Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the fiscal year ended December 31, 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 0-53211
EMERGING CTA PORTFOLIO L.P.
(Exact name of registrant as specified in its charter)
| New York | 04-3768983 | |
|
| ||
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
c/o Ceres Managed Futures LLC
522 Fifth Avenue — 14th floor
New York, New York 10036
(Address and Zip Code of principal executive offices)
(212) 296-1999
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Redeemable Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | Accelerated filer | Non-accelerated filer X | Smaller reporting company | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
Limited Partnership Redeemable Units with an aggregate value of $196,280,842 were outstanding and held by non-affiliates as of the last business day of the registrants most recently completed second fiscal quarter.
As of February 29, 2012, 147,061.6608 Limited Partnership Class A Redeemable Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
PART I
Item 1. Business.
(a) General Development of Business. Emerging CTA Portfolio L.P. (the “Partnership”) is a limited partnership that was organized on July 7, 2003 under the partnership laws of the State of New York. The objective of the Partnership is to achieve capital appreciation through the allocation of assets to early-stage commodity trading advisors which engage, directly and indirectly, in speculative trading of a diversified portfolio of commodity interests, including futures contracts, options and forward contracts. The Partnership may also enter into swap and other derivative transactions with the approval of the General Partner (defined below). The sectors traded include currencies, livestock, energy, grains, metals, indices, lumber, softs, and U.S. and non-U.S. interest rates. The Partnership directly and through its investments in the Funds, (as defined below) may trade futures, forwards and option contracts of any kind. The commodity interests that are traded by the Partnership and the Funds are volatile and involve a high degree of market risk.
Between December 1, 2003 (commencement of the offering period) and August 5, 2004, 20,872 redeemable units of limited partnership interest (“Redeemable Units”) were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until August 6, 2004, at which time they were remitted to the Partnership for trading. The Partnership is authorized to sell 300,000 units and continues to offer Redeemable Units to qualified investors. Subscriptions of additional Redeemable Units and additional general partner contributions and redemptions of Redeemable Units for the years ended December 31, 2011, 2010 and 2009 are reported in the Statements of Changes in Partners’ Capital on page 40 under “Item 8. Financial Statements and Supplementary Data.”
Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Inc. (“Citigroup”) indirectly owns a minority equity interest in MSSB Holdings. Citigroup also indirectly owns Citigroup Global Markets Inc. (“CGM”) the commodity broker and a selling agent for the Partnership. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup.
As of September 1, 2011, the Partnership began offering three classes of limited partnership interests: Class A units, Class D units and Class Z units; each will be referred to as “Class” and collectively referred to as the “Classes”. All Redeemable Units issued prior to September 1, 2011 were deemed “Class A units.” The rights, liabilities, risks, and fees associated with investment in the Class A units were not changed. Class A units and Class D units are available to taxable U.S. individuals and institutions, as well as U.S. tax exempt individuals and institutions. Class Z units will be offered to certain employees of Morgan Stanley Smith Barney and its affiliates (and their family members). The Class of units that a Limited Partner receives upon subscription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer units to investors at its discretion. As of December 31, 2011, there were no Redeemable Units outstanding in Class D or Class Z.
As of December 31, 2011, all trading decisions are made for the Partnership by its eight trading advisors (the “Advisors”) either directly, through individually managed accounts, or indirectly, through investments in other collective investment vehicles. Blackwater Capital Management, LLC (“Blackwater”), J E Moody & Company LLC (“J E Moody”), PGR Capital LLP (“PGR Capital”), Waypoint Capital Management LLC (“Waypoint”) and Willowbridge Associates Inc. (“Willowbridge”) have been selected by the General Partner as the major commodity trading advisors. In addition, the General Partner has allocated the Partnership’s assets to additional non-major trading advisors. The General Partner may allocate less than 10% of the Partnership’s assets to a new trading advisor or another trading program of a current Advisor. The Advisors are not affiliated with one another, are not affiliated with the General Partner or CGM and are not responsible for the organization or operation of the Partnership.
The Partnership will be liquidated upon the first to occur of the following: December 31, 2023; the net asset value per Redeemable Unit decreases to less than $400 per Redeemable Unit as of the close of any business day; a decline in net assets after trading commences to less than $1,000,000; or under certain other circumstances as defined in the Second Amended and Restated Limited Partnership Agreement of the Partnership (the “Limited Partnership Agreement”).
On November 1, 2005, the assets allocated to Altis Partners Jersey Limited (“Altis”) for trading were invested in CMF Altis Partners Master Fund L.P. (“Altis Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 4,898.1251 units of the Altis Master with cash equal to $4,196,275 and a contribution of open commodity futures and forward contracts with a fair value of $701,851. Altis Master was formed to permit commodity pools managed now or in the future by Altis using the Global Futures Portfolio program, a proprietary, systematic trading program, to invest together in one vehicle. The General Partner is also the general partner of Altis Master. Individual and pooled accounts currently managed by Altis, including the Partnership are permitted to be limited partners of Altis Master. The General Partner and Altis believe that trading through this structure should promote efficiency and economy in the trading process.
On March 1, 2006, the assets allocated to Avant Capital Management L.P. (“Avant”) for trading were invested in the CMF Avant Master Fund L.P. (“Avant Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 8,177.1175 units of Avant Master with cash equal to $6,827,887 and a contribution of open commodity futures
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and forward contracts with a fair value of $1,349,230. Avant Master was formed in order to permit accounts managed now or in the future by Avant using the Diversified Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Avant Master on April 30, 2010 for cash equal to $12,280,606.
On May 1, 2009, the assets allocated to Sasco Energy Partners LLC (“Sasco”) for trading were invested in the CMF Sasco Master Fund L.P. (“Sasco Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 16,437.9008 units of Sasco Master with cash equal to $16,364,407 and a contribution of open commodity futures contracts with a fair value of $(1,325,727). Sasco Master was formed in order to permit accounts managed now or in the future by Sasco using the Energy Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Sasco Master on May 31, 2011 for cash equal to $14,575,007.
On March 1, 2010, the assets allocated to Waypoint Capital Management LLC for trading were invested in the Waypoint Master Fund L.P. (“Waypoint Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 26,581.6800 units of Waypoint Master with cash equal to $26,581,680. Waypoint Master was formed in order to permit accounts managed now or in the future by Waypoint using its Diversified Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Waypoint Master. Individual and pooled accounts currently managed by Waypoint, including the Partnership, are permitted to be limited partners of Waypoint Master. The General Partner and Waypoint believe that trading through this structure should promote efficiency and economy in the trading process.
On November 1, 2010, the assets allocated to PGR Capital LLP (“PGR”) for trading were invested in the PGR Master Fund L.P. (“PGR Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 14,913.0290 units of PGR Master with cash equal to $14,913,029. PGR Master was formed to permit accounts managed now or in the future by PGR using the Mayfair Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for PGR Master. Individual and pooled accounts currently managed by PGR, including the Partnership, are permitted to be limited partners of PGR Master. The General Partner and PGR believe that trading through this structure should promote efficiency and economy in the trading process.
On November 1, 2010, the assets allocated to Blackwater Capital Management LLC (“Blackwater”) for trading were invested in the Blackwater Master Fund L.P. (“Blackwater Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 15,674.6940 units of Blackwater Master with cash equal to $15,674,694. Blackwater Master was formed to permit accounts managed now or in the future by Blackwater using the Global Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for Blackwater Master. Individual and pooled accounts currently managed by Blackwater, including the Partnership, are permitted to be limited partners of Blackwater Master. The General Partner and Blackwater believe that trading through this structure should promote efficiency and economy in the trading process.
On January 1, 2011, the assets allocated to J E Moody & Company LLC (“JE Moody”) for trading were invested in JEM Master Fund L.P. (“JEM Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 19,624.4798 units of JEM Master with cash equal to $19,624,480. JEM Master was formed to permit accounts managed now or in the future by J E Moody using the Commodity Relative Value Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for JEM Master. Individual and pooled accounts currently managed by J E Moody, including the Partnership, are permitted to be limited partners of JEM Master. The General Partner and J E Moody believe that trading through this structure should promote efficiency and economy in the trading process.
On January 1, 2011, the assets allocated to Cirrus Capital Management LLC (“Cirrus”) for trading were invested in CMF Cirrus Master Fund L.P. (“Cirrus Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 22,270.9106 units of Cirrus Master with cash equal to $22,270,911. Cirrus Master was formed to permit accounts managed now or in the future by Cirrus using the Energy Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for Cirrus Master. Individual and pooled accounts currently managed by Cirrus, including the Partnership, are permitted to be limited partners of Cirrus Master. The General Partner and Cirrus believe that trading through this structure should promote efficiency and economy in the trading process.
On May 1, 2011, the assets allocated to Flintlock Capital Asset Management, LLC (“Flintlock”) for trading were invested in FL Master Fund L.P. (“FL Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in FL Master with cash equal to $23,564,973. FL Master was formed to permit accounts managed now or in the future by Flintlock using the 2x Flintlock Commodity Opportunities Partners, LP, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for FL Master. Individual and pooled accounts currently managed by Flintlock, including the Partnership, are permitted to be limited partners of FL Master. The General Partner and Flintlock believe that trading through this structure should promote efficiency and economy in the trading process.
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The General Partner is not aware of any material changes to the trading programs discussed above during the fiscal period ended December 31, 2011.
Altis Master’s, Waypoint Master’s, PGR Master’s, Blackwater Masters’s, JEM Master’s, Cirrus Master’s and FL Master’s (collectively, the “Funds”) trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. The Funds engage in such trading through commodity brokerage accounts maintained with CGM.
A limited partner may withdraw all or part of their capital contribution and undistributed profits, if any, from the Funds as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the General Partner at least 3 days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partners elect to redeem and informs the Funds.
Management, administrative and incentive fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (“NFA”) (collectively the “clearing fees”) are borne by the Partnership and through its investment in the Funds. All other fees including CGM’s direct brokerage fees are charged at the Partnership level.
For the period January 1, 2011 through December 31, 2011, the approximate average market sector allocation for the Partnership was as follows:
At December 31, 2011, the Partnership had approximately 3.0% of Altis Master, 55.8% of Waypoint Master, 39.5% of Blackwater Master, 63.9% of PGR Master, 69.9% of JEM Master, 87.5% of Cirrus Master and 85.7% of FL Master. At December 31, 2010, the Partnership had approximately 27.6% of Altis Master, 52.0% of Waypoint Master, 22.8% of Sasco Master, 74.9% of PGR Master and 77.3% of Blackwater Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.
The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions.
The General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly administrative fee equal to 1/24 of 1% (0.5% per year) of month-end Net Assets. Month-end Net Assets, for the purpose of calculating administrative fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fees, incentive fees accrual, the General Partner’s administrative fee and any redemptions or distributions as of the end of such month.
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Pursuant to the terms of the management agreements (each, a “Management Agreement” and collectively, the “Management Agreements”) with each Advisor, the Partnership is obligated to pay the Advisors a monthly management fee ranging from 1% to 2% per year of month-end Net Assets allocated to each Advisor. Month-end Net Assets, for the purpose of calculating management fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fees, incentive fee accruals, the General Partner’s administrative fee and any redemptions or distributions as of the end of such month. The Management Agreement generally continue in effect until June 30 of each year and is renewable by the General Partner for additional one-year periods upon 30 days’ prior notice to the Advisor. Each Management Agreement may be terminated upon notice by either party.
In addition, the Partnership is obligated to pay each Advisor an incentive fee, payable quarterly, ranging from 17% to 20% of the New Trading Profits, as defined in each Management Agreement, earned by the Advisors for the Partnership during each calendar quarter.
The Partnership has entered into a customer agreement (the “Customer Agreement”) with CGM which provides that the Partnership will pay CGM a brokerage fee equal to 7/24 of 1% (3.5% per year) of month-end Net Assets, in lieu of brokerage fees on a per trade basis. Month-end Net Assets, for the purpose of calculating brokerage fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s brokerage fee, incentive fee accruals, management fees, the General Partner’s administrative fee, other expenses and any redemptions or distributions as of the end of such month. CGM will pay a portion of its brokerage fees to other properly registered selling agents and to financial advisors who have sold Redeemable Units. Brokerage fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. This fee may be increased or decreased at any time at CGM’s discretion upon written notice to the Partnership. The Partnership will pay clearing fees directly and through its investment in the Funds. In addition, CGM has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s) account during each month. The interest is earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. The Customer Agreement between the Partnership/Funds and CGM gives the Partnership/Funds the legal right to net unrealized gains and losses on open futures and forward contracts. The Customer Agreement may be terminated upon notice by either party.
Administrative fees, management fees, incentive fees and all other expenses of the Partnership are allocated proportionally to each class based on the Net Asset Value of the class.
(b) Financial Information about Segments. The Partnership’s business consists of only one segment, speculative trading of commodity interests. The Partnership does not engage in sales of goods or services. The Partnership’s net income (loss) from operations for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 is set forth under “Item 6. Selected Financial Data.” The Partnership’s Capital as of December 31, 2011 was $204,952,071.
(c) Narrative Description of Business.
See Paragraphs (a) and (b) above.
(i) through (xii) — Not applicable.
(xiii) — The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does not engage in the sale of goods or services or own any long-lived assets, and therefore this item is not applicable.
(e) Available Information. The Partnership does not have an Internet address. The Partnership will provide paper copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports free of charge upon request.
(f) Reports to Security Holders. Not applicable.
(g) Enforceability of Civil Liabilities Against Foreign Persons. Not applicable.
(h) Smaller Reporting Companies. Not applicable.
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Item 1A. Risk Factors.
As a result of leverage, small changes in the price of the Partnership’s positions may result in major losses.
The trading of commodity interests is speculative, volatile and involves a high degree of leverage. A small change in the market price of a commodity interest contract can produce major losses for the Partnership. Market prices can be influenced by, among other things, changing supply and demand relationships, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events, weather and climate conditions, insects and plant disease, purchases and sales by foreign countries and changing interest rates.
An investor may lose all of its investment.
Due to the speculative nature of trading commodity interests, an investor could lose all of its investment in the Partnership.
The Partnership will pay substantial fees and expenses regardless of profitability.
Regardless of its trading performance, the Partnership will incur fees and expenses, including brokerage fees and management fees. Substantial incentive fees may be paid to one or more of the Advisors even if the Partnership experiences a net loss for the full year.
An investor’s ability to redeem units is limited.
An investor’s ability to redeem Redeemable Units is limited, and no market exists for the Redeemable Units.
Conflicts of interest exist.
The Partnership is subject to numerous conflicts of interest including those that arise from the facts that:
| 1. | The General Partner and the Partnership’s /Funds’ commodity broker are affiliates; |
| 2. | Each of the Advisors, the Partnership’s /Funds’ commodity broker and their principals and affiliates may trade in commodity interests for their own accounts; and |
| 3. | An investor’s financial advisor will receive ongoing compensation for providing services to the investor’s account. |
Investing in units might not provide the desired diversification of an investor’s overall portfolio.
The Partnership will not provide any benefit of diversification of an investor’s overall portfolio unless it is profitable and produces returns that are independent from stock and bond market returns.
Past performance is no assurance of future results.
The Advisors’ trading strategies may not perform as they have performed in the past. The Advisors have from time to time incurred substantial losses in trading on behalf of clients.
An investor’s tax liability may exceed cash distributions.
Investors are taxed on their share of the Partnership’s income, even though the Partnership does not intend to make any distributions.
The General Partner may allocate the Partnership’s assets to undisclosed advisors.
The General Partner at any time may select and allocate the Partnership’s assets to undisclosed advisors. Investors may not be advised of such changes in advance. Investors must rely on the ability of the General Partner to select commodity trading advisors and allocate assets among them.
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Regulatory changes could restrict the Partnership’s operations.
Regulatory changes could adversely affect the Partnership by restricting its markets or activities, limiting its trading and/or increasing the taxes to which investors are subject. Pursuant to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, the Commodity Futures Trading Commission (“CFTC”) and the Securities and Exchange Commission (the “SEC”) are in the process of promulgating rules to regulate swaps dealers, to require that swaps be traded on an exchange or swap execution facilities, to mandate additional reporting and disclosure requirements and to require that derivatives (such as those traded by the Partnership) be moved into central clearinghouses. These rules may negatively impact the manner in which swap contracts are traded and/or settled and limit trading by speculators (such as the Partnership) in futures and over-the-counter markets.
Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person may hold or control in particular futures and options on futures. In addition, the CFTC has adopted new speculative position limits on economically equivalent futures, options and swaps. The trading instructions of an advisor may have to be modified, and positions held by the Partnership/Funds may have to be liquidated in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership by increasing transaction costs to liquidate positions and foregoing potential profits.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner operates out of facilities provided by its affiliate, MSSB Holdings.
Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which CGM or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.
CGM is a New York corporation with its principal place of business at 388 Greenwich St., New York, New York 10013. CGM is registered as a broker-dealer and futures commission merchant (“FCM”), and provides futures brokerage and clearing services for institutional and retail participants in the futures markets. CGM and its affiliates also provide investment banking and other financial services for clients worldwide.
There have been no material administrative, civil or criminal actions within the past five years against CGM (formerly known as Salomon Smith Barney) or any of its individual principals and no such actions are currently pending, except as follows.
Mutual Funds
Several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Citigroup has received subpoenas and other requests for information from various government regulators regarding market timing, financing, fees, sales practices and other mutual fund issues in connection with various investigations. Citigroup is cooperating with all such reviews. Additionally, CGM has entered into a settlement agreement with the SEC with respect to revenue sharing and sales of classes of funds.
In May 2007, CGM finalized settlements agreement with the NYSE and the New Jersey Bureau of Securities relating to alleged improper market-timing of mutual funds by certain of its brokers prior to September 2003. The allegations included failure to supervise trading of mutual fund shares and variable annuity mutual fund sub-accounts, failure to prevent market-timing by its brokers and failure to comply with applicable recordkeeping requirements. CGM neither admitted nor denied any wrongdoing or liability, and paid $50 million in disgorgement and penalties.
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FINRA Settlement
On October 12, 2009, FINRA announced its acceptance of an Award Waiver and Consent (“AWC”) in which CGM, without admitting or denying the findings, consented to the entry of the AWC and a fine and censure of $600,000. The AWC includes findings that CGM failed to adequately supervise the activities of its equities trading desk in connection with swap and related hedge trades in U.S. and Italian equities that were designed to provide certain perceived tax advantages. CGM was charged with failing to provide for effective written procedures with respect to the implementation of the trades, failing to monitor Bloomberg messages and failing to properly report certain of the trades to the NASDAQ.
Auction Rate Securities
On May 31, 2006, the SEC instituted and simultaneously settled proceedings against CGM and 14 other broker-dealers regarding practices in the auction rate securities market. The SEC alleged that the broker-dealers violated Section 17(a)(2) of the Securities Act of 1933, as amended. The broker-dealers, without admitting or denying liability, consented to the entry of an SEC cease-and-desist order providing for censures, undertakings and penalties. CGM paid a penalty of $1.5 million.
