contracts at prevailing market prices or settle in cash.

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Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

Market Risk (Continued)

Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments Series J holds and the liquidity and inherent volatility of the markets in which Series J trades.

Credit Risk

When entering into futures or forward contracts, Series J is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on U.S. and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions entered into by Series J, as Series J’s clearing broker is the sole counterparty.

Series J has entered into a master netting agreement with UBS Securities LLC, the clearing broker for Ortus and Krom. Series J has also entered into a master netting agreement with Newedge USA LLC, the clearing broker for Paskewitz, Crabel and Tudor. Series J does not have a master netting agreement between UBS Securities LLC and Newedge USA LLC. As a result of the master netting agreements, when applicable, Series J presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of Series J’s contracts is the net unrealized gain (loss) included in the statements of financial condition; however, counterparty non-performance on only certain of Series J’s contracts may result in greater loss than non-performance on all of Series J’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series J.

The Managing Owner attempts to minimize both credit and market risks by requiring Series J and its Trading Advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.

Series J’s futures commission merchants, in accepting orders for the purchase or sale of domestic futures contracts, are required by CFTC regulations to separately account for and segregate as belonging to Series J all assets of Series J relating to domestic futures trading and are not allowed to commingle such assets with its other assets.

At June 30, 2011 and December 31, 2010, such segregated assets totaled $18,954,828 and $24,432,605, respectively, which are included in cash and cash equivalents on the condensed statements of financial condition. Part 30.7 of the CFTC regulations also requires Series J’s futures commission merchants to secure assets of Series J related to foreign futures trading, which totaled $1,657,754 and $3,399,129 at June 30, 2011 and December 31, 2010, respectively. There are no segregation requirements for assets related to forward trading. As of June 30, 2011, all of Series J’s open futures contracts mature within fifteen months.

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(Unaudited)

 

 

 

Note 11.

FINANCIAL HIGHLIGHTS

The following information presents per Unit operating performance data and other supplemental financial data for the Second Quarter 2011 and 2010 and Year-To-Date 2011 and 2010. This information has been derived from information presented in the financial statements.

 

Total returns are calculated based on the change in value of a Unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.

 

 

(1)

Dividend and Interest income per Unit, expenses per Unit are calculated by dividend and interest income and expenses applicable to each class by the weighted average number of Units of each class outstanding during the period. Total trading and investing loss is a balancing amount necessary to reconcile the change in net asset value per Unit of each class with the other per Unit information.

(2)

Represents dividend and interest income less total expenses (exclusive of incentive fees). Excludes the Trust’s proportionate share of income and expenses from investments in affiliated funds.

(3)

Annualized.

(4)

Not annualized.

(5)

Effective January 1, 2011, includes loss from affiliated investment funds.

-23-

 

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 11.

FINANCIAL HIGHLIGHTS (CONTINUED)

 

Total returns are calculated based on the change in value of a Unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.

 

 

(1)

Interest income per Unit, expenses per Unit and offering costs per Unit are calculated by dividing interest income, expenses and offering costs applicable to each class by the weighted average number of Units of each class outstanding during the period. Net realized and change in unrealized loss is a balancing amount necessary to reconcile the change in net asset value per Unit of each class with the other per Unit information.

(2)

Represents interest income less total expenses (exclusive of incentive fees).

(3)

Annualized.

(4)

Not annualized.

-24-

 

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 12.

SUBSEQUENT EVENTS

From July 1, 2011 through August 15, 2011, there were estimated subscriptions and redemptions of $1,961,716 and $956,209, respectively.

Effective September 1, 2011, Series J plans to allocate approximately one-seventh of its net assets to CTA Choice CRABL-PV (“CRABL-PV”), a series of the Company. Crabel Capital Management, LLC is the Trading Advisor for CRABL-PV and will manage the assets pursuant to its Two Plus Program. Series J will pay CRABL-PV a management fee equal to 1/24 of 1.00% (1.00% per annum) of Series J;s allocated assets as of each standard allocation date, as adjusted on a time weighted basis for any increase or decrease to Series J’s allocated assets on any non-standard allocation date. Series J will also pay a quarterly incentive fee of 25% for achieving “New High Net Trading Profits” as defined in CRABL-PV’s advisory agreement.

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Item 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This report on Form 10-Q (the “Report”) for the quarter ending June 30, 2011 (“Second Quarter 2011”) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments Corp., the managing owner of World Monitor Trust III – Series J (“Registrant”), about the future results, performance, prospects and opportunities of Registrant. The managing owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “should,” “estimate” or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the managing owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause Registrant’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the managing owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

General

World Monitor Trust III (the “Trust”) was formed as a Delaware Statutory Trust on September 28, 2004, with separate series (each, a “Series”) of units of beneficial interest (“Units” or “Interests”). Its term will expire on December 31, 2054 (unless terminated earlier in certain circumstances). The trustee of the Trust is Wilmington Trust Company. The Trust’s fiscal year for book and tax purposes ends on December 31.

The Trust’s Units were initially offered in four (4) separate and distinct Series: Series G, Series H, Series I, and Series J. The Trust may issue additional Series of Units in the future. Each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). Each Series offers Units in two classes (each, a “Class”) – Class I and Class II. Class I Units pay a service fee. Class II Units may only be offered to investors who are represented by approved correspondent selling agents who are directly compensated by the investor for services rendered in connection with an investment in the Trust (such arrangements commonly referred to as “wrap-accounts”).

Series G, H, I and J commenced trading operations on December 1, 2005.

Units are offered as of the beginning of each month, and Units will continue to be offered in each Series until the maximum amount of each Series’ Units which are registered are sold. The managing owner may suspend or terminate the offering of Units of any Series at any time or extend the offering by registering additional Units. The managing owner terminated the offering of Units of Series H and Series I effective March 31, 2007 and dissolved Series H and Series I effective close of business on April 30, 2007. The Managing Owner terminated the offering of Units of Series G on December 31, 2007 and dissolved Series G effective close of business on December 31, 2007.

Managing Owner and its Affiliates

Kenmar Preferred Investments Corp. (“Kenmar Preferred” or the “Managing Member”) is the Managing Owner of the Registrant.

Kenmar Preferred has been the Managing Owner of Registrant since October 1, 2004. The Managing Owner may, but is not required under the terms of the Trust Agreement to maintain an interest in Registrant.

Registrant reimburses the Managing Owner for services it performs for Registrant, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, risk management and related services with respect to monitoring the Trading Advisors and the Trust and other administrative services. Effective October 1, 2010 Registrant pays a monthly fee to ClariTy Managed Account & Analytics Platform LLC (“ClariTy”), an affiliate of the Managing Owner, for risk management and related services with respect to monitoring the trading advisors.

The Offering

Interests are being offered to investors who meet certain established suitability standards. Prior to November 30, 2008, investments required a minimum aggregate initial subscription of $5,000 and $2,000 for certain Benefit Plan Investors

 

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(including IRAs), although the minimum purchase for any single series was $500. Effective December 1, 2008, the minimum initial investment for new subscribers is $25,000 ($10,000 for benefit plan investors (including IRAs)) and the minimum additional subscription amount for current investors, who are “accredited investors,” is $5,000.

Effective November 30, 2008, the Board of Directors of the Managing Owner of the Registrant determined that, Registrant’s Units of beneficial interest are no longer to be publicly offered and are only to be available on a private placement basis to “accredited investors” pursuant to Regulation D under the Securities Act of 1933. This change in the manner in which the Registrant’s Units are offered has no material impact to current investors as there is no change in the fees and expenses and redemption terms of the Units or any change in the management and investment strategy and reporting provided to investors of the Registrant. The only change is in the method by which the Registrant’s Units will be available, and the increased suitability standard of persons subscribing for Units. New subscriptions must be made by persons that are “accredited investors”. Current investors that are not “accredited investors” are not required to redeem their current Units, but are not able to purchase additional Units.

Initially, the Units for each Series were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Interest. The subscription minimum of $30,000,000 for Registrant was reached during the Initial Offering Period permitting all of Series G, H, I and J to commence trading operations. Registrant completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443, which was fully allocated to the trading vehicles. Series H and I Units were fully redeemed as of April 30, 2007 and Series G’s Units as of December 31, 2007. Until the Subscription Maximum for Registrant is reached, Registrant’s Units will continue to be offered on a monthly basis at the then current Net Asset Value per Unit.

The Trading Advisors and the Trading Vehicles

From January 1, 2008 through June 30, 2009, Registrant allocated its assets to the three managed accounts separately managed by the advisors: Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program, Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program, and Graham Capital Management, L.P. (“Graham”) pursuant to its K4D-15V Program. Effective July 1, 2009, Registrant entered into trading advisory agreements with GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus Program, See Note 12 of the attached Registrant’s financial statements. Effective March 31, 2010, the Managing Owner terminated the managed account agreement with GLC.

Beginning April 1, 2010, Registrant allocated its assets substantially equally to each of Graham (pursuant to its K4D-15V Program), Eagle (pursuant to its Eagle Momentum Program), Ortus (pursuant to its Major Currency Program), Krom (pursuant to its Commodity Diversified Program), Crabel (pursuant to its Two Plus Program), Tudor Investment Corporation (“Tudor”) (pursuant to its Tudor Mercis Program), and Paskewitz Asset Management, LLC (“Paskewitz”) (pursuant to its Contrarian Stock Index Program) (collectively with Graham, Eagle, Ortus, Krom, Crabel, Tudor, and Paskewitz, the “Trading Advisors”). The Registrant allocated approximately one-seventh of its net assets to each Trading Advisor’s managed account (collectively the “Managed Accounts”), with such allocations to be re-balanced quarterly. The Managing Owner terminated the managed account agreements with Graham and Eagle effective December 31, 2010 and April 30, 2011, respectively.

Beginning January 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice GRM (“GRM”), a series of CTA Choice Fund LLC, a Delaware limited liability company organized in series. Graham is the Trading Advisor for GRM and will manage the assets pursuant to its K4D-15V Program. Through its investment in GRM, Registrant pays its pro-rata share of the 2.0% annual management fee (accrued and paid monthly) and a 20% incentive fee on “New High Net Trading Profits” (accrued monthly and paid quarterly) as defined in GRM’s advisory agreement.

Beginning May 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice EAGL (“EAGL”), a series of CTA Choice Fund LLC, a Delaware limited liability company organized in series. Eagle is the Trading Advisor for EAGL and will manage the assets pursuant to its Momentum Program. Through its investment in EAGL, Registrant pays its pro-rata share of the 1.5% annual management fee (accrued and paid monthly) and a 25% incentive fee on “New High Net Trading Profits” (accrued monthly and paid quarterly) as defined in EAGL’s advisory agreement.

Registrant pays each trading advisor a monthly management fee and an incentive fee accrued monthly and paid quarterly pursuant to the applicable managed account advisory agreement.

 

 

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		Prior To October 1, 2010
Trading Advisor		Management Fee(1) (%)				Incentive Fee(2) (%)
Ortus			2.00				20.00
Eagle*			2.00				20.00
Graham*			2.50				20.00
GLC*			2.00				20.00
Krom			2.00				20.00
Paskewitz			2.00				20.00
Crabel			1.00				25.00
Tudor			2.00				20.00

* The Managing Owner terminated the managed account agreements with GLC, Graham, and Eagle effective March 31, 2010, December 31, 2010 and March 31, 2011, respectively.

Effective October 1, 2010, Series J and each of the trading advisors listed below entered into an amendment to change the management fee and incentive fee charged by each trading advisor pursuant to the applicable advisory agreement as indicated below:

 

		Effective October 1, 2010
Trading Advisor		Management Fee(1) (%)				Incentive Fee(2) (%)
Krom			1.50				25.00
Ortus (3)			1.00				25.00
Paskewitz			1.00				25.00

 

 

(1)	The Management Fee is paid monthly at a rate equal to 1/12 of the indicated rate above of the net asset value of Series J accordance with the applicable advisory agreement.

(2)	The Incentive Fee is paid quarterly on the percentage indicated of new net high trading profits of Series J in accordance with the applicable advisory agreement.

(3)	The change in fees for Ortus are not effective until January 1, 2011.

Competition

The Managing Owner and its affiliates have formed, and may continue to form, various entities to engage in the speculative trading of futures, forward and options contracts which have certain of the same investment policies as Registrant.

Registrant is an open-end fund, which solicits the sale of additional Limited Interests on a monthly basis until the maximum amount of Limited Interests being offered by Registrant have been sold. As such, Registrant may compete with other entities, whether or not formed by the Managing Owner, to attract new participants. In addition, to the extent that a Trading Advisor recommends similar or identical trades to Registrant and other accounts that it manages, Registrant may compete with those accounts for the execution of the same or similar trades, as well as with other market participants.

The Administrator

Spectrum Global Fund Administration, L.L.C. (“Spectrum” or the “Administrator”), a Delaware limited liability company located at 33 West Monroe – Suite 1000, Chicago, IL, USA, 60603, and 8415 Pulsar Place Suite 400, Columbus, Ohio 43240., was the administrator of Registrant and provided certain administration and accounting services pursuant to the terms of a Services Agreement with Registrant dated as of May 23, 2007. On December 10, 2010, AlphaMetrix360, LLC purchased the assets of Spectrum. Prior to June 1, 2011 the Administrator referred to either AlphaMetrix360, LLC or Spectrum depending on the applicable period discussed, See Note 9 of Registrant’s 2010 Annual Report filed as an exhibit to Registrant’s Form 10-K.