On August 7, 2008, Citigroup reached a settlement with the New York Attorney General, the SEC, and other state regulatory agencies, pursuant to which Citigroup agreed to offer to purchase at par auction rate securities from all Citigroup individual investors, small institutions (as defined by the terms of the settlement), and charities that purchased auction rate securities from Citigroup prior to February 11, 2008. In addition, Citigroup agreed to pay a $50 million fine to the State of New York and a $50 million fine to the other state regulatory agencies.
Beginning in March 2008, Citigroup and certain of its affiliates, including CGM, have been named as defendants in numerous actions and proceedings brought by Citigroup shareholders and customers concerning auction-rate securities (“ARS”), many of which have been resolved. These have included, among others: (i) numerous lawsuits and arbitrations filed by customers of Citigroup and its affiliates seeking damages in connection with investments in ARS; (ii) a consolidated putative class action asserting claims for federal securities violations, which has been dismissed and is now pending on appeal; (iii) two putative class actions asserting violations of Section 1 of the Sherman Act, which have been dismissed and are now pending on appeal; and (iv) a derivative action filed against certain Citigroup officers and directors, which has been dismissed. In addition, based on an investigation, report and recommendation from a committee of Citigroup’s Board of Directors, the Board refused a shareholder demand that was made after dismissal of the derivative action. Additional information relating to certain of these actions is publicly available in court filings under the docket numbers 08 Civ. 3095 (S.D.N.Y.) (Swain, J.), 10-722 (2d Cir.); 10-867 (2d Cir.); 11-1270 (2d Cir.).
Subprime Mortgage-Related Litigation and Other Matters
The SEC, among other regulators, is investigating Citigroup’s subprime and other mortgage-related conduct and business activities, as well as other business activities affected by the credit crisis, including an ongoing inquiry into Citigroup’s structuring and sale of CDOs. Citigroup is cooperating fully with the SEC’s inquiries.
On July 29, 2010, the SEC announced the settlement of an investigation into certain of Citigroup’s 2007 disclosures concerning its subprime-related business activities. The SEC alleged misleading statements about the extent of its holdings of assets backed by subprime mortgages. On October 19, 2010, the United States District Court for the District of Columbia entered a Final Judgment approving the settlement, pursuant to which Citigroup agreed to pay a $75 million civil penalty and to maintain certain disclosure policies, practices and procedures for a three-year period. Additional information relating to this action is publicly available in court filings under the docket number 10 Civ. 1277 (D.D.C.) (Huvelle, J.).
On October 19, 2011, the SEC and Citigroup announced a settlement, subject to judicial approval, in connection with the SEC’s investigation into the structuring and sale of CDOs. Pursuant to the proposed settlement, CGM agreed to pay $160 million in disgorgement, $30 million in prejudgment interest, and a civil penalty of $95 million relating to CGM’s role in the structuring and sale of the Class V Funding III CDO transaction. On November 28, 2011, the United States District Court for the Southern District of New York declined to approve the settlement on the grounds that the court was not presented with enough facts to approve the settlement. A trial date was set for July 16, 2012. On December 15 and 19, 2011, respectively, the SEC and s filed notices of appeal. On December 27, 2011, the United States Court of Appeals for the Second Circuit granted an emergency stay of further proceedings in the district court, pending the Second Circuit’s ruling on the SEC’s motion to stay the district court proceedings during the pendency of the appeals. Additional information relating to this matter is publicly available in court filings under the docket number 11 Civ. 7387 (S.D.N.Y.) (Rakoff, J.).
Citigroup and certain of its affiliates have also been named as defendants in actions brought by counterparties and investors that have suffered losses as a result of the credit crisis. Those actions include claims asserted by investors in CDO-related transactions, including Moneygram Payment Systems, Inc., which filed a lawsuit in Minnesota state court on October 26, 2011, alleging misstatements in connection with the sale of CDO securities. Additional information relating to this action is publicly available in court filings under docket number 102611H-10 (Minn. 4th Judicial District, Hennepin Cnty.). Additional actions asserting claims related to investments or participation in CDO-related transactions may be filed in the future.
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On February 9, 2012, Citigroup announced that CitiMortgage, along with other mortgage servicers, had reached an agreement in principle with the United States and with the Attorneys General for 49 states (Oklahoma did not participate) and the District of Columbia to settle a number of related investigations into residential loan servicing and origination practices. In conjunction with this settlement, Citigroup and certain of its affiliates, including CGM, also entered into a settlement with the United States Attorney’s Office for the Southern District of New York of a “qui tam” action. This action alleged that, as a participant in the Direct Endorsement Lender program, CitiMortgage had certified to the United States Department of Housing and Urban Development and the Federal Housing Administration (“FHA”) that certain loans were eligible for FHA insurance when in fact they were not. The settlement releases Citigroup from claims arising out of its acts or omissions relating to the origination, underwriting, or endorsement of all FHA-insured loans prior to the effective date of the settlement. Under the settlement, Citigroup will pay the United States $158.3 million, for which Citigroup had fully provided as of December 31, 2011. CitiMortgage will continue to participate in the Direct Endorsement Lender program. Additional information relating to this action is publicly available in court filings under the docket number 11 Civ. 5423 (S.D.N.Y.) (Marrero, J.).
The Federal Reserve Bank, the OCC and the FDIC, among other federal and state authorities, are investigating issues related to the conduct of certain mortgage servicing companies, including Citigroup affiliates, in connection with mortgage foreclosures. Citigroup is cooperating fully with these inquiries.
Credit Crisis Related Matters
Beginning in the fourth quarter of 2007, certain of Citigroup’s, and CGM’s regulators and other state and federal government agencies commenced formal and informal investigations and inquiries, and issued subpoenas and requested information, concerning Citigroup’s subprime mortgage-related conduct and business activities. Citigroup and certain of its affiliates, including CGM, are involved in discussions with certain of its regulators to resolve certain of these matters.
Certain of these regulatory matters assert claims for substantial or indeterminate damages. Some of these matters already have been resolved, either through settlements or court proceedings, including the complete dismissal of certain complaints or the rejection of certain claims following hearings.
In the course of its business, CGM, as a major futures commission merchant and broker-dealer, is a party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of CGM. GCM may establish reserves from time to time in connections with such actions.
Item 4. Mine Safety Disclosures. Not applicable.
9
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| (a) | Market Information. The Partnership has issued no stock. There is no public market for the Redeemable Units. |
| (b) | Holders. The number of holders of Redeemable Units as of December 31, 2011, was 1,748. |
| (c) | Dividends. The Partnership did not declare any distributions in 2011 or 2010. The Partnership does not intend to declare distributions in the foreseeable future. |
| (d) | Securities Authorized for Issuance Under Equity Compensation Plans. None |
| (e) | Performance Graph. Not applicable. |
| (f) | Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities. For the twelve months ended December 31, 2011, there were subscriptions of 36,244.7785 Class A Redeemable Units totaling $52,906,261 and General Partner contribution representing 136.3280 Class A unit equivalents totaling $200,000. For the twelve months ended December 31, 2010, there were subscriptions of 26,464.2572 Class A Redeemable Units totaling $37,194,829. For the twelve months ended December 31, 2009, there were subscriptions of 32,652.7934 Class A Redeemable Units totaling $47,627,000 and General Partner contribution representing 1,173.6036 Class A unit equivalents totaling $1,700,000. |
The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as described in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.
Proceeds from the subscriptions of Redeemable Units are used in the trading of commodity interests including futures contracts, swaps, options and forward contracts.
| (g) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following chart sets forth the purchases of Redeemable Units by the Partnership. |
| Period |
Class A (a) Total Number of Redeemable |
Class A (b) Average |
(c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the Plans or Programs | ||||
| October 1, 2011 – |
1,238.3803 | $ 1,459.19 | N/A | N/A | ||||
| November 1, 2011 – |
935.4970 | $ 1,435.62 | N/A | N/A | ||||
| December 1, 2011 – |
1,175.9940 | $ 1,449.84 | N/A | N/A | ||||
| 3,349.8713 | $ 1,449.33 |
| * | Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners. |
| ** | Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day. |
10
Item 6. Selected Financial Data.
Net realized and unrealized trading gains (losses), interest income, net income, increase (decrease) in net asset value per unit and net asset value per unit for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 and total assets at December 31, 2011, 2010, 2009, 2008 and 2007 were as follows:
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| Net realized and unrealized trading gains (losses) and investment in Funds net of brokerage fees (including clearing fees) of $8,438,594, $7,138,973, $6,945,800, $6,174,578, and $4,577,746, respectively |
$ | 3,654,017 | $ | 14,772,228 | $ | (6,137,060 | ) | $ | 39,424,671 | $ | 6,386,632 | |||||||||
| Interest income |
64,743 | 189,515 | 147,376 | 2,038,055 | 5,105,509 | |||||||||||||||
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| $ | 3,718,760 | $ | 14,961,743 | $ | (5,989,684 | ) | $ | 41,462,726 | $ | 11,492,141 | ||||||||||
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| Net income (loss) |
$ | (3,727,719 | ) | $ | 9,108,040 | $ | (11,927,806 | ) | $ | 29,408,855 | $ | 6,304,054 | ||||||||
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| Increase (decrease) in net asset value per unit |
$ | (29.76 | ) | $ | 73.22 | $ | (102.13 | ) | $ | 244.45 | $ | 62.64 | ||||||||
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| Net asset value per unit |
$ | 1,449.84 | $ | 1,479.60 | $ | 1,406.38 | $ | 1,506.43 | $ | 1,261.98 | ||||||||||
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| Total assets |
$ | 207,893,019 | $ | 187,096,653 | $ | 171,248,643 | $ | 180,118,590 | $ | 141,636,874 | ||||||||||
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11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Partnership, directly and through its investments in the Funds aims to achieve substantial capital appreciation and permit investors to diversify a traditionally structured stock and bond portfolio. The Partnership attempts to accomplish its objectives through speculative trading in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals directly, or through investments in the Funds. The Partnership/Funds may employ futures, swaps, options on futures, and forward contracts in those markets. The Partnership/Funds may also enter into swap and other derivative transactions with the approval of the General Partner.
The General Partner manages all business of the Partnership/Funds. The General Partner has delegated its responsibility for the investment of the Partnership’s assets to the Advisors. The General Partner employs a team of approximately 47 professionals whose primary emphasis is on attempting to maintain quality control among the Advisors to the partnerships operated or managed by the General Partner. A full-time staff of due diligence professionals use proprietary technology and on-site evaluations to monitor new and existing futures money managers. The accounting and operations staff provides processing of subscriptions and redemptions and reporting to limited partners and regulatory authorities. The General Partner also includes staff involved in marketing and sales support. In selecting the Advisors for the Partnership, the General Partner conducts proprietary research and considers the background of the advisors’ principals, as well as the advisors’ trading styles, strategies and markets traded, expected volatility, trading results (to the extent available) and fee requirements.
Responsibilities of the General Partner include:
| • | due diligence examinations of the Advisors; |
| • | selection, appointment and termination of the Advisors; |
| • | negotiation of the management agreements; and |
| • | monitoring the activity of the Advisors. |
In addition, the General Partner prepares the books and records and provides the administrative and compliance services that are required by law or regulation, from time to time, in connection with the operation of the Partnership. These services include the preparation of required books and records and reports to limited partners, government agencies and regulators; computation of net asset value; calculation of fees; assistance in connection with subscriptions, redemptions and limited partner communications; and preparation of offering documents and sales literature.
The General Partner seeks the best prices and services available in its commodity futures brokerage transactions.
The programs traded by each Advisor on behalf of the Partnership are: Altis — Global Futures Portfolio Program, Waypoint — Diversified Program, PGR — Mayfair Program, Blackwater — Global Program, JE Moody — Commodity Relative Value Program, Cirrus — Energy Program, Willowbridge — wPraxis Futures Trading Approach and MStrategy Trading Approach and Flintlock — 2x Flintlock Commodity Opportunities Partners, LP Program. The General Partner may modify or terminate the allocation of assets among the Advisors at any time and may allocate assets to additional Advisors at any time. As of December 31, 2011 and September 30, 2011, the Partnership’s assets were allocated among these Advisors in the following approximate percentages:
| Advisor | December 31, 2011 | September 30, 2011 | ||||||
| Altis Partners (Jersey) Limited |
2 | % | 2 | % | ||||
| Waypoint Capital Management LLC |
11 | % | 11 | % | ||||
| PGR Capital LLP |
14 | % | 13 | % | ||||
| Blackwater Capital Management LLC |
16 | % | 16 | % | ||||
| J E Moody & Company LLC |
15 | % | 13 | % | ||||
| Cirrus Capital Management LLC |
10 | % | 10 | % | ||||
| Flintlock Capital Asset Management LLC |
10 | % | 8 | % | ||||
| Willowbridge Associates Inc. |
19 | % | 12 | % | ||||
12
Altis Partners (Jersey) Limited.
Altis trades its Global Futures Portfolio Program on behalf of the Partnership. It is a systematic, automated trading program that builds on the Principals’ market experience and employs a unique proprietary Advanced Asset Allocator. The Advanced Asset Allocator was specifically developed to manage portfolios of derivative instruments in a robust and scalable manner. The portfolio management technology combines original, traditional and contrasting investment techniques into one complete and comprehensive trading system. Investment changes are implemented after considering their effect on the whole portfolio, not just the individual markets concerned.
Waypoint Capital Management LLC
Waypoint relies on technical rather than fundamental information as the basis for its trading decisions in the Diversified Program, a proprietary, systematic trading system. The primary objective of the trading program is to identify and exploit medium and long-term price trends in futures and currency markets. The program is designed to mathematically analyze recent trading characteristics of each market and compare such characteristics to the historical trading pattern of the particular market. The program utilizes proprietary trend identification and risk management strategies that are intended to enable it to benefit from sustained price trends with the goal of protecting the account from high levels of risk and volatility. Over the course of a long-term trend, times exist when the potential reward of a market appears to be outweighed by the risk. In such circumstances, some of Waypoint’s trading programs may exit the position prior to the end of the trend. While the result may be that program is out of the market during a significant portion of a trend, Waypoint expects that the accompanying decrease in volatility of performance is adequate reward.
While Waypoint normally follows a disciplined systematic approach to trading, on occasion it may override the signals generated by the programs. This may take the form of a decision not to trade a certain futures contract or reducing the number of contracts traded and is based on such factors as past market volatility, amount of risk, potential return and margin requirements. Such modifications may not necessarily be beneficial to the results achieved. Waypoint applies a portfolio management strategy to measure and manage overall portfolio risk. This strategy includes portfolio structure, capital allocation, and risk limitation. One objective of portfolio management is to determine periods of relatively high and low portfolio risk, and when such points are reached Waypoint may reduce or increase position size accordingly.
Waypoint may trade any and all commodity futures contracts including financial, agricultural, metals, energy contracts and/or foreign currency contracts. The combination of markets traded may vary over time and from time to time. Waypoint may also trade spot and forward currency contracts on a principal basis on behalf of clients.
PGR Capital LLP
PGR’s Mayfair Program, a proprietary, systematic trading program, seeks to profit over the medium term by exploiting inefficiencies in futures and forward markets across a broad range of asset classes and geographic regions. Proprietary models developed by the founding partners are implemented in an inhouse trading system which systematically processes real-time data and executes trades automatically on electronic future exchanges and foreign exchange trading platforms.
PGR’s investment strategies have a strong mathematical and statistical basis and exploit established signal processing and econometric techniques. Current strategies are continuously being developed and may change over the life of the investment. The strategy is primarily momentum-based. Adaptive signal processing techniques are used to forecast both market direction and risk. The estimates of the direction and strength of a market’s price trend are combined with the estimate of its risk to calculate a position which optimizes the risk/return profile for that market.
The strategies are primarily directional in nature meaning they identify and take advantage of both upward and downward price momentum. The source of these trends may be sound economic considerations, asymmetric information or behavioral patterns of market participants. Persistent trends can be identified from these factors in all markets across all sectors with varying strengths and durations. PGR’s strategies have been designed to identify the direction and strength of any trend with duration between a few days and a few months and position the fund to take advantage of it. PGR’s investment strategy employs sophisticated, robust and already-proven computerized systems to enable the entire trading process to be automated. The system monitors live market data from real-time feeds and continuously updates the desired position for each market. Rigorous risk management is central to the PGR’s systems and operations. Risk management is fully integrated and systematic at all levels of the system. It takes account of changes intra and inter-market, to ensure that volatility and drawdowns remain under control as markets both react and evolve. The automation of trade execution and reconciliation avoids the possibility of human errors in relation to these processes while further processes continuously monitor and assess risk throughout all stages of the investment process. PGR’s ability to adjust positions and gearing according to the prevailing levels of market and portfolio risk means that it can rapidly control the risk of the strategy as a whole. The PGR uses a number of standard and non-standard measures to assess risk including correlations, value at risk, sector exposure, entropy and stress tests.
13
Blackwater Capital Management LLC
Blackwater utilizes medium and long term, systematic technical models to trade global futures and foreign exchange markets. The models are designed to establish positions when market behavior exhibits a high probability of an emerging sustained move. Blackwater seeks to aggressively protect open equity after profit targets have been reached, limiting sharp reversals and drawdowns. It incorporates strict money management techniques in order to reduce volatility.
The Global Program a proprietary, systematic trading program, was established to capture intermediate and long term trends in the global futures and foreign exchange markets. The Global Program is based on chart and volatility patterns observed over many years of trading and following macro markets. The Blackwater trading model is designed to establish positions in relatively low to moderate volatility markets that are starting to show signs of an emerging, sustained price move. Once a trade has been established, the model generates stop levels and profit objectives. Stop levels are based on multiple volatility measurements. Proprietary indicators are used to reduce trading in range bound, trendless markets. When Blackwater’s indicators point to a range bound market, extra confirmation is needed to enter a trade. Excessive volatility in a particular market will cause Blackwater to exit that market. Money management techniques are applied on the individual market level, sector level, and portfolio level. The system analyzes how well each market has been performing. Markets that are performing poorly, receive less risk capital. When open equity levels surpass predetermined thresholds, partial profits will be taken on the most successful open trades.
J E Moody & Company LLC
The JEM CRV Program is a systematic program that uses quantitative models to detect and exploit price shifts and mispricings between related instruments in the energy, metal and agricultural markets, while employing hedging methods to maintain approximate market or sector neutrality. The strategies do not make un-hedged directional bets. Most trades are implemented using offsetting long and short positions in futures and futures options, thus reducing exposure to sudden changes in market direction. As examples, such offsetting positions may be in different delivery months of the same commodity market (e.g., calendar or butterfly spreads), in different but related markets (e.g., crude oil and unleaded gasoline) or between contracts traded on different exchanges (e.g., New York and London copper).
Market coverage for the CRV portfolio includes crude oil and petroleum distillates, natural gas, industrial metals, precious metals, grains, livestock, foodstuffs, fibers, and potentially other commodities. The Advisor utilizes primarily exchange-traded futures and futures options to implement its relative value trades, although trades may also be made using other instruments, such as commodity swaps or over-the-counter derivatives contracts.