 

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Effective May 31, 2011, the Registrant replaced AlphaMetrix 360, LLC with GlobeOp Financial Services LLC (“GlobeOp” or the “Administrator”), a Delaware limited liability company located at 1 South Road, Harrison, NY, USA, 10528 as administrator and AlphaMetrix 360, LLC Services Agreement with the Registrant was terminated effective close of business on May 31, 2011.

The Administrator performs or supervises the performance of services necessary for the operation and administration of Registrant (other than making investment decisions), including administrative and accounting services. The Administrator also calculates Registrant’s Net Asset Value. In addition, the Administrator maintains certain books and records of Registrant, including certain books and records required by CFTC Rule 4.23(a), at its offices located as specified above. “Administrator” refers to Spectrum, AlphaMetrix 360, LLC, or GlobeOp depending on the applicable period discussed.

Employees

Registrant has no employees. Management and administrative services for Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3, 4, 5, 6, 7 and 8 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the year ended December 31, 2010.

Critical Accounting Policies

General

Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the application of appropriate accounting rules and guidance. Applying these policies requires the Managing Owner to make judgments, estimates and assumptions in connection with the preparation of Registrant’s financial statements. Actual results may differ from the estimates used.

The Managing Owner has evaluated Registrant’s financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For a further discussion of Registrant’s significant accounting policies, see Note 2 to Registrant’s financial statements for the year ended December 31, 2010, which was included in the annual report on Form 10-K for the fiscal year ended December 31, 2010.

The valuation of Registrant’s investments that are not traded on a United States (“U.S.”) or internationally recognized futures exchange is a critical accounting policy. The market values of futures (exchange traded) contracts is verified by Registrant’s administrator, which obtains valuation data from third party data providers such as Bloomberg, Reuters and Super Derivatives and compares those prices with Registrant’s clearing broker. The market value of currency swap and forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices quoted as of 4 p.m. (EST). on the last business day of the reporting period. All values assigned by the administrator and confirmed by the Managing Owner are final and conclusive as to all of Registrant’s Unitholders. As such, if actual results vary from estimates used, they are not anticipated to have a material impact on the financial statements and related disclosures.

Registrant records all investments at fair value in its financial statements, with changes in fair value reported as a component of Trading Profits (Losses) in the Condensed Statements of Operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price. Registrant considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps, and certain option contracts for which market quotations are not readily available are priced by Super Derivatives, Bloomberg, Reuters and or other third party data providers who derive fair values for those assets from observable inputs (Level 2). Level 3 inputs reflect Registrant’s assumptions that it believes market participants would use in pricing the asset or liability. Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or Registrant’s proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data. Registrant does not currently have any investments valued using Level 3 inputs.

The investments in affiliated investment funds are reported in Registrants condensed statement of financial condition. Fair value ordinarily is the value determined for the affiliated investment funds in accordance with the fund’s valuation policies and reported at the time of Registrants valuation by the management of the fund. Generally, the fair value of Registrant’s investments in the funds represents the amount that Registrant could reasonably expect to receive from the funds if Registrant’s

 

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investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that Registrant believes to be reliable.

Of the Registrant’s investments at June 30, 2011, $114,340,184 or 93.69% are classified as Level 1 and $7,704,404 or 6.31% as Level 2. Of the Registrant’s Investments at December 31, 2010, $104,897,390 or 97.87% are classified as Level 1 and $2,284,411 or 2.13% as Level 2. There are no Level 3 investments at June 30, 2011 or December 31, 2010.

The Managing Owner has determined that it is in the best interest of the Registrant to invest a portion of non-margin assets, either directly or indirectly through certain investment funds which invest primarily in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rules and regulations. At the end of each month, the Managing Owner will be paid 1/12 of 50% (a 50% annual rate) of the first 1% of the returns earned on its investment of non-margin assets. Registrant will be credited with all additional returns earned on Registrants investment of non-margin assets.

In January 2010, the Financial Accounting Standards Board amended the existing disclosure guidance on fair value measurements, which was effective for Registrant on January 1, 2010, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for Registrant on January 1, 2011. Among other things, the updated guidance requires additional disclosure for the amounts of significant transfers in and out of Level 1 and Level 2 measurements and requires certain Level 3 disclosures on a gross basis. Additionally, the updates amend existing guidance to require a greater level of disaggregated information and more robust disclosures about valuation techniques and inputs to fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions effective January 1, 2011 will not impact Registrant’s financial position or results of operations. The implementation of this guidance did not have a material impact on Registrant’s financial statements.

Liquidity and Capital Resources

Registrant commenced operations on December 1, 2005 with gross proceeds of $31,024,443 allocated to commodities trading. Additional contributions raised through the continuous offering of limited interests (“Limited Interests”) and general interests (“General Interests” or “Managing Owner Interests” and, together with the Limited Interests, “Interests”) of beneficial ownership in Registrant for the period from December 1, 2005 (commencement of operations) to June 30, 2011 resulted in additional gross proceeds to Registrant of $179,895,115.

Limited Interests in Registrant may be subscribed or redeemed on a monthly basis.

Subscriptions and Redemptions

Second Quarter 2011

Subscriptions of Limited Interests and General Interests for the Second Quarter 2011 were $9,707,025 and $0, respectively. Redemptions of Limited Interests and General Interests for the Second Quarter 2011 were $6,571,447 and $269,455, respectively.

Second Quarter 2010

Subscriptions of Limited Interests and General Interests for the Second Quarter 2010 were $6,753,553 and $0, respectively. Redemptions of Limited Interests and General Interests for the Second Quarter 2010 were $2,679,323 and $0, respectively.

Liquidity

A portion of Registrant’s net assets were allocated to commodities trading. A portion of Registrant’s net assets was held in cash, which was used as margin for trading in commodities. In as much as the sole business of Registrant is to trade in commodities, Registrant continues to own such liquid assets to be used as margin. The clearing brokers and bank credit Registrant with interest income on 100% of its average daily equity maintained in its accounts with the clearing brokers and bank during each month at competitive interest rates.

 

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The commodities contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent Registrant from promptly liquidating its commodity futures positions.

Since Registrant’s business is to trade futures, forward and option contracts, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond Registrant’s experience to date and could ultimately lead to a loss of all or substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Registrant and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 8 to Registrant’s financial statements for the year ended December 31, 2010, which is filed as an exhibit to Registrant’s 2010 Annual Report for a further discussion on the credit and market risks associated with Registrant’s futures, forward and option contracts.