The trading opportunities captured by the CRV models are believed to arise due to various factors, including: changes in relative supply and demand of different commodity contracts, the idiosyncratic actions of market participants, external events that may disrupt production (e.g., droughts, hurricanes, labor unrest or geopolitics), and risk premia associated with general uncertainties in future supply or demand. By virtue of their relative value nature, CRV trades may be interpreted as providing market liquidity to directional traders who need it, and earning a risk premium by doing so.
Relative value strategies are frequently employed by hedge funds in the equity, fixed income, convertible bond and option markets, but are relatively uncommon in the commodity or managed futures arenas. Over extended time periods, relative value strategies have been observed to produce more consistent returns and higher Sharpe ratios than un-hedged, directional trading strategies. With the high leverage often used, however, some relative value managers have experienced significant losses, particularly when extreme market events have occurred.
The Advisor attempts to manage the risk of large losses by limiting the overall portfolio leverage and the degree of exposure to any single commodity market or sector. The CRV portfolio typically includes about 18 to 24 active relative value trades, with the number of open positions depending on the arbitrage opportunities available. The CRV trades have low mutual correlation, cover multiple markets and sectors and thus enable meaningful diversification within the CRV portfolio.
14
When few favorable relative value trading opportunities arise in the commodity markets, or as the Advisor may determine, the Advisor may choose to make relative value trades in the financial futures, options, swap or derivatives markets. At times when many or few trading opportunities are available, the Advisor may increase or reduce overall CRV portfolio exposure.
To hedge offsetting long and short positions, the Advisor may use techniques such as static hedging, dynamic hedging and option overlays. Moreover, hedging may seek to achieve market or sector neutrality via various benchmarks, such as by being “contract neutral”, “dollar neutral” or “delta neutral”. No hedging strategy is perfect, but each has its costs, risks, advantages and limitations. Even with well-hedged positions, there is usually some residual exposure to directional market movements. The Advisor seeks to balance the advantages of the hedging strategy used in a particular relative value trade versus the costs and risks of implementing the trade.
Cirrus Capital Management LLC
The Advisor’s investment objective is to maximize risk adjusted return primarily through speculative trading in energy commodities and their respective derivative instruments utilizing its systematic trading program.
The structure of investments will vary as the Advisor acts as a discretionary financial trader in the energy markets executing trades via cleared exchanges.
The foundation for the Advisor’s trading strategies will begin with strong fundamental research and analysis of the various underlying energy markets and infrastructure. With a fundamental view of the market, opportunities will be identified and then analyzed to produce an investment structure which will not only portray the desired view, but to do so in a way which maximizes the asymmetric risk/return profile for the portfolio.
The Advisor will employ technical analysis to further identify opportunities, as well as optimize entry and exit of its positions. The identified positions will be taken in a combination of fixed price and/or option structures, and then actively traded around to not only enhance the returns of the given position, but to also reduce potential loss from adverse price movements.
While the portfolio will have positions that extend out along the curve, it is anticipated that 75% of the investments will be focused in the first 24 months. The remaining 25% will not extend beyond the first 48 months, which shall allow the portfolio to remain relatively liquid at all times.
Flintlock Capital Asset Management, LLC
The objective of the Advisor is to generate attractive risk-adjusted returns while preserving capital, regardless of market conditions, by investing primarily in commodities futures involved in macro-fundamental or catalyst-driven situations utilizing its systematic trading program. Derivatives, such as options, futures and forwards approved by the investor, may be used whenever the Advisor, in its sole discretion, deems it appropriate to do so. Such instruments will primarily be used for hedging purposes; however, the Advisor may also use such instruments to express a certain view. FL Master is expected to have two times leverage pari passu to Flintlock Commodity Opportunities Partners, LP in addition to the inherent leverage of futures contracts and other derivative instruments.
The Advisor will seek to generate attractive risk-adjusted returns, while preserving capital and minimizing the correlation of the account’s returns to the U.S. commodity and equity markets. The Advisor believes that this fundamental-focused strategy will be effective in most business and economic climates. In general, the market for thematic, pattern and event-driven parameters are used to form a fundamental view of global commodities. Rigorous research and disciplined analysis are used to test and formulate a fundamental view of a certain commodity. This fundamental view is then combined with technical indicators, market sentiment and flow analysis to gain a complete picture of a likely commodity price behavior.
Additionally, it is widely understood that there are serious imbedded imperfections in the structure of commodity indices. Because of their simplicity, however, many investors are attracted to the security of these indices. The managed account will seek to generate additional attractive risk-adjusted returns exploiting these imbedded imperfections.
Willowbridge Associates Inc.
The MStrategy Trading Approach is a discretionary trading approach using extensive technical analysis and quantitative methodologies as the foundation for trading decisions. MStrategy trades a diversified portfolio of exchange-traded futures contracts and options on futures including commodities, currencies, fixed income and equity indices. There is a special focus on short-term movements, especially with regard to equity indices trading. The approach combines traditional technical analysis, analogues and divergences with fundamental analysis and anecdotal information to form a unique discretionary trading style.
The wPraxis Futures Trading Approach’s primary investment objective is to achieve capital appreciation from trading. The Advisor will utilize a fully discretionary trading strategy to build a portfolio consisting of futures on currency, fixed income, stock indices and commodities pursuant to its wPraxis approach. The approach may trade commodities, futures, forwards, options, spot contracts in the commodities, currencies, and fixed income markets, and, in the future, it may trade swaps.
No assurance can be given that the Advisors’ strategies will be successful or that they will generate profits for the Partnership.
Specific Fund level performance information is included in Note 5 to the Partnership’s financial statements included in “Item 8 Financial Statements and Supplementary Data.”
15
For the period January 1, 2011 through December 31, 2011 the average allocation by commodity market sector for each of the Funds was as follows:
CMF Altis Partners Master Fund L.P.
| Currencies |
27.2 | % | ||
| Energy |
13.5 | % | ||
| Grains |
6.6 | % | ||
| Indices |
13.2 | % | ||
| Interest Rates Non-U.S. |
9.2 | % | ||
| Interest Rates U.S. |
4.6 | % | ||
| Livestock |
1.2 | % | ||
| Metals |
15.8 | % | ||
| Softs |
8.7 | % |
Waypoint Master Fund L.P
| Currencies |
65.7 | % | ||
| Energy |
1.3 | % | ||
| Grains |
1.5 | % | ||
| Indices |
11.5 | % | ||
| Interest Rates Non-U.S. |
11.5 | % | ||
| Interest Rates U.S. |
5.2 | % | ||
| Metals |
1.4 | % | ||
| Softs |
1.9 | % |
PGR Master Fund L.P
| Currencies |
10.7 | % | ||
| Energy |
11.9 | % | ||
| Grains |
4.2 | % | ||
| Indices |
26.7 | % | ||
| Interest Rates Non-U.S. |
22.0 | % | ||
| Interest Rates U.S. |
10.9 | % | ||
| Livestock |
0.4 | % | ||
| Metals |
8.6 | % | ||
| Softs |
4.6 | % |
16
Blackwater Master Fund L.P
| Currencies |
33.1 | % | ||
| Energy |
7.7 | % | ||
| Grains |
6.9 | % | ||
| Indices |
17.9 | % | ||
| Interest Rates Non-U.S. |
13.1 | % | ||
| Interest Rates U.S. |
8.2 | % | ||
| Livestock |
1.0 | % | ||
| Metals |
11.5 | % | ||
| Softs |
0.6 | % |
JEM Master Fund L.P.
| Energy |
62.8 | % | ||
| Grains |
9.2 | % | ||
| Livestock |
14.9 | % | ||
| Metals |
0.8 | % | ||
| Softs |
12.3 | % |
CMF Cirrus Master Fund L.P.
| Energy |
100.0 | % |
FL Master Fund L.P.
| Energy |
33.5 | % | ||
| Grains |
12.8 | % | ||
| Livestock |
8.8 | % | ||
| Metals |
28.5 | % | ||
| Softs |
16.4 | % |
17
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its assets are its (i) investments in Funds, (ii) equity in its trading account, consisting of cash and cash equivalents, net unrealized appreciation on open futures and forward contracts, net unrealized depreciation on open futures, and (iii) interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2011.
To minimize the risk relating to low margin deposits, the Partnership/Funds follow certain trading policies, including:
| (i) | The Partnership/Funds invest their assets only in commodity interests that the Advisors believe are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisors believe will permit them to enter and exit trades without noticeably moving the market. |
| (ii) | An Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Partnership’s net assets allocated to that Advisor. |
| (iii) | The Partnership/Funds may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged. |
| (iv) | The Partnership/Funds do not employ the trading technique commonly known as “pyramiding,” in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities. |
| (v) | The Partnership/Funds do not utilize borrowings other than short-term borrowings if the Partnership/Funds take delivery of any cash commodities. |
| (vi) | The Advisors may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Partnership/Funds. “Spreads” and “Straddles” describe commodity futures trading strategy involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets. |
| (vii) | The Partnership/Funds will not permit the churning of their commodity trading accounts. The term “churning” refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, indicating the desire to generate commission income. |
From January 1, 2011 through December 31, 2011, the Partnerships’ average margin to equity ratio (i.e., the percentage of assets on deposit required for margin) was approximately 15.8%. The foregoing margin to equity ratio takes into account cash held in the Partnership’s name, as well as the allocable value of the positions and cash held on behalf of the Partnership in the name of the Funds.
In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments include forwards, futures and options whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specified terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards and option contracts. Specific market movements of commodities or future contracts underlying an option cannot be accurately predicted. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 0.5% to 22.7% of the Partnership/Funds’ contracts are traded OTC.
The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. The limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership/Funds are exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
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Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk, as CGM or a CGM affiliate is the sole counterparty or broker with respect to the Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through CGM, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.
As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Funds do not consider these contracts to be guarantees.
The General Partner monitors and attempts to control the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions. (See also “Item 8. Financial Statements and Supplementary Data” for further information on financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity futures and other derivatives, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the General Partner may, in its discretion, cause the Partnership to cease trading operations and liquidate all open positions under certain circumstances including a decrease in net asset value per Redeemable Unit to less than $400 as of the close of business on any trading day.
(b) Capital Resources.
(i) The Partnership has made no material commitments for capital expenditures.
(ii) The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by expenses, interest income, subscriptions, redemptions of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be predicted. Market movements in commodities are dependent upon fundamental and technical factors which the Advisors may or may not be able to identify, such as changing supply and demand relationships, weather, government, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. Partnership expenses consist of, among other things, brokerage fees, administrative fees and advisory fees. The level of these expenses is dependent upon trading performance and the level of Net Assets maintained. In addition, the amount of interest income payable by CGM is dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value as of the end of each month, on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions. Redemptions generally are funded out of the Partnership’s cash holdings. For the year ended December 31, 2011, 19,056.630 Class A Redeemable Units were redeemed totaling $27,952,072. For the year ended December 31, 2010, 20,961.9097 Class A Redeemable Units were redeemed totaling $29,482,940. For the year ended December 31, 2009, 26,312.7107 Class A Redeemable Units were redeemed totaling $38,177,873.
The Partnership continues to offer Redeemable Units at the net asset value per unit as of the end of each month. For the year ended December 31, 2011, there were subscriptions of 36,244.7785 Class A Redeemable Units totaling $52,906,261 and General Partner’s contribution representing 136.3280 Class A unit equivalents totaling $200,000. For the year ended December 31, 2010, there were subscriptions of 26,464.2572 Class A Redeemable Units totaling $37,194,829. For the year ended December 31, 2009, there were subscriptions of 32,652.7934 Class A Redeemable Units totaling $47,627,000 and General Partner’s contribution representing 1,173.6036 Class A unit equivalents totaling $1,700,000.
(c) Results of Operations.
For the year ended December 31, 2011, the net asset value per Class A unit decreased 2.0% from $1,479.60 to $1,449.84. For the year ended December 31, 2010, the net asset value per Class A unit increased 5.2% from $1,406.38 to $1,479.60. For the year ended December 31, 2009, the net asset value per Class A unit decreased 6.6% from $1,506.43 to $1,406.38.
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The Partnership experienced a net trading gain of $12,092,611 before brokerage fees and expenses in 2011. Gains were primarily attributed to the Partnership’s/Funds’ trading in energy, U.S. and non-U.S. interest rates, livestock and metals and were partially offset by losses in currencies, grains, indices and softs. The net trading gain or loss for the Partnership/Funds are discussed on page 39 under “Item 8. Financial Statements and Supplementary Data.”
The most significant trading gains during the year ended December 31, 2011 were experienced within the global interest rate sector throughout the majority of the third quarter from long positions in European, U.S., and Canadian fixed income futures as prices advanced higher due to concern about the European sovereign debt crisis and a faltering global economy. Further gains were achieved within this sector during December from long positions in European and U.S. fixed income futures as prices rose on increased “safe-haven” demand while European leaders struggled to find funding for the euro-zone rescue plan. Within the metals complex, gains were recorded primarily during July and August from long positions in gold futures after prices reached a record high as escalating concern that the global economy is slowing boosted demand for the precious metal. Further gains were achieved within this sector during April from long positions in silver and gold futures as rising inflation spurred by commodity shortages, economic recovery, and turmoil in the Middle East bolstered demand for the precious metals as an alternative investment. Further gains were experienced within the energy sector from short positions in natural gas futures as prices declined in early February on forecasts of warmer-than-normal weather in U.S. consuming regions that reduced demand for the heating fuel. Further gains were recorded within this sector during November and December from short positions in natural gas futures as prices moved lower on speculation of abundant supplies and low demand amid mild weather across the U.S. A portion of the Partnership’s trading gains for the year was offset by trading losses experienced in the global stock index markets, primarily during March, May, June, and July. During March, long positions in European, U.S., and Pacific Rim equity index futures resulted in losses as prices moved sharply lower after the tsunami and subsequent nuclear plant disaster in Japan spurred concern about global economic growth. Additional losses were experienced within this sector during May from long positions in U.S., European, and Pacific Rim equity index futures as prices declined on worse-than-expected economic reports and mounting worries over the European debt crisis. During June and July, long positions in European and U.S. equity index futures resulted in losses as prices dropped amid concern about the European sovereign debt crisis and Standard & Poor’s downgrade of the United States’ sovereign credit rating. Within the currency sector, losses were recorded during May from long positions in the British pound versus the U.S. dollar as the value of the British pound moved lower against the U.S. dollar after Standard & Poor’s downgraded Greece’s credit rating, prompting concern that the European sovereign debt crisis may escalate. Additional losses in the currency sector were recorded during October from long positions in the Japanese yen versus the U.S. dollar as the value of the Japanese yen fell after the Bank of Japan intervened to weaken Japan’s currency for the third time during the year. Within the agricultural complex, losses were incurred primarily during May from long futures positions in corn and soybeans as prices declined as investors sold commodities on speculation higher prices and weaker economic growth will curb demand for raw materials, including those used to make food products. Elsewhere, corn futures continued to decline after the U.S. government said U.S. inventories will be larger than analysts expected, easing supply concern for food and fuel. Additional losses were experienced within this sector during June from long futures positions in cotton as prices declined as the U.S. dollar’s rally reduced the appeal of fiber exports from the U.S., the world’s biggest exporter of cotton.
The Partnership experienced a net trading gain of $21,911,201 before brokerage fees and expenses in 2010. Gains were primarily attributed to the Partnership’s/Funds’ trading in currencies, grains, U.S. and non-U.S. interest rates, metals and softs and were partially offset by losses in energy, livestock and indices.
In 2010, the most significant trading gains were experienced within the fixed income sector from long positions in European, U.S., and Japanese fixed-income futures. In this sector, prices increased during the first quarter on concerns that lending restrictions in China, possible reductions in U.S. stimulus measures, and Greece’s fiscal struggles might stifle the global economic rebound. Prices were then pressured higher during the second quarter amid an unexpected drop in U.S. consumer confidence, increased regulatory scrutiny of the financial industry, and the growing European debt crisis. During the third quarter, prices continued to climb higher due to concern that European governments may struggle to repay their debt and Chinese economic growth may be slowing. Within the currency markets, gains were achieved primarily during May, September and December. During May, short positions in the euro versus the U.S. dollar posted gains as the euro continued to weaken amid concerns over the Greek debt crisis. During September, long positions in the Australian dollar versus the U.S. dollar as the value of the Australian dollar rose against these currencies amid speculation that the Reserve Bank of Australia may raise interest rates in October. During December, short positions in the British pound versus the Australian dollar, Japanese yen, and Swiss franc resulted in gains as the value of the British pound declined against these currencies following lower-than-expected mortgage approval figures in the United Kingdom. Additional gains were experienced from long positions in the Australian dollar, Brazilian real and South African rand versus the U.S. dollar as the value of these currencies rose against the U.S. dollar after better-than-expected economic data spurred speculation that global growth is gathering momentum, boosting demand for higher-yielding and commodity-driven currencies. Within the agricultural complex, gains were experienced from long futures positions in the soybean complex and corn as prices increased after the U.S. Department of Agriculture said domestic and world supplies of these crops will be smaller than forecast and adverse weather threatened crops in South America. Further gains were recorded in October from long positions in sugar futures as prices rose amid worries that dry weather and port delays will curb shipments from Brazil, the world’s biggest producer of sugar.
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A portion of the Partnership’s gains for the year was offset by losses recorded in the energy markets from long futures positions in crude oil and its related products as prices declined amid speculation that China’s slowing economic activity and European sovereign debt problems would reduce energy demand.
Interest income is earned on 100% of the Partnership’s average daily equity maintained in cash (or the Partnership’s allocable portion of a Fund’s) account during each month at the 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. Interest income for the three and twelve months ended December 31, 2011 decreased by $52,622 and $124,772, respectively, as compared to the corresponding periods in 2010. The decrease interest income is due to lower U.S. Treasury bill during the three and twelve months ended December 31, 2011, rates as compared to the corresponding periods in 2010. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s and the Funds’ accounts and upon interest rates over which neither the Partnership/Funds nor CGM has control.
Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Brokerage fees and clearing fees for the three and twelve months ended December 31, 2011 increased by $167,563 and $1,299,621, respectively, as compared to the corresponding periods in 2010. The increase in brokerage fees is primarily due to higher average net assets during the three and twelve months ended December 31, 2011, as compared to the corresponding periods in 2010.
Management fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Management fees for the three and twelve months ended December 31, 2011 decreased by $68,615 and $56,924, respectively, as compared to the corresponding periods in 2010. The decreased in management fees is due to a change in fee percentage rates during the three and twelve months ended December 31, 2011, as compared to the corresponding periods in 2010.
Administrative fees are paid to the General Partner for administering the business and affairs of the Partnership. These fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Administrative fees for the three and twelve months ended December 31, 2011 increased by $26,060 and $150,752, respectively, as compared to the corresponding periods in 2010. The increase in administrative fees is primarily due to higher average adjusted net assets during the three and twelve months ended December 31, 2011, as compared to the corresponding periods in 2010.