Registrant does not have, nor does it expect to have, any capital assets.

Market Overview

Following is a market overview for Second Quarter 2011 and Second Quarter 2010:

Second Quarter 2011

The Second Quarter of 2011 was volatile in the financial markets, although risk assets ended the quarter not too far from where they began. The early part of the quarter saw the global economy carrying the momentum from the first quarter. However, the last two months of the quarter were marked by a slew of generally disappointing economic data from around the world. While political tensions in the Middle East and North Africa faded from the headlines, markets were roiled by another episode of the unfolding Eurozone drama. Toward the end of the quarter, an 11th hour bailout of Greece sparked a powerful rally in equities. US GDP growth decelerated in the first quarter to a disappointing 1.9% annual rate. To date, the data released for the second quarter indicate no reacceleration in the GDP growth. Moreover, the hopes for a robust increase in employment that were spurred by the first quarter’s rise in hiring activity were belied, as job growth fizzled and the unemployment rate climbed back above the 9% mark. The housing market remained in the doldrums. However, oil prices fell toward the end of the quarter, providing relief for consumers and stoked hopes of acceleration in consumer spending in the second half.

Interest Rates: Treasuries rallied across the curve as confidence in the economic recovery faltered and concerns about Eurozone fueled safe haven demand. The 10-year yield decreased by 29 basis points to end the quarter at 3.18%. At one point in the quarter, the 10-year yield had fallen well below the 3% level for the first time since November 2010. The 30-year yield also declined, by 13 basis points. The 5-year note rallied even more, with the yield falling by 48 basis points. Thus, the yield curve from the 5 year to the 30 year steepened. However, the short-end of the curve flattened as the 2-year yield fell only by 35 basis points. The Fed kept rates unchanged throughout the quarter and acknowledged that the economy and the labor markets had underperformed expectations. The ECB was the most hawkish, raising interest rates in April and becoming the first among the major central banks to do so in the recovery. The BOE continued to be divided over elevated inflation but the fragile and stalling economy prevented any action. The Bank of Japan kept key rates unchanged throughout the quarter as well.

Currencies: The greenback’s slide contoured in the quarter, although the rate of decline stabilized. The Dollar Index dropped 2.1% falling to its lowest level since 2008. Notwithstanding the continued troubles over sovereign debt, the euro ended the quarter up 2.4% against the dollar. The British pound, on the other, hand was flat during the quarter, reflecting the BOE’s dovish stance. The Swiss franc surged 8.1%, climbing to a new record level against the dollar as the spate of European deposits fleeing to Switzerland boosted the franc. The Japanese yen appreciated 2.6% as the economy appeared to be putting the earthquake behind. The Australian and the Canadian dollar continued to rally, rising 3.6% and 0.8%, respectively.

Indices: After three consecutive quarterly gains, the rally in US equities paused in the second quarter, although the Dow managed to eke out a gain of 0.8% for the quarter. The performance across the sectors was mixed. Utilities and transportation posted solid gains while the S&P® Financial Index slipped over 6%. The S&P 500® and NASDAQ® edged down

 

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approximately 0.4% and 0.3%, respectively, for the quarter. European stocks outperformed US equities as well as global equities. The STOXX 600, a broad measure of European equities, gained 1.0%, in dollar terms. The CAC edged down 0.2% while the FTSE 100® and DAX® closed the quarter with gains of approximately 0.6% and 4.8%, respectively. Asian markets were mixed. Japan bounced back from the earthquake induced drop of the previous quarter and the Nikkei climbed up 0.6%. However, the Hang Seng fell 4.8% and the Korean Kospi® edged down 0.3%. The Australian All Ordinaries Index declined 5.5%.

Energies: Commodities slipped for the first time in four quarters as Middle East tensions eased, crop acreage and inventories turned out higher and fears of a hard landing in China gained some credence. While much of the commodity complex declined during the quarter, sugar, gold and copper were the notable exceptions. Crude fell 13.0% during the quarter and heating oil declined 7.0%. Gasoline bucked the trend, rising 1.5%. Natural gas slipped further, declining 1.2%, as the market remained oversupplied.

Metals: Silver ended the quarter down 7.8% but not before getting close to the $50/oz mark. Gold continued its steady climb breaching the $1500 mark and gaining 5.2% for the quarter. Base metals were mixed. While copper recorded a gain of 0.5%, aluminum, nickel and zinc experienced losses of 3.8%, 8.5%, and 1.1%, respectively.

Agriculturals /Softs and Grains: Grains suffered from the strong USDA report showing acreage and inventories well above analysts’ expectations. Wheat plunged 27.2%. Corn and soybeans fell 15.0% and 5.7%, respectively. Cotton corrected from its all time high, declining 14.1%. The softs complex went against the trend in the broader agricultural complex, with sugar, coffee and cocoa all recording gains.

Second Quarter 2010

The Second Quarter of 2010 jolted the global financial markets. The economy took a backseat as the escalating sovereign debt problems in some Eurozone countries, questions about the European banking system and renewed misgivings about the ultimate fate of the euro dominated the financial markets. Economic data was simply not strong enough to overcome the negative influence of European developments. The tone of economic data deteriorated during the quarter. Consumer spending failed to follow up on that of the robust first quarter. After starting the quarter on a bright note, private payroll employment slipped back to a disappointing pace. Other labor market indicators also appeared to be stalling.

Commodities had a mixed quarter, which was surprising given the broad based risk aversion. While industrial commodities were hurt by the fears surrounding global growth prospects, agricultural commodities rallied thanks to strong emerging market demand and the unusually hot, dry weather.

Interest Rates: With all the stars lining up, global financial turmoil, disappointing U.S. growth and the renewed threat of deflation, U.S. Treasury bonds had their best quarter since the fourth quarter of 2008. Yields dropped below the 3% level for the first time since April 2009. The Federal Reserve kept policy unchanged throughout the quarter and there were no indications of imminent change in interest rate policy. The major Federal Reserve actions during the quarter were the reestablishment of the temporary dollar liquidity swaps with various central banks in order to contain the fallout from the Eurozone crisis. The European Central Bank, the Bank of England and the Bank of Japan kept key rates unchanged throughout the quarter as well. The Reserve Bank of Australia continued its rate hike cycle that began late in 2009 as the economy and labor markets strengthened on the back of strong demand for commodities from its Asian trading partners.

Currencies: The U.S. dollar rally that began in December 2009 reached a crescendo in the second quarter. In addition to the euro’s weakness, the dollar was buoyed by global risk aversion and flight to quality in the second quarter. The U.S. Dollar Index gained approximately 6.2%, and climbed above 86 for the first time since April 2009. The dollar appreciated smartly against the euro as the storm clouds quickly spread from Greece to engulf Portugal, Spain and Ireland and threatened the very future of the European Monetary Union. The euro finished the second quarter down approximately 9.1% against the dollar. The British pound fared better, declining 1.6% in the second quarter against the greenback. The Japanese yen not surprisingly rallied with the rising global risk aversion, gaining 5.8% against the dollar. The two currencies heavily influenced by commodities, the Australian and Canadian dollars, fell sharply despite solid economic data. The Australian and Canadian dollars dropped 7.5% and 4.4%, respectively, against the U.S. dollar.

Indices: The strongest equity rally since the 1930s hit a brick wall in the second quarter as stock prices suffered their first quarterly decline since the first quarter of 2009. Unlike in the first quarter, robust earnings were not enough to overcome the Eurozone jitters and growing fears of sovereign debt crisis around the developed world. The losses were broad-based across most sectors. The Dow Jones Industrial Average, S&P 500 and NASDAQ fell approximately 9.9%, 11.9% and 12.0%, respectively, for the quarter. European stocks, weighed down by problems in Greece, lagged U.S. equities, although the

 

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German markets were an exception. The STOXX 600, a broad measure of European equities, declined approximately 16.4%, in dollar terms, although in euro terms it showed a smaller loss of 7.7%. The CAC, FTSE 100 and DAX closed the quarter with losses of approximately 13.4%, 13.4% and 3.1%, respectively. Asian markets were more mixed as the Nikkei fell 15.4% and the Hang Seng declined 5.2%, the Korean Kospi edged up 0.3%. The Australian All Ordinaries Index posted an 11.6% decline.

Energies: Crude oil fell 10.9% on the back of macro risk aversion and softening freight data. Natural gas soared 13.0%, reflecting the fact that at current prices it is an attractive substitute for other energy products. Heating oil ended the quarter with an approximate 10.6% loss. Reformulated gasoline followed crude and heating oil and declined 11.3% in the quarter.

Metals: Gold registered a solid 10.7% gain during the quarter. Although the dollar remains the preferred safe haven, the euro’s troubles appear to have supported gold. The international community’s desire to diversify their reserves may be helping gold given the euro and the sterling’s weakness. Silver lagged gold, rising 4.4%, but the performance was surprising given that base metals, which often have a strong correlation to silver, fell steeply. Copper, aluminum and nickel ended the quarter with declines of 17.9%, 15.9%, and 21.2%, respectively.

Agriculturals /Softs and Grains: Agricultural commodities generally gained during the quarter. Coffee led the way with a 19.5% surge on the back of weak harvests in Vietnam and Central America. Sugar rebounded back from a steep plunge in the previous quarter, rising 8.0%. Grains managed modest gains as the macro environment weighed against generally supportive fundamentals.

Sector Performance

Due to the nature of Registrant’s trading activities, a period-to-period comparison of its trading results is not meaningful.

However, set forth below are the following:

 

(a)

the major sectors to which Registrant’s assets were allocated as of Second Quarter 2011 and 2010, measured as a percentage of the “gross speculator margin” (i.e., the minimum amount of cash or marginable securities a speculator must post when buying or selling futures assets); and

 

(b)

a discussion of Registrant’s trading results for the major sectors in which Registrant traded for the Second Quarter 2011 and 2010.

Second Quarter 2011

As of June 30, 2011, the allocation of Registrant’s assets to major sectors was as follows:

 

Sector		Allocation
Currencies			40.34	%
Energies			7.24	%
Grains			5.93	%
Indices			26.71	%
Interest Rates			10.72	%
Meats			0.32	%
Metals			7.43	%
Tropicals			1.31	%
TOTAL			100.00	%

Trading results for the major sectors in which Registrant traded for Second Quarter 2011 were as follows:

 

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Currencies: (+) Registrant experienced the majority of its gains in the Australian dollar and Swiss franc. The majority of losses were experienced in the British pound, Canadian dollar and the Euro.

Energies: (-) Registrant experienced the majority of its losses in crude oil and natural gas.

Grains: (-) Registrant experienced gains in wheat. The majority of losses were experienced in soybeans, cotton and corn.

Indices: (+) Registrant experienced large gains in the S&P 500®. The majority of losses were incurred in the Nikkei®, Heng Seng and the NASDAQ®.

Interest Rates: (+) Registrant experienced gains in Australian Bonds and Treasury Notes. The majority of losses were experienced in the German Bund and Euribor.

Meats: (-) Registrant experienced losses in live cattle and live hogs.

Metals: (-) Registrant experienced gains in gold. Losses were incurred in aluminum, copper and lead.

Softs: (+) Registrant experienced gains in coffee. The majority of losses were incurred in sugar.

Second Quarter 2010

As of June 30, 2010, the allocation of Registrant’s assets to major sectors was as follows:

 

Sector		Allocation
Currencies			41.07	%
Energies			14.17	%
Environmental			0.15	%
Grains			4.58	%
Indices			21.43	%
Interest Rates			9.14	%
Meats			0.35	%
Metals			8.34	%
Tropicals			0.77	%
TOTAL			100.00	%

Trading results for the major sectors in which Registrant traded for Second Quarter 2010 were as follows:

Currencies: (+) Registrant experienced a majority of its gains in the euro, Swiss franc and Japanese yen. The majority of losses were experienced in the Australian dollar, British pound and Mexican peso.

Energies: (-) Registrant experienced gains in crude oil. Losses were incurred in natural gas, brent crude, gas oil, heating oil and reformulated gasoline.

Grains: (-) Registrant experienced gains in soybean meal and rapeseed. Losses were incurred in corn, bean oil, wheat and soybeans.

Indices: (-) Registrant experienced a majority of its gains in the S&P 500 and Russell 2000. Losses were incurred in the CAC, DAX, DJ STOXX, Nasdaq and Nikkei.

Interest Rates: (+) Registrant experienced a majority of its gains in US Treasuries, Euribor, Eurodollar, German Bobl, German Bund, Japanese Government Bonds and Short Sterling. The majority of losses were experienced in Australian and Canadian Bonds.

 

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Meats: (-) Registrant experienced losses in live cattle and live hogs.

Metals: (+) Registrant experienced gains in gold, platinum, copper, lead and zinc. Losses were incurred in nickel, silver and aluminum.

Softs: (+) Registrant experienced gains in coffee. Losses were incurred in cocoa and sugar.

Results of Operations

Second Quarter 2011

The Net Asset Value per Interest of Class I as of June 30, 2011 was $122.28, a decrease of $2.51 from the March 31, 2011 Net Asset Value of $124.79.