Incentive fees are based on the new trading profits generated by each Advisor at the end of the quarter, as defined in the respective management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and twelve months ended December 31, 2011 resulted in incentive fees accrual of $163,246 and $2,436,418, respectively. Trading performance for the three and twelve months ended December 31, 2010, resulted in incentive fees accrual of $500,938 and $917,614, respectively.
The Partnership pays professional fees, which generally include legal and accounting expenses. Professional fees for the years ended December 31, 2011 and 2010 were $566,639 and $584,021, respectively.
The Partnership pays other expenses, which generally include filing, reporting and data processing fees. Other expenses for the years ended December 31, 2011 and 2010 were $72,124 and $74,598, respectively.
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The Partnership experienced a net trading gain of $808,740 before brokerage fees and expenses in 2009. Gains were primarily attributed to the Partnership’s/Funds’ trading in currencies, energy, grains, lumber and metals and were partially offset by losses in livestock, indices, U.S. and non-U.S. interest rates and softs.
2009 was a volatile year for the financial markets. The U.S. stock market entered 2009 reeling from the financial turmoil of 2008. The results of the sub-prime fallout, bank bailouts, auto industry bankruptcies, and capitulating economic data overwhelmed not just stock prices, but fueled extraordinarily high levels of risk aversion. The market’s recovery was driven by stability in the banking sector and a rapid recovery in global markets. By mid-year 2009, the market had hit bottom in March, banks were seeking to return TARP bailout money and other leading indicators were recovering. The Partnership realized losses due to volatile trends. The volatility was due to sensitivity to news shocks and contrary economic data.
Sharp reversals in the equity market resulted in losses for the Partnership. Losses were also realized in trading fixed income instruments. With the economic backdrop of 2009, yields started to exhibit asymmetric volatility due to extreme uncertainty prevailing in the longer time horizon. Encouraged by the continuing efforts of the Obama administration to stabilize the U.S. economy, the markets finally began to recover a degree of risk-taking confidence in March, resulting in the reversal of many of the trends that had driven returns in late 2008.
In the General Partner’s opinion, the Advisors continue to employ trading methods and produce results consistent with their expected performance given market conditions and the objectives of the Partnership. The General Partner continues to monitor the Advisors’ performance on a daily, weekly, monthly and annual basis to ensure that these objectives are met.
Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership/Funds depends on the existence of major price trends and the ability of the Advisors to identify those price trends correctly. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations.
In allocating the assets of the Partnership among the Advisors, the General Partner considers past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time. Each Advisor’s percentage allocation and trading program is described in the “Overview” section of this Item 7.
(d) Off-balance Sheet Arrangements. None
(e) Contractual Obligations. None
(f) Operational Risk.
The Partnership/Funds are directly exposed to market risk and credit risk, which arise in the normal course of their business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk — the risk of financial and opportunity loss and legal liability attributable to operational problems, such as inaccurate pricing of transactions, untimely trade execution, clearance and/or settlement, or the inability to process large volumes of transactions. The Partnership/Funds are subject to increased risks with respect to their trading activities in emerging market securities, where clearance, settlement, and custodial risks are often greater than in more established markets. Additionally, the General Partner’s computer systems may be vulnerable to unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events that could have a security impact on such systems. If one or more of such events occur, this potentially could jeopardize a limited partner’s personal, confidential, proprietary or other information processed and stored in, and transmitted through, the General Partner’s computer systems, and adversely affect the Partnership’s business, financial condition or results of operations.
Technological Risk — the risk of loss attributable to technological limitations or hardware failure that constrain the Partnership’s/Funds’ ability to gather, process, and communicate information efficiently and securely, without interruption, to customers, and in the markets where the Partnership/Funds participate.
Legal/Documentation Risk — the risk of loss attributable to deficiencies in the documentation of transactions (such as trade confirmations) and customer relationships (such as master netting agreements) or errors that result in non-compliance with applicable legal and regulatory requirements.
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Financial Control Risk — the risk of loss attributable to limitations in financial systems and controls. Strong financial systems and controls ensure that assets are safeguarded, that transactions are executed in accordance with management’s authorization, and that financial information utilized by management and communicated to external parties, including the Partnership’s unit holders, creditors, and regulators, is free of material errors.
(g) Critical Accounting Policies.
Partnership’s and the Funds’ Investments. All commodity interests held by the Partnership and the Funds (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses.
Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Partnership’s and the Funds’ Level 1 assets and liabilities are actively traded.
Accounting principles generally accepted in the United States of America (“GAAP”) also require the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Funds’ Level 2 assets and liabilities.
The Partnership and the Funds will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.
The Partnership and the Funds consider prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2). Investments in funds (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investment in Funds reflects its proportional interest in the Funds. As of and for the years ended December 31, 2011 and 2010, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). The gross presentation of the fair value of the Partnership’s derivatives by instrument type is shown in Note 4, “Trading Activities” on the financial statements.
Futures Contracts. The Partnership and the Funds trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and the Funds. When the contract is closed, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses.
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Forward Foreign Currency Contracts. Forward foreign currency contracts are contracts where the Partnership and the Funds agree to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Forward foreign currency contracts are valued daily, and Partnership’s and the Funds’ net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Income and Expenses.
The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses.
London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and Funds. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership and Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and changes in net unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses.
Options. The Partnership and the Funds may purchase and write (sell) both exchange-listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Partnership and the Funds write an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Partnership and the Funds purchase an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Introduction
The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by the Partnership and the Funds are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s/Funds’ main line of business.
The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their capital contributions to the Partnership and their share of Partnership assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
Market movements result in frequent changes in the fair market value of the Partnership’s/Funds’ open positions and, consequently, in their earnings and cash balances. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s/Funds’ open positions and the liquidity of the markets in which they trade.
The Partnership/Funds rapidly acquire and liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s/Funds’ past performance is not necessarily indicative of its future results.
“Value at Risk” is a measure of the maximum amount which the Partnership/Funds could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s/Funds’ speculative trading and the recurrence in the markets traded by the Partnership/Funds of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s/Funds’ experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership’s/Funds’ losses in any market sector will be limited to Value at Risk or by the Partnership’s/Funds’ attempts to manage their market risk.
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 the Partnership’s/Funds’ market sensitive instruments.
Quantifying the Partnership’s Trading Value at Risk
The following quantitative disclosures regarding the Partnership’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 and Section 21E of the Securities Exchange Act of 1934, as amended). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor except for statements of historical fact (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period).
The Partnership’s/Funds’ risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership’s/Funds’ mark-to-market accounting, any loss in the fair value of the Partnership’s/Funds’ open positions including investments in other partnerships, is directly reflected in the Partnership’s earnings (realized and unrealized) and cash balances. Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day intervals. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component which is not relevant to Value at Risk.
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In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership/Funds), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.
The fair value of the Partnership’s/Funds’ futures and forward contracts does not have any optionality component. However, the Advisors may trade commodity options. The Value at Risk associated with options is reflected in the following tables as the margin requirement attributable to the instrument underlying each option. Where this instrument is a futures contract, the futures margin has been used, and where this instrument is a physical commodity, the futures-equivalent maintenance margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership/Funds in almost all cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership’s/Funds’ Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been added to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership’s/Funds’ positions are rarely, if ever, 100% positively correlated have not been reflected.
The Partnership’s Trading Value at Risk in Different Market Sectors
Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. Some of the Partnership’s Advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name over which they have been granted limited authority to make trading decisions. The first two trading value at risk tables reflect the market sensitive instruments held by the Partnership directly and through its investments in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly and indirectly by each Fund separately.
The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of December 31, 2011 and 2010. As of December 31, 2011, the Partnership’s total capitalization was $204,952,071.
| Market Sector |
Value at Risk | % of Total Capitalization |
||||||
| Currencies |
$ | 2,045,101 | 1.00 | % | ||||
| Energy |
1,049,884 | 0.51 | % | |||||
| Grains |
554,666 | 0.27 | % | |||||
| Indices |
969,832 | 0.47 | % | |||||
| Interest Rates U.S. |
456,702 | 0.22 | % | |||||
| Interest Rates Non-U.S. |
2,195,954 | 1.07 | % | |||||
| Livestock |
17,245 | 0.01 | % | |||||
| Lumber |
1,710 | 0.00 | %* | |||||
| Metals |
804,434 | 0.40 | % | |||||
| Softs |
220,609 | 0.11 | % | |||||
|
|
|
|
|
|||||
| Total |
$ | 8,316,137 | 4.06 | % | ||||
|
|
|
|
|
|||||
| * | Due to rounding. |
As of December 31, 2010, the Partnership’s total capitalization was $183,525,601.
| Market Sector |
Value at Risk | % of Total Capitalization |
||||||
| Currencies |
$ | 3,742,488 | 2.05 | % | ||||
| Energy |
3,712,642 | 2.02 | % | |||||
| Grains |
610,757 | 0.33 | % | |||||
| Indices |
3,061,953 | 1.67 | % | |||||
| Interest Rates U.S. |
653,137 | 0.36 | % | |||||
| Interest Rates Non-U.S. |
1,216,750 | 0.66 | % | |||||
| Livestock |
268,789 | 0.15 | % | |||||
| Lumber |
1,435 | 0.00 | %* | |||||
| Metals |
1,427,354 | 0.78 | % | |||||
| Softs |
756,573 | 0.41 | % | |||||
|
|
|
|
|
|||||
| Total |
$ | 15,451,878 | 8.43 | % | ||||
|
|
|
|
|
|||||
| * | Due to rounding. |
26
The following tables indicate the trading Value at Risk associated with the Partnership’s investments and investments in other Partnerships by market category as of December 31, 2011 and December 31, 2010, the highest and lowest value at any point and the average value during the years. All open position trading risk exposures have been included in calculating the figures set forth below. As of December 31, 2011, the Partnership’s Value at Risk for the portion of its assets that are traded directly was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 15,524 | 0.01 | % | $ | 3,016,047 | $ | 15,524 | $ | 1,667,723 | ||||||||||
| Energy |
78,000 | 0.04 | % | 1,025,063 | 51,958 | 486,312 | ||||||||||||||
| Grains |
68,250 | 0.03 | % | 651,925 | 22,574 | 230,826 | ||||||||||||||
| Indices |
28,000 | 0.01 | % | 2,523,159 | 28,000 | 896,548 | ||||||||||||||
| Metals |
59,500 | 0.03 | % | 2,138,330 | 51,000 | 623,747 | ||||||||||||||
| Softs |
18,000 | 0.01 | % | 867,645 | 6,750 | 295,195 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 267,274 | 0.13 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2010, the Partnership’s Value at Risk for the portion of its assets that are traded directly was as follows:
December 31, 2010
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 1,070,681 | 0.58 | % | $ | 8,643,224 | $ | 1,620,748 | $ | 2,949,106 | ||||||||||
| Energy |
756,948 | 0.41 | % | 1,430,685 | 440,556 | 761,191 | ||||||||||||||
| Grains |
318,900 | 0.17 | % | 738,061 | 180,375 | 346,994 | ||||||||||||||
| Indices |
1,200,793 | 0.66 | % | 2,979,873 | 798,017 | 1,950,676 | ||||||||||||||
| Interest Rates U.S. |
499,400 | 0.27 | % | 1,930,750 | 288,485 | 942,116 | ||||||||||||||
| Interest Rates Non-U.S. |
571,973 | 0.31 | % | 3,055,102 | 281,406 | 1,478,558 | ||||||||||||||
| Livestock |
145,900 | 0.08 | % | 268,450 | 32,850 | 111,777 | ||||||||||||||
| Metals |
779,984 | 0.43 | % | 1,077,058 | 286,188 | 619,746 | ||||||||||||||
| Softs |
476,838 | 0.26 | % | 690,412 | 192,635 | 402,287 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 5,821,417 | 3.17 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2011, Altis Master’s total capitalization was $144,935,126. The Partnership owned approximately 3.0% of Altis Master. As of December 31, 2011, the Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 4,706,034 | 3.25 | % | $ | 4,735,198 | $ | 646,682 | $ | 2,692,436 | ||||||||||
| Energy |
1,077,077 | 0.74 | % | 2,954,905 | 374,821 | 1,387,930 | ||||||||||||||
| Grains |
1,147,409 | 0.79 | % | 1,342,558 | 294,622 | 660,686 | ||||||||||||||
| Indices |
1,694,372 | 1.17 | % | 4,865,066 | 470,802 | 1,611,202 | ||||||||||||||
| Interest Rates U.S. |
659,750 | 0.46 | % | 1,007,400 | 101,249 | 442,163 | ||||||||||||||
| Interest Rates Non-U.S. |
2,332,739 | 1.61 | % | 2,332,739 | 211,275 | 1,252,268 | ||||||||||||||
| Livestock |
242,550 | 0.17 | % | 244,350 | 21,625 | 109,725 | ||||||||||||||
| Lumber |
57,000 | 0.04 | % | 70,500 | 800 | 22,233 | ||||||||||||||
| Metals |
2,499,389 | 1.72 | % | 3,663,593 | 644,520 | 1,887,972 | ||||||||||||||
| Softs |
1,438,518 | 0.99 | % | 1,748,653 | 374,414 | 801,205 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 15,854,838 | 10.94 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2010, Altis Master’s total capitalization was $63,685,511. The Partnership owned approximately 27.6% of Altis Master. As of December 31, 2010, the Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follows:
December 31, 2010
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk * |
|||||||||||||||
| Currencies |
$ | 3,113,522 | 4.89 | % | $ | 3,481,070 | $ | 143,363 | $ | 2,231,735 | ||||||||||
| Energy |
1,077,195 | 1.69 | % | 2,479,469 | 236,868 | 1,086,124 | ||||||||||||||
| Grains |
483,876 | 0.76 | % | 915,463 | 136,257 | 435,755 | ||||||||||||||
| Indices |
1,251,469 | 1.97 | % | 7,740,340 | 220,942 | 2,503,689 | ||||||||||||||
| Interest Rates U.S. |
191,408 | 0.30 | % | 1,193,750 | 110,116 | 570,835 | ||||||||||||||
| Interest Rates Non-U.S. |
733,663 | 1.15 | % | 1,849,973 | 183,212 | 1,000,258 | ||||||||||||||
| Livestock |
107,232 | 0.17 | % | 170,400 | 22,320 | 82,718 | ||||||||||||||
| Lumber |
5,200 | 0.01 | % | 27,500 | 1,100 | 9,287 | ||||||||||||||
| Metals |
1,079,175 | 1.69 | % | 2,589,641 | 241,177 | 1,152,447 | ||||||||||||||
| Softs |
747,574 | 1.17 | % | 937,879 | 199,670 | 499,464 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 8,790,314 | 13.80 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
27
As of December 31, 2011, Waypoint Master’s total capitalization was $39,192,330. The Partnership owned approximately 55.8% of Waypoint Master. As of December 31, 2011, the Waypoint Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Waypoint for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High
Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 1,465,318 | 3.74 | % | $ | 10,317,436 | $ | 325,222 | $ | 5,419,330 | ||||||||||
| Energy |
47,250 | 0.12 | % | 195,000 | 12,250 | 73,156 | ||||||||||||||
| Grains |
181,500 | 0.46 | % | 221,500 | 15,000 | 94,143 | ||||||||||||||
| Indices |
84,070 | 0.21 | % | 1,861,926 | 19,012 | 596,211 | ||||||||||||||
| Interest Rates U.S. |
339,700 | 0.87 | % | 591,250 | 26,000 | 244,963 | ||||||||||||||
| Interest Rates Non-U.S. |
1,096,807 | 2.80 | % | 1,537,795 | 55,028 | 713,282 | ||||||||||||||
| Metals |
137,000 | 0.35 | % | 245,750 | 17,000 | 151,548 | ||||||||||||||
| Softs |
108,000 | 0.28 | % | 353,250 | 14,700 | 75,763 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 3,459,645 | 8.83 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2010, Waypoint Master’s total capitalization was $41,247,646. The Partnership owned approximately 52.0% of Waypoint Master. As of December 31, 2010, the Waypoint Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Waypoint for trading) was as follows:
December 31, 2010
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk * |
|||||||||||||||
| Currencies |
$ | 1,878,430 | 4.55 | % | $ | 11,817,974 | $ | 633,809 | $ | 5,198,266 | ||||||||||
| Indices |
901,236 | 2.18 | % | 1,613,660 | 100,993 | 790,428 | ||||||||||||||
| Metals |
80,750 | 0.20 | % | 216,436 | 31,500 | 66,207 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 2,860,416 | 6.93 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | For the period March 1, 2010 (commencement of trading operations) to December 31, 2010 average of month-end Value at Risk |
As of December 31, 2011, PGR Master’s total capitalization was $45,036,946. The Partnership owned approximately 63.9% of PGR Master. As of December 31, 2011, the PGR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to PGR for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High
Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 694,855 | 1.54 | % | $ | 694,855 | $ | 100,205 | $ | 258,300 | ||||||||||
| Energy |
348,040 | 0.77 | % | 541,391 | 154,095 | 291,918 | ||||||||||||||
| Grains |
244,450 | 0.54 | % | 252,500 | 37,750 | 98,122 | ||||||||||||||
| Indices |
1,529,751 | 3.40 | % | 1,529,751 | 236,424 | 793,620 | ||||||||||||||
| Interest Rates U.S. |
375,000 | 0.83 | % | 398,000 | 94,750 | 259,088 | ||||||||||||||
| Interest Rates Non -U.S. |
1,821,829 | 4.05 | % | 1,821,829 | 107,676 | 771,169 | ||||||||||||||
| Livestock |
22,800 | 0.05 | % | 25,200 | 1,200 | 9,917 | ||||||||||||||
| Metals |
344,450 | 0.77 | % | 414,700 | 77,258 | 193,290 | ||||||||||||||
| Softs |
201,285 | 0.45 | % | 201,285 | 61,317 | 113,562 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 5,582,460 | 12.40 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
28
As of December 31, 2010, PGR Master’s total capitalization was $20,386,581. The Partnership owned approximately 74.9% of PGR Master. As of December 31, 2010, the PGR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to PGR for trading) was as follows:
December 31, 2010
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk * |
|||||||||||||||
| Currencies |
$ | 183,120 | 0.90 | % | $ | 183,120 | $ | 103,066 | $ | 154,058 | ||||||||||
| Energy |
252,600 | 1.24 | % | 252,600 | 107,024 | 195,337 | ||||||||||||||
| Grains |
111,250 | 0.54 | % | 111,250 | 43,750 | 83,625 | ||||||||||||||
| Indices |
617,024 | 3.03 | % | 621,232 | 385,104 | 524,198 | ||||||||||||||
| Interest Rates U.S. |
80,800 | 0.40 | % | 141,150 | 66,450 | 81,150 | ||||||||||||||
| Interest Rates Non-U.S. |
180,603 | 0.89 | % | 265,434 | 135,161 | 161,976 | ||||||||||||||
| Livestock |
10,000 | 0.05 | % | 11,000 | 6,000 | 9,500 | ||||||||||||||
| Metals |
162,000 | 0.79 | % | 162,000 | 69,500 | 125,875 | ||||||||||||||
| Softs |
98,003 | 0.48 | % | 109,657 | 57,757 | 89,793 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 1,695,400 | 8.32 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | For the period November 1, 2010 (commencement of trading operations) to December 31, 2010 average of month-end Value at Risk |
As of December 31, 2011, Blackwater Master’s total capitalization was $82,889,779. The Partnership owned approximately 39.5% of Blackwater Master. As of December 31, 2011, the Blackwater Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Blackwater for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Currencies |
$ | 2,411,930 | 2.91 | % | $ | 2,568,118 | $ | 336,921 | $ | 1,115,740 | ||||||||||
| Energy |
402,750 | 0.49 | % | 1,023,868 | 16,250 | 232,145 | ||||||||||||||
| Grains |
764,500 | 0.92 | % | 870,250 | 30,000 | 240,345 | ||||||||||||||
| Indices |
300,251 | 0.36 | % | 1,607,842 | 247,572 | 684,419 | ||||||||||||||
| Interest Rates Non -U.S. |
1,542,704 | 1.86 | % | 1,552,868 | 102,339 | 581,511 | ||||||||||||||
| Metals |
1,292,162 | 1.56 | % | 1,292,162 | 86,599 | 500,735 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 6,714,297 | 8.10 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2010, Blackwater Master’s total capitalization was $25,938,011. The Partnership owned approximately 77.3% of Blackwater Master. As of December 31, 2010, the Blackwater Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Blackwater for trading) was as follows:
December 31, 2010
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk * |
|||||||||||||||
| Currencies |
$ | 903,667 | 3.48 | % | $ | 903,667 | $ | 577,300 | $ | 765,383 | ||||||||||
| Energy |
357,370 | 1.38 | % | 508,250 | 184,174 | 350,610 | ||||||||||||||
| Grains |
97,000 | 0.37 | % | 97,000 | 30,000 | 48,500 | ||||||||||||||
| Indices |
756,741 | 2.92 | % | 1,256,105 | 756,741 | 941,241 | ||||||||||||||
| Interest Rates U.S. |
52,250 | 0.20 | % | 171,550 | 14,700 | 33,475 | ||||||||||||||
| Interest Rates Non-U.S. |
397,172 | 1.53 | % | 445,693 | 86,447 | 358,644 | ||||||||||||||
| Livestock |
111,000 | 0.43 | % | 111,000 | 40,000 | 97,000 | ||||||||||||||
| Metals |
240,867 | 0.93 | % | 346,947 | 240,866 | 283,148 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 2,916,067 | 11.24 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | For the period November 1, 2010 (commencement of trading operations) to December 31, 2010 average of month-end Value at Risk |
29
As of December 31, 2011, JEM Master’s total capitalization was $45,664,676. The Partnership owned approximately 69.9% of JEM Master. As of December 31, 2011, the JEM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to JE Moody for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk * |
|||||||||||||||
| Energy |
$ | 1,859,447 | 4.07 | % | $ | 5,686,643 | $ | 181,650 | $ | 1,801,740 | ||||||||||
| Grains |
520,100 | 1.14 | % | 740,600 | 8,250 | 252,410 | ||||||||||||||
| Livestock |
694,200 | 1.52 | % | 1,276,200 | 48,750 | 531,258 | ||||||||||||||
| Metals |
55,575 | 0.12 | % | 213,525 | 4,350 | 22,019 | ||||||||||||||
| Softs |
850,000 | 1.86 | % | 1,601,400 | 13,750 | 469,008 | ||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 3,979,322 | 8.71 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | Annual average of month-end Value at Risk |
As of December 31, 2011, FL Master’s total capitalization was $22,660,590. The Partnership owned approximately 85.7% of FL Master. As of December 31, 2011, the FL Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Flintlock for trading) was as follows:
December 31, 2011
| Market Sector |
Value at Risk | % of Total Capitalization |
High Value at Risk |
Low Value at Risk |
Average Value at Risk* |
|||||||||||||||
| Energy |
$ | 570,800 | 2.52 | % | $ | 1,601,607 | $ | 195,250 | $ | 681,872 | ||||||||||
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 570,800 | 2.52 | % | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| * | For the period May 1, 2011 (commencement of trading operations) to December 31, 2011 average of month-end Value at Risk |
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership/Funds is typically many times the applicable maintenance margin requirement (margin requirements generally range between 2% and 15% of contract face value) as well as many times the capitalization of the Partnership/Funds. The magnitude of the Partnership’s/Funds’ 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 — unusual, but historically recurring from time to time — could cause the Partnership/Funds to incur severe losses over a short period of time. The foregoing Value at Risk tables — as well as the past performance of the Partnership/Funds — give no indication of this “risk of ruin.”
Non-Trading Risk
The Partnership/Funds have non-trading market risk on their foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s/Funds’ market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership/Funds manage their primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s/Funds’ primary market risk exposures as well as the strategies used and to be used by the General Partner and the Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s/Funds’ risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the management strategies of the Partnership/Funds. There can be no assurance that the Partnership’s/Funds’ current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long- term. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
30
The following were the primary trading risk exposures of the Partnership as of December 31, 2011 by market sector.
Interest Rates. Interest rate movements directly affect the price of the futures and forward positions held by the Partnership/Funds and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership’s/Funds’ profitability. The Partnership’s/Funds’ primary interest rate exposure is to interest rate fluctuations in the United States and the other G-8 countries. However, the Partnership/Funds also take futures positions on the government debt of smaller nations.
Currencies. The Partnership’s/Funds’ currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Partnership’s/Funds’ currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the U.S. dollar-based Partnership/Funds in expressing Value at Risk in a functional currency other than U.S. dollars.
Stock Indices. The Partnership’s/Funds’ primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Partnership/Funds are limited to futures on broadly based indices. As of December 31, 2011 the Partnership’s/Funds’ primary exposures were in the Hong Kong Futures Exchange (HKFE) and Sydney Futures Exchange (SFE) stock indices. The General Partner anticipates little, if any, trading in non-G-8 stock indices. The Partnership/Funds are primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices. (Static markets would not cause major market changes but would make it difficult for the Partnership/Funds to avoid being “whipsawed” into numerous small losses.)
Metals. The Partnership’s/Funds’ primary metal market exposure is to fluctuations in the price of palladium, platinum and silver. Although the Advisors will from time to time trade base metals such as copper, the principal market exposures of the Partnership/Funds have consistently been in the palladium, platinum and silver.
Softs. The Partnership’s/Funds’ primary commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Coffee, cotton and sugar accounted for the bulk of the Partnership’s/Funds’ commodity exposure.
Energy. The Partnership’s/Funds’ primary energy market exposure is to natural gas and oil price movements, often resulting from political developments in the Middle East. Oil prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.
Grains. The Partnership’s/Funds’ commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership/Funds as of December 31, 2011.
Foreign Currency Balances. The Partnership’s/Funds’ primary foreign currency balances are in Japanese yen, Euro and British pounds. The Advisors regularly convert foreign currency balances to dollars in an attempt to control the Partnership’s/Funds’ non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and attempts to control the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds may be subject.
The General Partner monitors the Partnership’s/Funds’ performance and the concentration of open positions, and consults with the Advisors concerning the Partnership’s/Funds’ overall risk profile. If the General Partner felt it necessary to do so, the General Partner could require the Advisors to close out positions as well as enter positions traded on behalf of the Partnership/Funds. However, any such intervention would be a highly unusual event. The General Partner primarily relies on the Advisors’ own risk control policies while maintaining a general supervisory overview of the Partnership’s/Funds’ market risk exposures.
The Advisors apply their own risk management policies to their trading. The Advisors often follow diversification guidelines, margin limits and stop loss points to exit a position. The Advisors’ research of risk management often suggests ongoing modifications to their trading programs.
As part of the General Partner’s risk management, the General Partner periodically meets with the Advisors to discuss their risk management and to look for any material changes to the Advisors’ portfolio balance and trading techniques. Each Advisor is required to notify the General Partner of any material changes to their programs.
31
Item 8. Financial Statements and Supplementary Data.
EMERGING CTA PORTFOLIO L.P.
The following financial statements and related items of the Partnership are filed under this Item 8: Oath or Affirmation, Management’s Report on Internal Control over Financial Reporting, Report of Independent Registered Public Accounting Firm, for the years ended December 31, 2011, 2010, and 2009; Statements of Financial Condition at December 31, 2011 and 2010; Condensed Schedules of Investments at December 31, 2011 and 2010; Statements of Income and Expenses for the years ended December 31, 2011, 2010, and 2009; Statements of Changes in Partners’ Capital for the years ended December 31, 2011, 2010, and 2009; and Notes to Financial Statements. Additional financial information has been filed as Exhibits to this Form 10-K.
32
To the Limited Partners of
Emerging CTA Portfolio L.P.
To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.
|
| ||
| By: |
Walter Davis | |
| President and Director | ||
| Ceres Managed Futures LLC | ||
| General Partner, | ||
| Emerging CTA Portfolio L.P. | ||
| Ceres Managed Futures LLC | ||
| 522 Fifth Avenue | ||
| 14th Floor | ||
| New York, NY 10036 | ||
| 212-296-1999 | ||
33
Management’s Report on Internal Control Over Financial Reporting
The management of Emerging CTA Portfolio L.P. (the “Partnership”), Ceres Managed Futures LLC is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Partnership’s internal control over financial reporting includes those policies and procedures that:
| (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
| (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and |
| (iii) | provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The management of Emerging CTA Portfolio L.P. has assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management concluded that the Partnership maintained effective internal control over financial reporting as of December 31, 2011 based on the criteria referred to above.
|
|
| |||
| Walter Davis | Brian Centner | |||
| President and Director | Chief Financial Officer | |||
| Ceres Managed Futures LLC | Ceres Managed Futures LLC | |||
| General Partner, | General Partner, | |||
| Emerging CTA Portfolio L.P. | Emerging CTA Portfolio L.P. |
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Emerging CTA Portfolio L.P.:
We have audited the accompanying statements of financial condition of Emerging CTA Portfolio L.P. (the “Partnership”), including the condensed schedules of investments, as of December 31, 2011 and 2010, and the related statements of income and expenses, and changes in partners’ capital for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Emerging CTA Portfolio L.P. as of December 31, 2011 and 2010, and the results of its operations and its changes in partners’ capital for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 23, 2012
35
For the fiscal year ended December 31, 2011
Emerging CTA Portfolio L.P.
Statements of Financial Condition
December 31, 2011 and 2010
| 2011 | 2010 | |||||||
| Assets: |
||||||||
| Investment in Funds, at fair value (Note 5) |
$ | 159,310,000 | $ | 93,009,857 | ||||
| Equity in trading account: |
||||||||
| Cash (Note 3c) |
48,192,792 | 85,698,856 | ||||||
| Cash margin (Note 3c) |
364,015 | 5,943,791 | ||||||
| Net unrealized appreciation on open futures contracts |
— | 1,516,219 | ||||||
| Net unrealized appreciation on open forward contracts |
26,212 | 19,265 | ||||||
| Options purchased, at fair value (cost $0 and $854,880 at December 31, 2011 and 2010, respectively) |
— | 901,226 | ||||||
|
|
|
|
|
|||||
| Total trading equity |
207,893,019 | 187,089,214 | ||||||
| Interest receivable (Note 3c) |
— | 7,439 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 207,893,019 | $ | 187,096,653 | ||||
|
|
|
|
|
|||||
| Liabilities and Partners’ Capital: |
||||||||
| Liabilities: |
||||||||
| Net unrealized depreciation on open futures contracts |
$ | 1,817 | $ | — | ||||
| Accrued expenses: |
||||||||
| Brokerage fees (Note 3c) |
606,200 | 545,698 | ||||||
| Management fees (Note 3b) |
259,281 | 279,142 | ||||||
| Administrative fees (Note 3a) |
86,298 | 77,685 | ||||||
| Incentive fees (Note 3b) |
163,245 | 500,939 | ||||||
| Professional fees |
87,214 | 71,978 | ||||||
| Other |
31,890 | 35,945 | ||||||
| Redemptions payable (Note 6) |
1,705,003 | 2,059,665 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
2,940,948 | 3,571,052 | ||||||
|
|
|
|
|
|||||
| Partners’ Capital: (Notes 1 and 6) |
||||||||
| General Partner, Class A, 1,438.9316 and 1,302.6036 unit equivalents outstanding at December 31, 2011 and 2010, respectively |
2,086,221 | 1,927,332 | ||||||
| Limited Partners, Class A, 139,922.8594 and 122,734.7189 Redeemable Units outstanding at December 31, 2011 and 2010, respectively |
202,865,850 | 181,598,269 | ||||||
|
|
|
|
|
|||||
| Total partners’ capital |
204,952,071 | 183,525,601 | ||||||
|
|
|
|
|
|||||
| Total liabilities and partners’ capital |
$ | 207,893,019 | $ | 187,096,653 | ||||
|
|
|
|
|
|||||
| Net asset value per units, Class A |
$ | 1,449.84 | $ | 1,479.60 | ||||
|
|
|
|
|
|||||
See accompanying notes to financial statements.
36
Emerging CTA Portfolio L.P.
Condensed Schedule of Investments
December 31, 2011
| Notional ($)/ Number of Contracts |
Fair Value | % of Partners’ Capital |
||||||||||
| Futures Contracts Purchased |
||||||||||||
| Energy |
13 | $ | (6,729 | ) | (0.00 | )%* | ||||||
| Grains |
35 | 13,919 | 0.00 | * | ||||||||
| Indices |
7 | (28 | ) | (0.00 | )* | |||||||
| Metals |
7 | (8,800 | ) | (0.00 | )* | |||||||
| Softs |
8 | (179 | ) | (0.00 | )* | |||||||
|
|
|
|
|
|||||||||
| Total futures contracts purchased |
(1,817 | ) | 0.00 | * | ||||||||
|
|
|
|
|
|||||||||
| Unrealized Appreciation on Forward Contracts |
||||||||||||
| Currencies |
$ | 18,983 | 42 | 0.00 | * | |||||||
| Metals |
43 | 149,404 | 0.07 | |||||||||
|
|
|
|
|
|||||||||
| Total unrealized appreciation on forward contracts |
149,446 | 0.07 | ||||||||||
|
|
|
|
|
|||||||||
| Unrealized Depreciation on Forward Contracts |
||||||||||||
| Currencies |
$ | 258,087 | (761 | ) | (0.00 | )* | ||||||
| Metals |
53 | (122,473 | ) | (0.06 | ) | |||||||
|
|
|
|
|
|||||||||
| Total unrealized depreciation on forward contracts |
(123,234 | ) | (0.06 | ) | ||||||||
|
|
|
|
|
|||||||||
| Investment in Funds |
||||||||||||
| CMF Altis Partners Master Fund L.P. |
4,403,517 | 2.15 | ||||||||||
| Waypoint Master Fund L.P. |
21,857,243 | 10.67 | ||||||||||
| Blackwater Master Fund L.P. |
32,714,125 | 15.96 | ||||||||||
| PGR Master Fund L.P. |
28,765,002 | 14.03 | ||||||||||
| JEM Master Fund L.P. |
31,902,038 | 15.57 | ||||||||||
| CMF Cirrus Master Fund L.P. |
20,248,797 | 9.88 | ||||||||||
| FL Master Fund L.P. |
19,419,278 | 9.47 | ||||||||||
|
|
|
|
|
|||||||||
| Total investment in Funds |
159,310,000 | 77.73 | ||||||||||
|
|
|
|
|
|||||||||
| Net fair value |
$ | 159,334,395 | 77.74 | % | ||||||||
|
|
|
|
|
|||||||||
* Due to rounding.
See accompanying notes to financial statements.
37
Emerging CTA Portfolio L.P.
Condensed Schedule of Investments
December 31, 2010
| Notional ($)/ Number of Contracts |
Fair Value | % of Partners’ Capital |
||||||||||
| Futures Contracts Purchased |
||||||||||||
| Currencies |
200 | $ | 313,957 | 0.17 | % | |||||||
| Energy |
62 | 233,896 | 0.13 | |||||||||
| Grains |
250 | 538,738 | 0.29 | |||||||||
| Indices |
163 | 16,869 | 0.01 | |||||||||
| Interest Rates U.S. |
592 | 135,855 | 0.07 | |||||||||
| Interest Rates Non-U.S. |
640 | 125,143 | 0.07 | |||||||||
| Livestock |
214 | 259,202 | 0.14 | |||||||||
| Metals |
75 | 315,525 | 0.17 | |||||||||
| Softs |
66 | 18,323 | 0.01 | |||||||||
|
|
|
|
|
|||||||||
| Total futures contracts purchased |
1,957,508 | 1.06 | ||||||||||
|
|
|
|
|
|||||||||
| Futures Contracts Sold |
||||||||||||
| Currencies |
114 | (56,972 | ) | (0.03 | ) | |||||||
| Energy |
159 | (55,211 | ) | (0.03 | ) | |||||||
| Grains |
75 | (191,587 | ) | (0.10 | ) | |||||||
| Indices |
97 | 156,446 | 0.09 | |||||||||
| Interest Rates U.S. |
6 | 25 | 0.00 | * | ||||||||
| Interest Rates Non-U.S. |
22 | 7,402 | 0.00 | * | ||||||||
| Livestock |
170 | (207,591 | ) | (0.11 | ) | |||||||
| Softs |
115 | (93,801 | ) | (0.05 | ) | |||||||
|
|
|
|
|
|||||||||
| Total futures contracts sold |
(441,289 | ) | (0.23 | ) | ||||||||
|
|
|
|
|
|||||||||
| Unrealized Appreciation on Forward Contracts |
||||||||||||
| Currencies |
$ | 76,652,847 | 1,610,313 | 0.88 | ||||||||
| Metals |
92 | 805,081 | 0.44 | |||||||||
|
|
|
|
|
|||||||||
| Total unrealized appreciation on forward contracts |
2,415,394 | 1.32 | ||||||||||
|
|
|
|
|
|||||||||
| Unrealized Depreciation on Forward Contracts |
||||||||||||
| Currencies |
$ | 69,670,836 | (1,639,341 | ) | (0.89 | ) | ||||||
| Metals |
88 | (756,788 | ) | (0.41 | ) | |||||||
|
|
|
|
|
|||||||||
| Total unrealized depreciation on forward contracts |
(2,396,129 | ) | (1.30 | ) | ||||||||
|
|
|
|
|
|||||||||
| Options Purchased |
||||||||||||
| Calls |
||||||||||||
| Energy |
106 | 295,740 | 0.16 | |||||||||
| Metals |
109 | 574,070 | 0.31 | |||||||||
| Softs |
11 | 31,416 | 0.02 | |||||||||
|
|
|
|
|
|||||||||
| Total options purchased |
901,226 | 0.49 | ||||||||||
|
|
|
|
|
|||||||||
| Investment in Funds |
||||||||||||
| CMF Altis Partners Master Fund L.P. |
17,568,791 | 9.57 | ||||||||||
| CMF Sasco Master Fund L.P. |
18,664,413 | 10.17 | ||||||||||
| Waypoint Master Fund L.P. |
21,455,619 | 11.69 | ||||||||||
| Blackwater Master Fund LP |
20,047,327 | 10.92 | ||||||||||
| PGR Master Fund LP |
15,273,707 | 8.32 | ||||||||||
|
|
|
|
|
|||||||||
| Total investment in Funds |
93,009,857 | 50.67 | ||||||||||
|
|
|
|
|
|||||||||
| Net fair value |
$ | 95,446,567 | 52.01 | % | ||||||||
|
|
|
|
|
|||||||||
| * | Due to rounding. |
See accompanying notes to financial statements.