The Net Asset Value per Interest of Class II as of June 30, 2011 was $131.81, a decrease of $2.02 from the March 31, 2011 Net Asset Value of $133.83.

Registrant’s average net asset levels during the Second Quarter 2011 were approximately $152,125,000, an increase of $15,785,000 as compared to the Second Quarter 2010, primarily due to the effect of additional subscriptions and positive trading performance during 2010.

Registrant’s performance for Class I and Class II for the Second Quarter 2011 was (2.01)% and (1.51)%, respectively. Performance includes the percentage change in Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of trading gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

Registrant’s trading gains before commissions and related fees for the Second Quarter 2011 were approximately $1,997,000. Registrant losses from its investments in affiliated investment funds were approximately $(2,918,000).

Dividend income for the Second Quarter 2011 was approximately $589,000, an increase of approximately $589,000, as compared to the Second Quarter 2010, as the Registrant began earning dividend income on the investment of non-margin assets in investment funds starting October 2010. For a further discussion of these investments, see Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

Brokerage Commissions and other transaction fees for the Second Quarter 2011 were approximately $116,000, a decrease of $56,000 as compared to the Second Quarter 2010, primarily due to decreased trading volumes and the change in structure regarding GRM and EAGL as discussed above.

Management fees to the Trading Advisors for the Second Quarter 2011 were approximately $386,000, a decrease of $278,000 as compared to the Second Quarter 2010, primarily due to the change in management fee rates charged by the Trading Advisors and the change in structure regarding GRM and EAGL as discussed above.

Management fees to the Managing Owner during the Second Quarter 2011 were approximately $194,000, an increase of $22,000 as compared to the Second Quarter 2010, primarily due to increase in average net asset levels discussed above.

ClariTy Managed Account fees for the Second Quarter 2011 were approximately $97,000, an increase of approximately $97,000 as compared to the Second Quarter 2010, as the Registrant began paying a fee to ClariTy in October 2010. For a further discussion of this fee, See Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

Service Fees for the Second Quarter 2011 were approximately $688,000, an increase of approximately $103,000 as compared to the Second Quarter 2010, primarily due to the increase of both the monthly 1/12 of 2% service fee and the initial upfront 2% sales commission. Sales Commissions for the Second Quarter 2011 were approximately $388,000, an increase of $45,000 as compared to the Second Quarter 2010, primarily due to increase in average net asset levels discussed above.

Incentive fees are based on the “New High Net Trading Profits” generated by the Trading Advisors, as defined in the Trading Advisory Agreements between Registrant and the Trading Advisors. Incentive fees for the Second Quarter 2011 were approximately $440,000.

 

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Managing Owner fees earned on investment funds for the Second Quarter 2011 were approximately $129,000, an increase of approximately $129,000 as compared to the Second Quarter 2010, as the Managing Owner began earning a fee on the return of the investment of non-margin assets in October 2010. For a further discussion of this fee, See Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010

Operating expenses were approximately $194,000 for the Second Quarter 2011. These expenses include accounting, audit, registrar, and transfer agent, tax and legal fees as well as printing and postage costs related to reports sent to limited owners.

Offering costs were approximately $76,000 for the Second Quarter 2011.

Second Quarter 2010

The Net Asset Value per Interest of Class I as of June 30, 2010 was $121.64, a decrease of approximately $0.21 from the March 31, 2010 Net Asset Value per Interest of $121.85.

The Net Asset Value per Interest of Class II as of June 30, 2010 was $128.59, an increase of approximately $0.40 from the March 31, 2010 Net Asset Value per Interest of $128.19.

Registrant’s average net asset levels during the Second Quarter 2010 were approximately $136,340,000, an increase of approximately $15,282,000 as compared to the Second Quarter 2009, primarily due to the effect of additional subscriptions and positive trading performance.

Registrant’s performance for Class I and Class II for the Second Quarter 2010 was (0.17)% and 0.31%, respectively. Performance includes the percentage change in Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of trading gains (losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

Registrant’s trading gains before commissions and related fees for the Second Quarter 2010 were approximately $2,479,000.

Commissions and other transaction fees for the Second Quarter 2010 were approximately $172,000, an increase of approximately $31,000 as compared to the Second Quarter 2009, primarily due to increased trading volumes and increase average net asset levels discussed above.

Management fees to the Trading Advisors for the Second Quarter 2010 were approximately $664,000, a decrease of approximately $16,000 as compared to the Second Quarter 2009, primarily due to the change in trading advisors effective April 1, 2010.

Management fees to the Managing Owner during the Second Quarter 2010 were approximately $172,000, an increase of approximately $21,000 as compared to the Second Quarter 2009, primarily due to increased average net asset levels discussed above.

Service Fees and Sales Commissions for the Second Quarter 2010 were approximately $585,000 and $343,000, respectively, an increase of approximately $8,000 and $41,000 as compared to the Second Quarter 2009, primarily due to increased average net asset levels discussed above.

Incentive fees are based on the “New High Net Trading Profits” generated by the Trading Advisors, as defined in the Trading Advisory Agreements between Registrant and the Trading Advisors. Incentive fees for the Second Quarter 2010 were approximately $461,000.

Operating expenses were approximately $184,000 for the Second Quarter 2010. These expenses include accounting, audit, registrar, and transfer agent, tax and legal fees as well as printing and postage costs related to reports sent to limited owners.

Offering costs were for the Second Quarter 2010 were approximately $73,000.

Inflation

 

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Inflation has had no material impact on the operations or on the financial condition of Registrant from inception through June 30, 2011.

Off-Balance Sheet Arrangements and Contractual Obligations

Registrant does not have any off-balance-sheet arrangements (as defined in Regulation S-K 303(a)(4)(ii)) that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Registrant’s contractual obligations are with the Managing Owner, the Trading Advisors and its commodity broker. Management fees payable by Registrant to the Trading Advisors and the Managing Owner are calculated as a fixed percentage of Registrant’s Net Asset Value. Incentive fees payable by the Registrant to the Trading Advisors are at a fixed rate, calculated as a percentage of Registrant’s “New High Net Trading Profits” (as defined in the Advisory Agreements). As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and “New High Net Trading Profits” are not known until a future date. Commissions payable to Registrant’s commodity broker are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. Additionally, Registrant does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations or other long-term liabilities that would otherwise be reflected on Registrant’s Statement of Financial Condition, a table of contractual obligations has not been presented. For a further discussion of Registrant’s contractual obligations, see Notes 1, 3, 4, 5 and 7 to Registrant’s financial statements for the year ended December 31, 2010, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2010.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Introduction

Past Results Not Necessarily Indicative of Future Performance

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

Market movements result in frequent changes in the fair market value of Registrant’s open positions and, consequently, in its earnings and cash flow. Registrant’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 Registrant’s open positions and the liquidity of the markets in which it trades.