38
Emerging CTA Portfolio L.P.
Statements of Income and Expenses
for the years ended December 31, 2011, 2010 and 2009
| 2011 | 2010 | 2009 | ||||||||||
| Investment Income: |
||||||||||||
| Interest income (Note 3c) |
$ | 19,229 | $ | 100,062 | $ | 96,229 | ||||||
| Interest income from investment in Funds |
45,514 | 89,453 | 51,147 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total investment income |
64,743 | 189,515 | 147,376 | |||||||||
|
|
|
|
|
|
|
|||||||
| Expenses: |
||||||||||||
| Brokerage fees (Note 3c) |
8,438,594 | 7,138,973 | 6,945,800 | |||||||||
| Management fees (Note 3b) |
3,354,074 | 3,410,998 | 3,365,881 | |||||||||
| Administrative fees (Note 3a) |
1,017,224 | 866,472 | 841,470 | |||||||||
| Incentive fees (Notes 3a and 3b) |
2,436,418 | 917,614 | 1,307,243 | |||||||||
| Professional fees |
566,639 | 584,021 | 370,746 | |||||||||
| Other |
72,124 | 74,598 | 52,782 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total expenses |
15,885,073 | 12,992,676 | 12,883,922 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net investment income (loss) |
(15,820,330 | ) | (12,803,161 | ) | (12,736,546 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Trading Results: |
||||||||||||
| Net gains (losses) on trading of commodity interests and investment in Funds: |
||||||||||||
| Net realized gains (losses) on closed contracts |
7,733,451 | 4,932,111 | 3,589,030 | |||||||||
| Net realized gains (losses) investment in Funds |
9,771,811 | 6,862,477 | 3,304,237 | |||||||||
| Change in net unrealized gains (losses) on open contracts |
(1,557,435 | ) | 1,863,619 | (5,150,348 | ) | |||||||
| Change in net unrealized gains (losses) on investment in Funds |
(3,855,216 | ) | 8,252,994 | (934,179 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Total trading results |
12,092,611 | 21,911,201 | 808,740 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) |
$ | (3,727,719 | ) | $ | 9,108,040 | $ | (11,927,806 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Net income (loss) per unit (Note 7)* |
$ | (29.76 | ) | $ | 73.22 | $ | (102.13 | ) | ||||
|
|
|
|
|
|
|
|||||||
| Weighted average units outstanding |
137,885.2498 | 122,411.2378 | 115,611.6683 | |||||||||
|
|
|
|
|
|
|
|||||||
| * | Based on change in net asset value per unit. |
See accompanying notes to financial statements.
39
Emerging CTA Portfolio L.P.
Statements of Changes in Partners’ Capital
for the years ended December 31, 2011, 2010 and 2009
| Limited Partners |
General Partner |
Total | ||||||||||
| Partners’ Capital at December 31, 2008 |
$ | 167,051,460 | $ | 194,329 | $ | 167,245,789 | ||||||
| Net income (loss) |
(11,865,433 | ) | (62,373 | ) | (11,927,806 | ) | ||||||
| Subscriptions of 32,652.7934 Redeemable Units and 1,173.6036 General Partner Unit Equivalents |
47,627,000 | 1,700,000 | 49,327,000 | |||||||||
| Proceeds from Limited Partners redemption fees |
238,562 | — | 238,562 | |||||||||
| Redemptions of 26,312.7107 Redeemable Units |
(38,177,873 | ) | — | (38,177,873 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Partners’ Capital at December 31, 2009 |
164,873,716 | 1,831,956 | 166,705,672 | |||||||||
| Net income (loss) |
9,012,664 | 95,376 | 9,108,040 | |||||||||
| Subscriptions of 26,464.2572 Redeemable Units |
37,194,829 | — | 37,194,829 | |||||||||
| Redemptions of 20,961.9097 Redeemable Units |
(29,482,940 | ) | — | (29,482,940 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Partners’ Capital at December 31, 2010 |
181,598,269 | 1,927,332 | 183,525,601 | |||||||||
| Net income (loss) |
(3,686,608 | ) | (41,111 | ) | (3,727,719 | ) | ||||||
| Subscriptions of 36,244.7785 Redeemable Units and 136.3280 General Partner Unit Equivalents |
52,906,261 | 200,000 | 53,106,261 | |||||||||
| Redemptions of 19,056.6380 Redeemable Units |
(27,952,072 | ) | — | (27,952,072 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Partners’ Capital at December 31, 2011 |
$ | 202,865,850 | $ | 2,086,221 | $ | 204,952,071 | ||||||
|
|
|
|
|
|
|
|||||||
Net asset value per unit, Class A:
| 2009: |
$ | 1,406.38 | ||||
|
|
|
|||||
| 2010: |
$ | 1,479.60 | ||||
|
|
|
|||||
| 2011: |
$ | 1,449.84 | ||||
|
|
|
See accompanying notes to financial statements.
40
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 1. | Partnership Organization: |
Emerging CTA Portfolio L.P. (the “Partnership”) is a limited partnership that was organized on July 7, 2003 under the partnership laws of the State of New York. The objective of the Partnership is to achieve capital appreciation through the allocation of assets to early-stage commodity trading advisors which engage, directly and indirectly, in speculative trading of a diversified portfolio of commodity interests, including futures contracts, options and forward contracts. The Partnership may also enter into swap and other derivative transactions with the approval of the General Partner (defined below). The sectors traded include currencies, livestock, energy, grains, metals, indices, lumber, softs, and U.S. and non-U.S. interest rates. The Partnership directly and through its investment in the Funds (as defined in Note 5 “Investment in Funds”) may trade futures, forwards and option contracts of any kind. The commodity interests that are traded by the Partnership and the Funds are volatile and involve a high degree of market risk.
Between December 1, 2003 (commencement of the offering period) and August 5, 2004, 20,872 redeemable units of limited partnership interest (“Redeemable Units”) were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until August 6, 2004, at which time they were remitted to the Partnership for trading. The Partnership privately and continuously offers Redeemable Units to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.
Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Inc. (“Citigroup”) indirectly owns a minority equity interest in MSSB Holdings. Citigroup also indirectly owns Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup. As of December 31, 2011, all trading decisions for the Partnership are made by the Advisors (as defined in note 3(b)).
As of September 1, 2011, the Partnership began offering three classes of limited partnership interests: Class A units, Class D units and Class Z units; each will be referred to as “Class” and collectively referred to as the “Classes”. All Redeemable Units issued prior to September 1, 2011 were deemed “Class A units.” The rights, liabilities, risks, and fees associated with investment in the Class A units were not changed. Class A units and Class D units are available to taxable U.S. individuals and institutions, as well as U.S. tax exempt individuals and institutions. Class Z units will be offered to certain employees of Morgan Stanley Smith Barney and its affiliates (and their family members). The Class of units that a Limited Partner receives upon subscription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer units to investors at its discretion. As of December 31, 2011, there are no Redeemable Units outstanding in Class D or Class Z.
The General Partner and each limited partner of the Partnership (each a “Limited Partner”) share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no Limited Partner shall be liable for obligations of the Partnership in excess of such Limited Partners capital contribution and profits, if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following: December 31, 2023; the net asset value per Redeemable Unit decreases to less than $400 per Redeemable Unit as of a close of any business day; a decline in net assets after trading commences to less than $1,000,000; or under certain other circumstances as defined in the Limited Partnership Agreement of the Partnership (the “Limited Partnership Agreement”).
41
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 2. | Accounting Policies: |
| a. | Use of Estimates. The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates. |
| b. | Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows. |
| c. | Partnership’s and the Funds’ Investments. All commodity interests held by the Partnership and the Funds (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses. |
Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Partnership’s and the Funds’ Level 1 assets and liabilities are actively traded.
GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Fund’s Level 2 assets and liabilities.
The Partnership and the Funds will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.
The Partnership and the Funds consider prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2). Investments in funds (other commodity pools) where there are no other rights or obligations
42
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the years ended December 31, 2011 and 2010, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).
| December 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| Assets |
||||||||||||||||
| Investment in Funds |
$ | 159,310,000 | $ | — | $ | 159,310,000 | $ | — | ||||||||
| Futures |
16,541 | 16,541 | — | — | ||||||||||||
| Forwards |
149,446 | 149,404 | 42 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 159,475,987 | $ | 165,945 | $ | 159,310,042 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Futures |
$ | 18,358 | $ | 18,358 | $ | — | $ | — | ||||||||
| Forwards |
123,234 | 122,473 | 761 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
141,592 | 140,831 | 761 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net fair value |
$ | 159,334,395 | $ | 25,114 | $ | 159,309,281 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2010* |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| Assets |
||||||||||||||||
| Investment in Funds |
$ | 93,009,857 | $ | — | $ | 93,009,857 | $ | — | ||||||||
| Futures |
2,422,050 | 2,422,050 | — | — | ||||||||||||
| Forwards |
2,415,394 | 805,081 | 1,610,313 | — | ||||||||||||
| Options purchased |
901,226 | 901,226 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | 98,748,527 | $ | 4,128,357 | $ | 94,620,170 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Futures |
$ | 905,831 | $ | 905,831 | $ | — | $ | — | ||||||||
| Forwards |
2,396,129 | 756,788 | 1,639,341 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total liabilities |
3,301,960 | 1,662,619 | 1,639,341 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net fair value |
$ | 95,446,567 | $ | 2,465,738 | $ | 92,980,829 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | The amounts have been reclassified from the December 31, 2010 prior year financial statements to conform to current year presentation. |
| d. | Futures Contracts. The Partnership and the Funds trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery can not occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value |
43
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and Funds. When the contract is closed, the Partnership and Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses. |
| e. | Forward Foreign Currency Contracts. Forward foreign currency contracts are contracts where the Partnership and the Funds agree to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Forward foreign currency contracts are valued daily, and the Partnership’s and Funds’ net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses. |
The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses.
| f. | London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and the Funds. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and changes in net unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses. |
| g. | Options. The Partnership and the Funds may purchase and write (sell) both exchange-listed and over-the-counter (“OTC”) options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Partnership and the Funds write an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Partnership and the Funds purchase an option, the premium paid is recorded as an asset in the Statements of |
44
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses. |
| h. | Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnership’s income and expenses. |
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has concluded that no provision for income tax is required in the Partnership’s financial statements.
The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.
| i. | Subsequent Events. The General Partner of the Partnership evaluates events that occur after the balance sheet date but before financial statements are filed. The General Partner has assessed the subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements. |
| j. | Recent Accounting Pronouncements. In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards” (“IFRS”). The amendments within this ASU change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between GAAP and IFRS. However, some of the amendments clarify FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for annual and interim periods beginning after December 15, 2011 for public entities. This new guidance is not expected to have a material impact on the Partnership’s financial statements. |
In October 2011, FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. Under longstanding GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. In addition to the changes to the criteria for determining whether an entity is an investment company, FASB also proposes that an investment company consolidate another investment company if it holds a controlling financial interest in the entity. The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.
In December 2011, FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative
45
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparisons between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented. The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements.
| k. | Net Income (Loss) per unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 7, “Financial Highlights”. |
| 3. | Agreements: |
| a. | Limited Partnership Agreement: |
The General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly administration fee equal to 1/24 of 1% (0.5% per year) of month-end Net Assets. Month-end Net Assets, for the purpose of calculating administrative fees, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fees, incentive fee accruals, the General Partner’s administrative fee and any redemptions or distributions as of the end of such month. The Partnership will also pay the General Partner an incentive fee payable annually equal to 5% of the Partnership’s overall New Trading Profits, as defined in the Limited Partnership Agreement, earned in each calendar year. For the years ended December 31, 2011, 2010 and 2009, there were no incentive fees earned by the General Partner.
| b. | Management Agreement: |
The General Partner, on behalf of the Partnership, has entered into management agreements (the “Management Agreements”) with Altis Partners Jersey Limited (“Altis”), Blackwater Capital Management, LLC (“Blackwater”), Cirrus Capital Management LLC (”Cirrus”), J E Moody & Company LLC (“JE Moody”), PGR Capital LLP (“PGR”), Waypoint Capital Management LLC (“Waypoint”), Flintlock Capital Asset Management LLC (“FL”) and Willowbridge Associates Inc. (“Willowbridge”), (each an “Advisor and collectively, the “Advisors”), each of which is a registered commodity advisor, and have been selected by the General Partner as major trading Advisors. Willowbridge directly trades a management account in the Partnership’s name. The Advisors are not affiliated with one another, are not affiliated with the General Partner or CGM and are not responsible for the organization or operation of the Partnership. The Partnership pays the Advisors a monthly management fee ranging from 1% to 2% per year of month-end Net Assets allocated to each Advisor. Month-end Net Assets, for the purpose of calculating management fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fees, incentive fee accruals, the General Partner’s administrative fee and any redemptions or distributions as of the end of such month. Each Management Agreement may be terminated by either party.
In addition, the Partnership is obligated to pay each Advisor an incentive fee, payable quarterly, ranging from 17% to 20% of the New Trading Profits, as defined in the Management Agreements, earned by the Advisors for the Partnership during each calendar quarter.
46
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
In allocating the assets of the Partnership among the Advisors, the General Partner conducts proprietary research and considers the background of the Advisors’ principals, as well as the Advisors’ trading styles, strategies and markets traded, expected volatility, trading results (to the extent available) and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time.
| c. | Customer Agreement: |
The Partnership has entered into a customer agreement (the “Customer Agreement”) which provides that the Partnership will pay CGM a monthly brokerage fee equal to 7/24 of 1% (3.5% per year) of month-end Net Assets, as defined, in lieu of brokerage fees on a per trade basis. Month-end Net Assets, for the purpose of calculating brokerage fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s brokerage fee, incentive fee accruals, management fees, the General Partner’s administrative fee, other expenses and any redemptions or distributions as of the end of such month. CGM will pay a portion of its brokerage fees to other properly registered selling agents and to financial advisors who have sold Redeemable Units. Brokerage fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. This fee may be increased or decreased at any time at CGM’s discretion upon written notice to the Partnership. The Partnership will pay for National Futures Association fees, as well as exchange, clearing, user, give-up and floor brokerage fees (collectively the “clearing fees”) directly and through its investment in the Funds. All of the Partnership’s assets, not held in the Funds’ accounts at CGM, are deposited in the Partnership’s account at CGM. The Partnership’s assets are deposited by CGM in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. At December 31, 2011 and 2010, the amounts of cash held for margin requirements was $364,015 and $5,943,791, respectively. CGM will pay the Partnership interest on 100% of the average daily equity maintained in cash in its (or the Partnership’s allocable portion of a Fund’s) account during each month at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is determined. The Customer Agreement may be terminated upon notice by either party.
| 4. | Trading Activities: |
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity interests. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses.
The Customer Agreements between the Partnership and CGM and the Funds and CGM give the Partnership and the Funds, the legal right to net unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures and open forward contracts on the Statements of Financial Condition as the criteria under ASC 210-20, Balance Sheet, have been met.
All of the commodity interests owned by the Partnership are held for trading purposes. The monthly average number of futures contracts traded during the years ended December 31, 2011 and 2010, were 3,152 and 5,922, respectively. The monthly average number of metals forward contracts traded during the years ended December 31, 2011 and 2010, were 544 and 414, respectively. The monthly average number of option contracts traded during the years ended December 31, 2011 and 2010, were 169 and
47
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
21, respectively. The monthly average notional values of currency forward contracts held directly by the Partnership during the years ended December 31, 2011 and 2010, were $302,259,678 and $319,994,839, respectively.
Brokerage fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions.
The following tables indicate the gross fair values of derivative instruments of futures, forwards and option contracts as separate assets and liabilities as of December 31, 2011 and 2010.
| 2011 | ||||
| Assets |
||||
| Futures Contracts |
||||
| Energy |
$ | 1,680 | ||
| Grains |
14,643 | |||
| Indices |
128 | |||
| Softs |
90 | |||
|
|
|
|||
| Total unrealized appreciation on open futures contracts |
$ | 16,541 | ||
|
|
|
|||
| Liabilities |
||||
| Futures Contracts |
||||
| Energy |
$ | (8,409 | ) | |
| Grains |
(725 | ) | ||
| Indices |
(155 | ) | ||
| Metals |
(8,800 | ) | ||
| Softs |
(269 | ) | ||
|
|
|
|||
| Total unrealized depreciation on open futures contracts |
$ | (18,358 | ) | |
|
|
|
|||
| Net unrealized depreciation on open futures contracts |
$ | (1,817 | )* | |
|
|
|
|||
| * | This amount is in “Net unrealized depreciation on open futures contracts” on the Statements of Financial Condition. |
| 2011 | ||||
| Assets |
||||
| Forward Contracts |
||||
| Currencies |
$ | 42 | ||
| Metals |
149,404 | |||
|
|
|
|||
| Total unrealized appreciation on open forward contracts |
$ | 149,446 | ||
|
|
|
|||
| Liabilities |
||||
| Forward Contracts |
||||
| Currencies |
$ | (761 | ) | |
| Metals |
(122,473 | ) | ||
|
|
|
|||
| Total unrealized depreciation on open forward contracts |
$ | (123,234 | ) | |
|
|
|
|||
| Net unrealized appreciation on open forward contracts |
$ | 26,212 | ** | |
|
|
|
|||
| ** | This amount is in “Net unrealized appreciation on open forward contracts” on the Statements of Financial Condition. |
48
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 2010 | ||||
| Assets |
||||
| Futures Contracts |
||||
| Currencies |
$ | 423,873 | ||
| Energy |
282,296 | |||
| Grains |
552,787 | |||
| Interest Rates Non-U.S. |
151,118 | |||
| Interest Rates U.S. |
169,390 | |||
| Indices |
223,941 | |||
| Livestock |
259,202 | |||
| Metals |
315,525 | |||
| Softs |
43,918 | |||
|
|
|
|||
| Total unrealized appreciation on open futures contracts |
$ | 2,422,050 | ||
|
|
|
|||
| Liabilities |
||||
| Futures Contracts |
||||
| Currencies |
$ | (166,888 | ) | |
| Energy |
(103,611 | ) | ||
| Grains |
(205,637 | ) | ||
| Interest Rates Non-U.S. |
(18,572 | ) | ||
| Interest Rates U.S. |
(33,510 | ) | ||
| Indices |
(50,626 | ) | ||
| Livestock |
(207,591 | ) | ||
| Softs |
(119,396 | ) | ||
|
|
|
|||
| Total unrealized depreciation on open futures contracts |
$ | (905,831 | ) | |
|
|
|
|||
| Net unrealized appreciation on open futures contracts |
$ | 1,516,219 | * | |
|
|
|
|||
| * | This amount is in “Net unrealized appreciation on open futures contracts” on the Statements of Financial Condition. |
| 2010 | ||||
| Assets |
||||
| Forward Contracts |
||||
| Currencies |
$ | 1,610,313 | ||
| Metals |
805,081 | |||
|
|
|
|||
| Total unrealized appreciation on open forward contracts |
$ | 2,415,394 | ||
|
|
|
|||
| Liabilities |
||||
| Forward Contracts |
||||
| Currencies |
$ | (1,639,341 | ) | |
| Metals |
(756,788 | ) | ||
|
|
|
|||
| Total unrealized depreciation on open forward contracts |
$ | (2,396,129 | ) | |
|
|
|
|||
| Net unrealized appreciation on open forward contracts |
$ | 19,265 | ** | |
|
|
|
|||
| ** | This amount is in “Net unrealized appreciation on open forward contracts” on the Statements of Financial Condition. |
49
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 2010 | ||||
| Assets |
||||
| Options Purchased |
||||
| Energy |
$ | 295,740 | ||
| Metals |
574,070 | |||
| Softs |
31,416 | |||
|
|
|
|||
| Total options purchased |
$ | 901,226 | *** | |
|
|
|
|||
| *** | This amount is in “Options purchased, at fair value” on the Statements of Financial Condition. |
The following tables indicate the trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the years ended December 31, 2011, 2010 and 2009.
| Sector |
2011 | 2010 | 2009 | |||||||||
| Currencies |
$ | (1,802,232 | ) | $ | 12,820 | $ | 2,459,707 | |||||
| Energy |
(443,514 | ) | (1,917,475 | ) | (1,657,789 | ) | ||||||
| Grains |
153,122 | 1,679,962 | 1,822,876 | |||||||||
| Indices |
(1,183,065 | ) | (2,016,474 | ) | (2,244,361 | ) | ||||||
| Interest Rates U.S. |
3,518,566 | 3,138,674 | 45,747 | |||||||||
| Interest Rates Non-U.S. |
2,198,642 | 2,745,405 | (1,918,698 | ) | ||||||||
| Livestock |
53,933 | (208,703 | ) | (161,189 | ) | |||||||
| Softs |
149,818 | 1,880,152 | (204,378 | ) | ||||||||
| Metals |
3,530,746 | 1,481,369 | 296,767 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 6,176,016 | **** | $ | 6,795,730 | **** | $ | (1,561,318 | )**** | |||
|
|
|
|
|
|
|
|||||||
| **** | This amount is in “Total trading results” on the Statements of Income and Expenses. |
| 5. | Investment in Funds: |
On November 1, 2005, the assets allocated to Altis Partners Jersey Limited (“Altis”) for trading were invested in CMF Altis Partners Master Fund L.P. (“Altis Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 4,898.1251 units of Altis Master with cash equal to $4,196,275 and a contribution of open commodity futures and forward contracts with a fair value of $701,851. Altis Master was formed to permit accounts managed now or in the future by Altis using the Global Futures Portfolio program, a proprietary, systematic trading program, to invest together in one vehicle. The General Partner is also the general partner of Altis Master. Individual and pooled accounts currently managed by Altis, including the Partnership are permitted to be limited partners of Altis Master. The General Partner and Altis believe that trading through this structure should promote efficiency and economy in the trading process.
On March 1, 2006, the assets allocated to Avant Capital Management L.P. (“Avant”) for trading were invested in the CMF Avant Master Fund L.P. (“Avant Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 8,177.1175 units of Avant Master with cash equal to $6,827,887 and a contribution of open commodity futures and forward contracts with a fair value of $1,349,230. Avant Master was formed in order to permit accounts managed now or in the future by Avant using the Diversified Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Avant Master on April 30, 2010 for cash equal to $12,280,606.
50
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
On May 1, 2009, the assets allocated to Sasco Energy Partners LLC (“Sasco”) for trading were invested in the CMF Sasco Master Fund L.P. (“Sasco Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 16,437.9008 units of Sasco Master with cash equal to $16,364,407 and a contribution of open commodity futures contracts with a fair value of $(1,325,727). Sasco Master was formed in order to permit accounts managed now or in the future by Sasco using the Energy Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Sasco Master on May 31, 2011 for cash equal to $14,575,007.
On March 1, 2010, the assets allocated to Waypoint Capital Management LLC for trading were invested in the Waypoint Master Fund L.P. (“Waypoint Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 26,581.6800 units of Waypoint Master with cash equal to $26,581,680. Waypoint Master was formed in order to permit accounts managed now or in the future by Waypoint using its Diversified Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Waypoint Master. Individual and pooled accounts currently managed by Waypoint, including the Partnership, are permitted to be limited partners of Waypoint Master. The General Partner and Waypoint believe that trading through this structure should promote efficiency and economy in the trading process.
On November 1, 2010, the assets allocated to PGR Capital LLP (“PGR”) for trading were invested in PGR Master Fund L.P. (“PGR Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 14,913.0290 units of PGR Master with cash equal to $14,913,029. PGR Master was formed to permit accounts managed now or in the future by PGR using the Mayfair Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for PGR Master. Individual and pooled accounts currently managed by PGR, including the Partnership, are permitted to be limited partners of PGR Master. The General Partner and PGR believe that trading through this structure should promote efficiency and economy in the trading process.
On November 1, 2010, the assets allocated to Blackwater Capital Management LLC (“Blackwater”) for trading were invested in Blackwater Master Fund L.P. (“Blackwater Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 15,674.6940 units of Blackwater Master with cash equal to $15,674,694. Blackwater Master was formed to permit accounts managed now or in the future by Blackwater using the Global Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for Blackwater Master. Individual and pooled accounts currently managed by Blackwater, including the Partnership, are permitted to be limited partners of Blackwater Master. The General Partner and Blackwater believe that trading through this structure should promote efficiency and economy in the trading process.
On January 1, 2011, the assets allocated to J E Moody & Company LLC (“J E Moody”) for trading were invested in JEM Master Fund L.P. (“JEM Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 19,624.4798 units of JEM Master with cash equal to $19,624,480. JEM Master was formed to permit accounts managed now or in the future by J E Moody using the Commodity Relative Value Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for JEM Master. Individual and pooled accounts currently managed by J E Moody, including the Partnership, are permitted to be limited partners of JEM Master. The General Partner and J E Moody believe that trading through this structure should promote efficiency and economy in the trading process.
51
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
On January 1, 2011, the assets allocated to Cirrus Capital Management LLC (“Cirrus”) for trading were invested in CMF Cirrus Master Fund L.P. (“Cirrus Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 22,270.9106 units of Cirrus Master with cash equal to $22,270,911. Cirrus Master was formed to permit accounts managed now or in the future by Cirrus using the Energy Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for Cirrus Master. Individual and pooled accounts currently managed by Cirrus, including the Partnership, are permitted to be limited partners of Cirrus Master. The General Partner and Cirrus believe that trading through this structure should promote efficiency and economy in the trading process.
On May 1, 2011, the assets allocated to Flintlock Capital Asset Management, LLC (“Flintlock”) for trading were invested in FL Master Fund L.P. (“FL Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in FL Master with cash equal to $23,564,973. FL Master was formed to permit accounts managed now or in the future by Flintlock using the 2x Flintlock Commodity Opportunities Partners, LP, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for FL Master. Individual and pooled accounts currently managed by Flintlock, including the Partnership, are permitted to be limited partners of FL Master. The General Partner and Flintlock believe that trading through this structure should promote efficiency and economy in the trading process.
The General Partner is not aware of any material changes to any of the trading programs discussed above during the year ended December 31, 2011.
Altis Master’s, Waypoint Master’s, PGR Master’s, Blackwater Master’s, JEM Master’s, Cirrus Master’s and FL Master’s (the “Funds”) trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. The Funds engage in such trading through commodity brokerage accounts maintained with CGM.
A limited partner may withdraw all or part of their capital contribution and undistributed profits, if any, from the Funds as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the General Partner at least 3 days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner elects to redeem and informs the Funds.
Management, administrative and incentive fees are charged at the Partnership level. All clearing fees are borne by the Partnership directly or and through its investment in the Funds. All other fees including CGM’s direct brokerage fees are charged at the Partnership level.
At December 31, 2011, the Partnership had approximately 3.0% of Altis Master, 55.8% of Waypoint Master, 39.5% of Blackwater Master, 63.9% of PGR Master, 69.9% of JEM Master, 87.5% of Cirrus Master and 85.7% of FL Master. At December 31, 2010, the Partnership had approximately 27.6% of Altis Master, 52.0% of Waypoint Master, 22.8% of Sasco Master, 74.9% of PGR Master and 77.3% of Blackwater Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.
52
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
Summarized information reflecting the total assets, liabilities and capital of the Funds is shown in the following tables:
| December 31, 2011 | ||||||||||||
| Total Assets | Total Liabilities | Total Capital | ||||||||||
| Altis Master |
$ | 145,096,295 | $ | 161,169 | $ | 144,935,126 | ||||||
| Waypoint Master |
39,260,567 | 68,237 | 39,192,330 | |||||||||
| Blackwater Master |
83,066,066 | 176,287 | 82,889,779 | |||||||||
| PGR Master |
45,105,430 | 68,484 | 45,036,946 | |||||||||
| JEM Master |
45,732,649 | 67,973 | 45,664,676 | |||||||||
| Cirrus Master |
23,186,209 | 55,047 | 23,131,162 | |||||||||
| FL Master |
28,928,129 | 6,267,539 | 22,660,590 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 410,375,345 | $ | 6,864,736 | $ | 403,510,609 | ||||||
|
|
|
|
|
|
|
|||||||
| December 31, 2010 | ||||||||||||
| Total Assets | Total Liabilities | Total Capital | ||||||||||
| Altis Master |
$ | 64,276,767 | $ | 591,256 | $ | 63,685,511 | ||||||
| Sasco Master |
81,882,294 | 198,664 | 81,683,630 | |||||||||
| Waypoint Master |
41,306,976 | 59,330 | 41,247,646 | |||||||||
| Blackwater Master |
25,966,821 | 28,810 | 25,938,011 | |||||||||
| PGR Master |
20,415,391 | 28,810 | 20,386,581 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 233,848,249 | $ | 906,870 | $ | 232,941,379 | ||||||
|
|
|
|
|
|
|
|||||||
Summarized information reflecting the net investment income (loss) from trading, total trading results and net income (loss) of the Funds is shown in the following tables.
| For the Period Ended December 31, 2011 | ||||||||||||
| Net Investment Income (Loss) |
Total Trading Results |
Net Income (Loss) |
||||||||||
| Altis Master |
$ | (288,293 | ) | $ | (27,709,216 | ) | $ | (27,997,509 | ) | |||
| Waypoint Master |
(198,220 | ) | (1,536,984 | ) | (1,735,204 | ) | ||||||
| Blackwater Master |
(102,547 | ) | 2,948,325 | 2,845,778 | ||||||||
| PGR Master |
(110,281 | ) | 2,276,086 | 2,165,805 | ||||||||
| JEM Master |
(710,961 | ) | 6,105,543 | 5,394,582 | ||||||||
| Cirrus Master |
(106,290 | ) | 2,396,102 | 2,289,812 | ||||||||
| FL Master |
(166,427 | ) | (840,792 | ) | (1,007,219 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (1,683,019 | ) | $ | (16,360,936 | ) | $ | (18,043,955 | ) | |||
|
|
|
|
|
|
|
|||||||
53
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| For the Period Ended December 31, 2010 | ||||||||||||
| Net Investment Income (Loss) |
Total Trading Results |
Net Income (Loss) |
||||||||||
| Altis Master |
$ | (217,601 | ) | $ | 8,818,344 | $ | 8,600,743 | |||||
| Sasco Master |
(869,785 | ) | 5,217,225 | 4,347,440 | ||||||||
| Waypoint Master |
(133,282 | ) | 7,879,774 | 7,746,492 | ||||||||
| Blackwater Master |
(36,799 | ) | 1,965,203 | 1,928,404 | ||||||||
| PGR Master |
(30,697 | ) | 592,832 | 562,135 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | (1,288,164 | ) | $ | 24,473,378 | $ | 23,185,214 | |||||
|
|
|
|
|
|
|
|||||||
Summarized information reflecting the Partnership’s investments in, and the operations of, the Funds is shown in the following tables:
| % of
Partnership’s Net Assets |
Income |
Expenses | Net Income (Loss) |
Investment Objective |
Redemption Permitted |
|||||||||||||||||||||||||
| Funds |
Fair Value | (Loss) | Brokerage Fees | Other | ||||||||||||||||||||||||||
| For the period ended December 31, 2011 |
| |||||||||||||||||||||||||||||
| Altis Master |
2.15 | % | $ | 4,403,517 | $ | (2,743,691 | ) | $ | 20,971 | $ | 7,861 | $ | (2,772,523 | ) | Commodity Portfolio |
Monthly | ||||||||||||||
| Sasco Master |
— | — | 443,762 | 104,912 | 18,860 | 319,990 | Energy Portfolio |
Monthly | ||||||||||||||||||||||
| Waypoint Master |
10.67 | % | 21,857,243 | (779,412 | ) | 75,008 | 33,666 | (888,086 | ) | Commodity Portfolio |
Monthly | |||||||||||||||||||
| Blackwater Master |
15.96 | % | 32,714,125 | 1,792,359 | 58,688 | 32,050 | 1,701,621 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
| PGR Master |
14.03 | % | 28,765,002 | 1,572,485 | 32,490 | 58,131 | 1,481,864 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
| JEM Master |
15.57 | % | 31,902,038 | 4,304,255 | 486,299 | 52,039 | 3,765,917 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
| Cirrus Master |
9.88 | % | 20,248,797 | 2,101,707 | 50,402 | 49,777 | 2,001,528 | Energy Markets |
Monthly | |||||||||||||||||||||
| FL Master |
9.47 | % | 19,419,278 | (729,356 | ) | 88,893 | 52,350 | (870,599 | ) | Commodity Portfolio |
Monthly | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total |
$ | 159,310,000 | $ | 5,962,109 | $ | 917,663 | $ | 304,734 | $ | 4,739,712 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Funds |
% of Partnership’s Net Assets |
Fair Value | Income (Loss) |
Expenses | Net Income (Loss) |
Investment Objective |
Redemptions Permitted |
|||||||||||||||||||||||
| Brokerage Fees | Other | |||||||||||||||||||||||||||||
| For the period ended December 31, 2010 |
| |||||||||||||||||||||||||||||
| Altis Master |
9.57 | % | $ | 17,568,791 | $ | 2,853,731 | $ | 58,825 | $ | 35,490 | $ | 2,759,416 | Commodity Portfolio |
Monthly | ||||||||||||||||
| Avant Master |
— | — | 1,066,892 | 20,335 | 28,036 | 1,018,521 | Commodity Portfolio |
Monthly | ||||||||||||||||||||||
| Sasco Master |
10.17 | % | 18,664,413 | 4,228,129 | 345,024 | 175,986 | 3,707,119 | Energy Portfolio |
Monthly | |||||||||||||||||||||
| Waypoint Master |
11.69 | % | 21,455,619 | 5,069,609 | 71,872 | 43,126 | 4,954,611 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
| Blackwater Master |
10.92 | % | 20,047,327 | 1,539,470 | 9,056 | 22,199 | 1,508,215 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
| PGR Master |
8.32 | % | 15,273,707 | 447,093 | 3,941 | 21,722 | 421,430 | Commodity Portfolio |
Monthly | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Total |
$ | 93,009,857 | $ | 15,204,924 | $ | 509,053 | $ | 326,559 | $ | 14,369,312 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
54
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 6. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors and they become limited partners on the first day of the month after their subscription is processed. Distributions of profits, if any, will be made at the sole discretion of the General Partner and at such times as the General Partner may decide. A limited partner may require the Partnership to redeem their Redeemable Units at their net asset value as of the end of each month on three business days’ notice to the General Partner. Redemption fees shall be for the benefit of the Partnership.
| 7. | Financial Highlights: |
Changes in the net asset value per unit for Class A for the years ended December 31, 2011, 2010 and 2009 were as follows:
| 2011 | 2010 | 2009 | ||||||||||
| Net realized and unrealized gains (losses)* |
$ | 23.77 | $ | 119.38 | $ | (51.90 | ) | |||||
| Interest income |
0.48 | 1.55 | 1.30 | |||||||||
| Expenses** |
(54.01 | ) | (47.71 | ) | (51.53 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Increase (decrease) for the year |
(29.76 | ) | 73.22 | (102.13 | ) | |||||||
| Proceeds from Limited Partner redemption fees |
— | — | 2.08 | |||||||||
| Net asset value per unit, beginning of year |
1,479.60 | 1,406.38 | 1,506.43 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net asset value per unit, end of year |
$ | 1,449.84 | $ | 1,479.60 | $ | 1,406.38 | ||||||
|
|
|
|
|
|
|
|||||||
| * | Includes brokerage fees and clearing fees. |
| ** | Excludes brokerage fees and clearing fees. |
| 2011 | 2010*** | 2009*** | ||||||||||
| Ratios to average net assets: |
||||||||||||
| Net investment income (loss) |
(7.9 | )% | (7.5 | )% | (7.7 | )% | ||||||
| Incentive fees |
1.2 | % | 0.5 | % | 0.8 | % | ||||||
|
|
|
|
|
|
|
|||||||
| Net investment income (loss) before incentive fees**** |
(6.7 | )% | (7.0 | )% | (6.9 | )% | ||||||
|
|
|
|
|
|
|
|||||||
| Operating expense |
6.8 | % | 7.1 | % | 7.0 | % | ||||||
| Incentive fees |
1.2 | % | 0.5 | % | 0.8 | % | ||||||
|
|
|
|
|
|
|
|||||||
| Total expenses |
8.0 | % | 7.6 | % | 7.8 | % | ||||||
|
|
|
|
|
|
|
|||||||
| Total return: |
||||||||||||
| Total return before incentive fees |
(0.8 | )% | 5.7 | % | (5.9 | )% | ||||||
| Incentive fees |
(1.2 | )% | (0.5 | )% | (0.7 | )% | ||||||
|
|
|
|
|
|
|
|||||||
| Total return after incentive fees |
(2.0 | )% | 5.2 | % | (6.6 | )% | ||||||
|
|
|
|
|
|
|
|||||||
| *** | The ratios are shown net and gross of incentive fees to conform to current year presentation. |
| **** | Interest income less total expenses. |
The above ratios may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.
55
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
| 8. | Financial Instrument Risks: |
In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or OTC. Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards, swaps, and option contracts. Specific market movements of commodities or future contracts underlying an option cannot be accurately predicted. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract.
The risk to the Limited Partners that have purchased Redeemable Units is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership/Funds are exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk, as CGM or a CGM affiliate is the sole counterparty or broker with respect to the Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through CGM, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.
As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Funds do not consider these contracts to be guarantees.