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

“Value at Risk” is a measure of the maximum amount which Registrant could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of Registrant’s speculative trading and the recurrence in the markets traded by Registrant of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or Registrant’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 quantification included in this section should not be considered to constitute any assurance or representation that Registrant’s losses in any market sector will be limited to Value at Risk or by Registrant’s attempts to manage its market risk.

Standard of Materiality

Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of Registrant’s market sensitive instruments.

 

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Quantifying Registrant’s Trading Value at Risk

Quantitative Forward-Looking Statements

The following quantitative disclosures regarding Registrant’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. as amended (the “Exchange Act”)).

Registrant’s risk exposure in the various market sectors traded by the Trading Advisors is quantified below in terms of Value at Risk. Due to Registrant’s mark-to-market accounting, any loss in the fair value of Registrant’s open positions is directly reflected in Registrant’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).

Exchange maintenance margin requirements have been used by Registrant 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. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

In the case of market sensitive instruments that are not exchange-traded (almost exclusively currencies in the case of Registrant), the margin requirements for the approximate estimated equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, estimated dealers’ margins have been used.

In quantifying Registrant’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that Registrant’s positions are rarely, if ever, 100% positively correlated have not been reflected.

Registrant’s Trading Value at Risk in Different Market Sectors

The following table presents the trading value at risk associated with Registrant’s open positions by market sector at June 30, 2011 and December 31, 2010. All open position trading risk exposures of Registrant have been included in calculating the figure set forth below. At June 30, 2011 and December 31, 2010, Registrant had total capitalizations of approximately $147 million and $150 million, respectively.

 

		June 30, 2011								December 31, 2010
Market Sector		Value at Risk				% of Total Capitalization				Value at Risk				% of Total Capitalization
Interest rates		$	1,746,717				1.19	%		$	522,734				0.35	%
Currencies		$	6,574,208				4.46	%		$	5,142,754				3.43	%
Commodities		$	3,626,580				2.46	%		$	4,036,258				2.69	%
Stock indices		$	4,347,976				2.95	%		$	3,341,705				2.23	%
Total		$	16,295,481				11.06	%		$	13,043,451				8.70	%

 

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The following table presents the average trading value at risk of Registrant’s open positions by market sector for Second Quarter 2011 and 2010 based upon Registrant’s total average capitalization of approximately $151 million and $136 million, respectively.

 

		Second Quarter 2011								Second Quarter 2010
Market Sector		Value at Risk				% of Total Capitalization				Value at Risk				% of Total Capitalization
Interest rates		$	2,175,882				1.44	%		$	1,371,998				1.00	%
Currencies		$	6,547,390				4.34	%		$	6,091,185				4.44	%
Commodities		$	3,806,204				2.52	%		$	7,500				0.01	%
Stock indices		$	4,237,217				2.81	%		$	6,109,516				4.45	%
Total		$	16,766,693				11.11	%		$	13,580,199				9.90	%

Material Limitations on Value at Risk as an Assessment of Market Risk

The notional value of the market sector instruments held by Registrant is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 10% of the face value) as well as many times the total capitalization of Registrant. The magnitude of Registrant’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions, although unusual, but historically recurring from time to time, could cause Registrant to incur severe losses over a short period of time. The foregoing Value at Risk table, as well as the past performance of Registrant give no indication of this “risk of ruin.”

Non-Trading Risk

Registrant has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding Registrant’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how Registrant manages its primary market risk exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Registrant’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner and the Trading Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of Registrant’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 Registrant. There can be no assurance that Registrant’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in Registrant.

Based on trading value at risk during the Second Quarter 2011, Registrant experienced an increase in its value at risk, relative to capitalization levels, as compared with the value at risk at December 31, 2010. Increases in trading value at risk were experienced across interest rates, currencies, and stock indices during Second Quarter 2011.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The means by which the Managing Owner and the Trading Advisors, severally, attempt to manage the risk of Registrant’s open positions is essentially the same in all market categories traded.

The Trading Advisors attempt to minimize market risk exposure by applying their own risk management trading policies that include the diversification of trading assets into various market sectors. Additionally, the Trading Advisors have an oversight committee broadly responsible for evaluating and overseeing the Trading Advisors’ trading policies. The oversight committee meets periodically to discuss and analyze issues such as liquidity, position size, capacity, performance cycles, and new product and market strategies.

 

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The Managing Owner attempts to minimize market risk exposure by requiring the Trading Advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies which include, but are not limited to, limiting the amount of margin or premium required for any one commodity or all commodities combined and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, the Managing Owner shall automatically terminate the Trading Advisor if the Net Asset Value of Registrant declines by 40% during any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that Registrant will liquidate its positions, and eventually dissolve, if Registrant experiences a decline in the net asset value of 50% in any year or since the commencement of trading activities. In each case, the decline in Net Asset Value is after giving effect for contributions, distributions and redemptions. The Managing Owner may impose additional restrictions (through modifications of such trading limitations and policies) upon the trading activities of the Trading Advisors as it, in good faith, deems to be in the best interest of Registrant.

Qualitative Disclosures Regarding Non-Trading Risk Exposure

At June 30, 2011, Registrant’s primary exposure to non-trading market risk resulted from foreign currency balances held in Euro, British Pound, and Japanese Yen. As discussed above, these balances, as well as any risk they represent, are immaterial.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Registrant’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed by Registrant in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to Registrant’s management, including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration (who, in these capacities, function as the Principal Executive Officers and Principal Financial Accounting Officer, respectively, of Registrant), as appropriate to allow for timely decisions regarding required disclosure.

In designing and evaluating Registrant’s disclosure controls and procedures, the Managing Owner recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can prove absolute assurance that all control issues and instances of fraud, if any, within Registrant have been detected.

The Managing Owner’s management, under the supervision and with the participation of certain officers of the Managing Owner (including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration), has evaluated the effectiveness of Registrant’s disclosure controls and procedures as of June 30, 2011. Based on the evaluation, the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration have concluded that, Registrant’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in Registrant’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during the Second Quarter 2011 that have materially affected, or are reasonably likely to materially affect, Registrant’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

There are no material legal proceedings pending, on appeal, or concluded to which Registrant is a party or to which any of its assets are subject.

 

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Item 1.A.

Risk Factors

There have been no changes from risk factors as previously disclosed in Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents sales of unregistered interests (i.e., Managing Owner interests) exempt from registration under Section 4(2) of the Securities Act of 1933 during the period from September 28, 2004 (inception) through June 30, 2011.

 

		Amount of
Date of Sale		Units Sold				Cash Received
March 10, 2005			10			$	1,000
December 1, 2005			3,080			$	308,000
January 1, 2006			765			$	74,535
February 1, 2006			416			$	40,000
March 1, 2006			256			$	24,489
April 1, 2006			223			$	21,560
May 1, 2006			265			$	27,537
June 1, 2006			454			$	47,400
July 1, 2006			575			$	59,000
August 1, 2006			530			$	52,350
September 1, 2006			403			$	39,200
October 1, 2006			374			$	36,000
November 1, 2006			189			$	18,000
December 1, 2006			11			$	1,000
January 1, 2007			62			$	6,000
February 1, 2007			217			$	21,000
March 1, 2007			109			$	10,000
August 1, 2007			30			$	3,000
September 1, 2007			10			$	1,000
October 1, 2007			49			$	5,000
November 1, 2007			28			$	3,000
December 1, 2007			19			$	2,000
January 1, 2008			265			$	29,000
March 1, 2008			113			$	15,000
April 1, 2008			258			$	40,000
May 1, 2008			419			$	50,000
June 1, 2008			329			$	40,000
July 1, 2008			497			$	61,000
August 1, 2008			294			$	35,000
September 1, 2008			347			$	40,000
October 1, 2008			196			$	22,000

Prior to December 1, 2008 Registrant was a publicly offered commodity pool and the Managing Owner was required to hold an interest in Registrant; therefore, sales of the Managing Owner’s interest qualified as unregistered sales of securities. From December 1, 2008 through June 30, 2011 all sales of interest qualify as unregistered sales due to Registrant offered as a private placement. The aggregate sale of Units in this time period was approximately 556,797.1076 Units amounting to approximately $68,901,535.

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 5.

Other Information

None

 

 

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Item 6.

Exhibits:

 

3.1		Fifth Amended and Restated Declaration of Trust Agreement of World Monitor Trust III dated March 31, 2010 (incorporated by reference to Exhibit 13.1 to Registrant’s Form 10-K for the year ended December 31, 2009)
4.2		Subscription Requirements (annexed to the Prospectus as Exhibit B and incorporated by reference to Exhibit 4.2 to the Trust’s Post-Effective Amendment No. 3 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2006)
4.3		Subscription instructions, Form of Subscription Agreement and Power of Attorney (annexed to the Prospectus as Exhibit C and incorporated by reference to Exhibit 4.3 to the Trust’s Post-Effective Amendment No. 3 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2006)
4.4		Form of Privacy Notices of the Managing Owner dated December 2010 (incorporated by reference to Exhibit 4.4 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010)
10.1		Form of Subscription Escrow Agreement (incorporated by reference to Exhibit 10.1 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)
10.2		Form of Advisory Agreement among WMT III Series G/J Trading Vehicle LLC, the Managing Owner and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.2 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)
10.3		Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Eagle Trading Systems Inc. (incorporated by reference to Exhibit 10.3 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
10.4		Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Ortus Capital Management (Cayman) Limited (incorporated by reference to Exhibit 10.4 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)
10.5		Form of Customer Agreement between the WMT III Series G/J Trading Vehicle LLC and UBS Securities LLC (incorporated by reference to Exhibit 10.5 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)
10.6		Form of Customer Agreement between the World Monitor Trust III – Series J and UBS Securities LLC (incorporated by reference to Exhibit 10.6 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
10.7		Form of FX Prime Brokerage Agreement between UBS AG and WMT III Series G/J Trading Vehicle LLC (incorporated by reference to Exhibit 10.7 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
10.8		Form of ISDA Master Agreement between UBS AG and WMT III Series G/J Trading Vehicle LLC, Schedule to ISDA Master Agreement and Credit Support Annex to Schedule (incorporated by reference to Exhibit 10.8 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
10.9		Form of FX Prime Brokerage Agreement between UBS AG and World Monitor Trust III – Series J (incorporated by reference to Exhibit 10.9 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)
10.10		Form of ISDA Master Agreement between UBS AG and World Monitor Trust III – Series J, Schedule to ISDA Master Agreement and Credit Support Annex to Schedule (incorporated by reference to Exhibit 10.10 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)

 

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10.11		WMT III Series G/J Trading Vehicle LLC Organization Agreement (incorporated by reference to Exhibit 1.1 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
10.12		Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.12 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007)
10.13		Form of Services Agreement among World Monitor Trust III – Series J, the Managing Owner and Spectrum Global Fund Administration, L.L.C. (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007)
10.14		Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Tudor Investment Corporation (incorporated by reference to Exhibit 10.9 to Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on March 26, 2010)
10.15		Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Paskewitz Asset Management, LLC (incorporated by reference to Exhibit 10.10 to Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on March 26, 2010)
10.16		Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated November 28, 2008, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Eagle Trading Systems Inc. (incorporated by reference to Exhibit 10.16 to Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
10.17		Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated November 28, 2008, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.17 to Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
10.18		Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated July 1, 2009, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Krom River Investment Management (Cayman) Limited and Krom River Trading AG (incorporated by reference to Exhibit 10.18 to Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
10.19		Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Paskewitz Asset Management, LLC (incorporated by reference to Exhibit 10.19 to Registrant’s Form 8-K, File No. 000-5161, filed with the Commission on October 1, 2010)
10.20		Amendment No. 1 dated September 29, 2010, with an effective date of January 1, 2011, to the Advisory Agreement dated May 28, 2009, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Ortus Capital Management Limited (incorporated by reference to Exhibit 10.20 to Registrant’s Form 8-K, File No. 000-5161, filed with the Commission on October 1, 2010)
10.21		Administrative Services Agreement entered into as of January 27, 2011, by and among GlobeOp Financial Services LLC and World Monitor Trust III – Series J (filed herewith)
10.22		Middle/Back Office Services Agreement entered into as of January 27, 2011, by and between GlobeOp Financial Services LLC, World Monitor Trust III – Series J and Kenmar Preferred Investments Corp. (filed herewith)
14.1		Kenmar Preferred Investments Corp. Code of Ethics (adopted pursuant to Section 406 of Sarbanes Oxley Act of 2002) as of November 9, 2009 (incorporated by reference to Exhibit 14.1 to Registrant’s Annual Report to Form 10-K for the year ended December 31, 2010)
31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)

 

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32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
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.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WORLD MONITOR TRUST III – SERIES J
By:		Kenmar Preferred Investments Corp., its Managing Owner
		By:		/s/ Kenneth A. Shewer				Date: August 15, 2011
				Name:		Kenneth A. Shewer
				Title:		Co-Chief Executive Officer (Principal Executive Officer)
		By:		/s/ David K. Spohr				Date: August 15, 2011
				Name:		David K. Spohr
				Title:		Senior Vice President and Director of Fund Administration (Principal Financial/Accounting Officer)

 

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