The General Partner monitors and attempts to control the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds may be subject. These monitoring systems generally allow the General Partner
56
Emerging CTA Portfolio L.P.
Notes to Financial Statements
December 31, 2011
to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Funds’ business, these instruments may not be held to maturity.
57
Selected unaudited quarterly financial data for the Partnership of the years ended December 31, 2011 and 2010 are summarized below:
| For the period from October 1, 2011 to December 31, 2011 |
For the period from July 1, 2011 to September 30, 2011 |
For the period from April 1, 2011 to June 30, 2011 |
For the period from January 1, 2011 to March 31, 2011 | |||||
| Net realized and unrealized trading gains (losses) net of brokerage fees and clearing fees including interest income |
$(10,485,198) | $16,636,638 | $1,522,798 | $(3,955,478) | ||||
| Net income (loss) |
$(11,447,299) | $12,937,710 | $ 88,081 | $(5,306,211) | ||||
| Increase (decrease) in net asset value per unit |
$ (83.62) | $ 93.24 | $ 0.99 | $ (40.37) |
| For the period from October 1, 2010 to December 31, 2010 |
For the period from July 1, 2010 to September 30, 2010 |
For the period from April 1, 2010 to June 30, 2010 |
For the period from January 1, 2010 to March 31, 2010 | |||||
| Net realized and unrealized trading gains (losses) net of brokerage fees and clearing fees including interest income |
$5,319,161 | $11,405,095 | $(3,454,489) | $1,691,976 | ||||
| Net income (loss) |
$3,601,393 | $ 9,816,731 | $(4,674,606) | $ 364,522 | ||||
| Increase (decrease) in net asset value per unit |
$ 28.89 | $ 79.59 | $ (38.29) | $ 3.03 |
58
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2011 and, based on that evaluation, the General Partner’s CEO and CFO have concluded that at that date the Partnership’s disclosure controls and procedures were effective.
The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; |
| • | provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP , and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements. |
The report included in “Item 8. Financial Statements and Supplementary Data.” includes management’s report on internal control over financial reporting (“Management’s Report”).
There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended December 31, 2011 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
Item 9B. Other Information. None.
59
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Partnership has no officers, directors or employees and its affairs are managed by its General Partner. Investment decisions are made by the Advisors.
The officers and directors of the General Partner are Walter Davis (President and Chairman of the Board of Directors), Brian Centner (Chief Financial Officer), Colbert Narcisse (Director), Douglas J. Ketterer (Director), Ian Bernstein (Director), Harry Handler (Director), Patrick T. Egan (Director) and Alper Daglioglu (Director). Each director of the General Partner holds office until the earlier of his or her death, resignation or removal. Vacancies on the board of directors may be filled by either (i) the majority vote of the remaining directors or (ii) Morgan Stanley Smith Barney Holdings LLC, as the sole member of the General Partner. The officers of the General Partner are designated by the General Partner’s board of directors. Each officer will hold office until his or her successor is designated and qualified or until his or her death, resignation or removal.
Walter Davis, age 47, has been President and Chairman of the Board of Directors of the General Partner since June 2010, where his responsibilities include oversight of the General Partner’s funds and accounts. Since June 2010, Mr. Davis has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA. Since June 2009, Mr. Davis has been employed by Morgan Stanley Smith Barney LLC (“Morgan Stanley Smith Barney”), a financial services firm, where his responsibilities include serving as Managing Director and the Director of the Managed Futures Department. Since June 2009, Mr. Davis has been registered as an associated person of Morgan Stanley Smith Barney. From May 2006 through June 2010, Mr. Davis served as President and Chairman of the Board of Directors of Demeter Management LLC (“Demeter”), a registered commodity pool operator, where his responsibilities included oversight of Demeter’s funds and accounts. From May 2006 through December 2010, Mr. Davis was listed as a principal of Demeter, and from July 2006 through December 2010, Mr. Davis was registered as an associated person of Demeter. From April 2007 through June 2009, Mr. Davis was employed by Morgan Stanley & Co. LLC (“MS & Co.”), a financial services firm, where his responsibilities included serving as the Managing Director and the Director of the Managed Futures Department. From April 2007 through June 2009, Mr. Davis was registered as an associated person of MS & Co. From August 2006 through April 2007, Mr. Davis was employed by Morgan Stanley DW Inc., a financial services firm, where his responsibilities included serving as Managing Director and the Director of the Managed Futures Department. From August 2006 through April 2007, Mr. Davis was registered as an associated person of Morgan Stanley DW Inc. From September 1999 through August 2006, Mr. Davis was employed by MS & Co., a financial services firm, where his responsibilities included oversight of the sales and marketing of MS & Co.’s managed futures funds to high net worth and institutional investors on a global basis. From January 1992 through September 1999, Mr. Davis was employed by Chase Manhattan Bank’s Alternative Investment Group, an alternative investment group, where his responsibilities included marketing managed futures funds to high net worth investors, as well as developing and structuring managed futures funds. Mr. Davis earned his Bachelor of Arts degree in Economics in May 1987 from the University of the South and his Master of Business Administration in Finance and International Business in May 1992 from Columbia University Graduate School of Business.
Brian Centner, age 34, has been the Chief Financial Officer and a principal of the General Partner since September 2011. Since July 2009, Mr. Centner has been employed by Morgan Stanley Smith Barney, a financial services firm, where his responsibilities include oversight of accounting and financial and regulatory reporting of the General Partner’s managed futures funds. From February 2003 through July 2009, Mr. Centner was employed by Citi Alternative Investments (“CAI”), a division of Citigroup, a financial services firm, which administered Citigroup’s hedge fund and fund of funds business, where he served as Senior Vice President responsible for the accounting and financial and regulatory reporting of CAI’s managed futures funds. From June 2002 through February 2003, Mr. Centner was employed by KPMG LLP, a U.S. audit, tax and advisory services firm, as a Senior Associate within the Investment Management division, where his responsibilities included performing audits and attestation services for financial services firms. From September 2000 through June 2002, Mr. Centner was employed by Arthur Andersen LLP, a U.S. audit, tax and advisory services firm, where he served in the Financial Services division and his responsibilities included performing audits and attestation services for financial services firms. Mr. Centner earned his Bachelor of Science degree in Accounting in May 2000 from Binghamton University and his Master of Business Administration degree in May 2011 from New York University’s Leonard N. Stern School of Business. Mr. Centner is a Certified Public Accountant.
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Colbert Narcisse, age 45, has been a Director and a principal of the General Partner since December 2011. Since February 2011, Mr. Narcisse has been a Managing Director at Morgan Stanley Smith Barney, a financial services firm, where his responsibilities have included serving as Head of the Alternative Investment Group, Head of the Corporate Equity Solutions Group, and Chief Operating Officer of the Investment Strategy and Client Solutions Division. From July 2009 until February 2011, Mr. Narcisse served as Chief Executive Officer of Gold Bullion International, a business services company that enables retail investors to acquire, manage and store physical precious metals through their financial advisor. From March 2009 until July 2009, Mr. Narcisse took personal leave. From August 1990 until March 2009, Mr. Narcisse was employed by Merrill Lynch & Co., Inc., a financial services firm, where his responsibilities included serving as Chief Operating Officer of Americas Investment Banking, Chief Operating Officer of the Global Wealth Management Division, and as an investment banker in both the Financial Institutions and Public Finance Groups. From July 1987 until August 1990, Mr. Narcisse was employed by the Federal Reserve Bank of New York, where his responsibilities included serving as a Bank Examiner. Additionally, Mr. Narcisse serves on the Board of Harlem RBI, as the Vice Chair of Finance for the Montclair Cooperative School Board of Trustees, as an Audit Committee Member of the New York City Housing Authority, and as a Member of the Executive Leadership Council. Mr. Narcisse received his Bachelor of Science degree in Finance in June 1987 from New York University. He received his Master of Business Administration degree in July 1992 from Harvard Business School.
Douglas J. Ketterer, age 46, has been a Director and a principal of the General Partner since December 2010. From October 2003 through December 2010, Mr. Ketterer was listed as a principal of Demeter, a commodity pool operator, until Demeter’s combination with the General Partner. From July 2010 through the present, Mr. Ketterer has been employed by Morgan Stanley Smith Barney, a financial services firm, as Managing Director and Head of the U.S. Private Wealth Management Group, where his responsibilities include overseeing the U.S. Private Wealth Management Group. From March 1990 through July 2010, Mr. Ketterer was employed by MS & Co., a financial services firm, where his responsibilities included serving as Chief Operating Officer of the Wealth Management Group and Head of the Products Group. During Mr. Ketterer’s employment at MS & Co. his responsibilities included oversight over a number of departments including the Alternative Investments Group, the Consulting Services Group, the Annuities & Insurance Department, and the Retirement & Equity Solutions Group, which offered products and services through MS & Co.’s Global Wealth Management Group. Mr. Ketterer received his Master of Business Administration degree from New York University’s Leonard N. Stern School of Business in January 1994 and his Bachelor of Science degree in Finance from the University at Albany’s School of Business in May 1987.
Ian Bernstein, age 49, has been a Director of the General Partner and listed as a principal of the General Partner since December 2010. From June 2009 through the present, Mr. Bernstein has been employed by Morgan Stanley Smith Barney, a financial services firm, as Managing Director of Capital Markets, with oversight of risk and infrastructure, joint venture negotiations and integration. From April 2007 through the present, Mr. Bernstein has been employed by MS & Co., a financial services firm, where his responsibilities include serving as Managing Director of the Capital Markets group, the head of the Global Wealth Management group, and serving as market risk manager. From October 1984 through April 2007, Mr. Bernstein was employed by Morgan Stanley DW Inc., a financial services firm, where his responsibilities included serving as a Repo trader, manager of the Repo trading desk, and Chief Operating Officer for fixed income. Mr. Bernstein also served as Managing Director of Morgan Stanley DW Inc. from March 2004 through April 2007. Mr. Bernstein earned his Bachelor of Arts in May 1980 from the University of Buckingham and his Master of Business Administration in May 1988 from New York University’s Leonard N. Stern School of Business.
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Harry Handler, age 52, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Handler has been registered as an associated person and listed as a principal of the General Partner, and is an associate member of the NFA. Mr. Handler was listed as a principal of Demeter from May 2005, and was registered as an associated person of Demeter from April 2006, until Demeter’s combination with the General Partner in December 2010. Mr. Handler was registered as an associated person of Morgan Stanley DW Inc., a financial services firm, from February 1984 until on or about April 2007, when, because of the merger of Morgan Stanley DW Inc. into MS & Co., he became registered as an associated person of MS & Co. due to the transfer of his original registration as an associated person of Morgan Stanley DW Inc. Mr. Handler withdrew as an associated person of MS & Co. in June 2009. Mr. Handler has been registered as an associated person of Morgan Stanley Smith Barney since June 2009. Mr. Handler serves as an Executive Director at Morgan Stanley Smith Barney in the Global Wealth Management Group. Mr. Handler works in the Capital Markets Division and is responsible for Electronic Equity and Securities Lending. Additionally, Mr. Handler serves as Chairman of the Global Wealth Management Group’s Best Execution Committee. In his prior position, Mr. Handler was a Systems Director in Information Technology, in charge of Equity and Fixed Income Trading Systems along with the Special Products, such as Unit Trusts, Managed Futures, and Annuities. Prior to his transfer to the Information Technology Area, Mr. Handler managed the Foreign Currency and Precious Metals Trading Desk of Dean Witter, a financial services firm and predecessor company to Morgan Stanley, from July 1982 until January 1984. He also held various positions in the Futures Division where he helped to build the Precious Metals Trading Operation at Dean Witter. Before joining Dean Witter, Mr. Handler worked at Mocatta Metals, a precious metals trading firm and futures broker that was sold to Standard Charted Bank in the 1980’s, as an Assistant to the Chairman from March 1980 until June 1982. His roles at Mocatta Metals included positions on the Futures Order Entry Desk and the Commodities Exchange Trading Floor. Additional work included building a computerized Futures Trading System and writing a history of the company. Mr. Handler graduated on the Dean’s List from the University of Wisconsin-Madison with a Bachelor of Arts degree in History and Political Science.
Patrick T. Egan, age 42, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Egan has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA. Since June 2011, Mr. Egan has been employed by Morgan Stanley Smith Barney, a financial services firm, where his responsibilities include serving as Executive Director and as Chief Risk Officer for Morgan Stanley Smith Barney Managed Futures. From June 2009 through June 2011, Mr. Egan was employed by Morgan Stanley Smith Barney, where his responsibilities included serving as Co-Chief Investment Officer for Morgan Stanley Smith Barney Managed Futures. Since November 2010, Mr. Egan has been registered as an associated person of Morgan Stanley Smith Barney. From April 2007 through June 2009, Mr. Egan was employed by MS & Co., a financial services firm, where his responsibilities included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From April 2007 through November 2010, Mr. Egan was registered as an associated person of MS & Co. From March 1993 through April 2007, Mr. Egan was employed by Morgan Stanley DW Inc., a financial services firm, where his initial responsibilities included serving as an analyst and manager within the Managed Futures Department (with primary responsibilities for product development, due diligence, investment analysis and risk management of the firm’s commodity pools) and later included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From February 1998 through April 2007, Mr. Egan was registered as an associated person of Morgan Stanley DW Inc. From August 1991 through March 1993, Mr. Egan was employed by Dean Witter Intercapital, the asset management arm of Dean Witter Reynolds, Inc., where his responsibilities included serving as a mutual fund administration associate. Mr. Egan also served as a Director from November 2004 through October 2006, and from November 2006 through October 2008 of the Managed Funds Association’s Board of Directors, a position he was elected to by industry peers for two consecutive two-year terms. Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.
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Alper Daglioglu, age 34, has been a Director and listed as a principal of the General Partner since December 2010. Since December 2010, Mr. Daglioglu has been employed by Morgan Stanley Smith Barney, a financial services firm, where his responsibilities include serving as Executive Director and Chief Investment Officer for Morgan Stanley Smith Barney Managed Futures and serving on the Alternative Investments Product Review Committee of Morgan Stanley Smith Barney’s Alternative Investments Group. From June 2009 through December 2010, Mr. Daglioglu was employed by Morgan Stanley Smith Barney, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group. From December 2003 through June 2009, Mr. Daglioglu was employed by Morgan Stanley, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group, and serving as the lead investment analyst for Global Macro and Managed Futures strategies within Morgan Stanley Graystone Research Group from February 2007 through June 2009. Mr. Daglioglu earned his Bachelor of Science degree in Industrial Engineering in June 2000 from Galatasaray University and his Master of Business Administration degree in Finance in May 2003 from the University of Massachusetts-Amherst’s Isenberg School of Management. Mr. Daglioglu was awarded a full merit scholarship and research assistantship at the Center for International Securities and Derivatives Markets during his graduate studies. In this capacity, he worked with various major financial institutions in performance monitoring, asset allocation and statistical analysis projects and specialized on alternative approaches to risk assessment for hedge funds and managed futures. Mr. Daglioglu wrote and published numerous research papers on alternative investments. Mr. Daglioglu is a Chartered Alternative Investment Analyst charterholder.
The Partnership has not adopted a code of ethics that applies to officers because it has no officers. In addition, the Partnership has not adopted any procedures by which investors may recommend nominees to the Partnership’s board of directors, and has not established an audit committee because it has no board of directors.
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Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by its General Partner. CGM, an affiliate of the General Partner, is the commodity broker for the Partnership and receives brokerage fees for such services, as described under “Item 1. Business.” Brokerage fees and clearing fees of $8,438,594 were earned by CGM for the year ended December 31, 2011. Management fees and incentive fees of $3,354,074 and $2,436,418, respectively, were earned by the Advisors for the year ended December 31, 2011. Administrative fees of $1,017,224 were earned by the General Partner for the year ended December 31, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(a) Security ownership of certain beneficial owners. As of February 29, 2012, the Partnership knows of no person who beneficially owns more than 5% of the Redeemable Units outstanding.
(b) Security ownership of management. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by the General Partner.
The following table indicates securities owned by management as of December 31, 2011:
|
(1) Title of Class |
(2) Name of Beneficial |
(3) Amount and Nature of |
(4) Percent of Class | |||
| General Partner unit equivalents |
General Partner | 1,438.9316 | 1.0% |
(c) Changes in control. None.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
(a) Transactions with related persons. None.
(b) Review, approval or ratification of transactions with related persons. Not applicable.
(c) Promoters and certain control persons. CGM and the General Partner would be considered promoters for purposes of item 404(c) of Regulation S-K. The nature and the amounts of compensation each promoter will receive, if any, from the Partnership are set forth under “Item 1. Business,” “Item 8. Financial Statements and Supplementary Data.” and “Item 11. Executive Compensation.”
Item 14. Principal Accountant Fees and Services.
(1) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte & Touche LLP (“Deloitte”) for the years ended December 31, 2011 and 2010 for the audits of the Partnership’s annual financial statements, reviews of financial statements included in the Partnership’s Forms 10-Q and 10-K and other services normally provided in connection with regulatory filings or engagements were:
| 2011 |
$ | 168,100 | ||
| 2010 |
$ | 156,200 |
(2) Audit-Related Fees. None
(3) Tax Fees. In the last two fiscal years, Deloitte did not provide any professional service for tax compliance, tax advice or tax planning. The aggregate fees billed for each of the last two fiscal years for professional services rendered by PricewaterhouseCoopers LLP for tax compliance and tax advice given in the preparation of the Partnership’s Schedules K-1, the preparation of the Partnership’s Form 1065 and preparation of all State Tax Returns were:
| 2011 |
$ | 30,850 | ||
| 2010 |
$ | 26,250 |
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
| (a)(1) | Financial Statements: | |||
| Statements of Financial Condition at December 31, 2011 and 2010. | ||||
| Condensed Schedules of Investments at December 31, 2011 and 2010 | ||||
| Statements of Income and Expenses for the years ended December 31, 2011, 2010 and 2009. | ||||
| Statements of Changes in Partners’ Capital for the years ended December 31, 2011, 2010 and 2009. | ||||
| Notes to Financial Statements. | ||||
| (2) | Exhibits: | |||
| 3.1(a) | Certificate of Limited Partnership dated June 30, 2003 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference). | |||
| (b) | Certificate of Amendment of the Certificate of Limited Partnership dated September 21, 2005 (filed as Exhibit 3.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference). | |||
| (c) | Certificate of Amendment of the Certificate of Limited Partnership dated September 19, 2008 (filed as Exhibit 3.1(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |||
| (d) | Certificate of Amendment of the Certificate of Limited Partnership dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report of Form 8-K filed on September 30, 2009 and incorporated herein by reference). | |||
| (e) | Certificate of Amendment of the Certificate of Limited Partnership dated June 30, 2010 (filed as Exhibit 3.1(e) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference). | |||
| (f) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Form 8-K filed on September 7, 2011 and incorporated herein by reference). | |||
| 3.2 | Second Amended and Restated Limited Partnership Agreement (filed as Exhibit 3.2 to the Current Report on Form 8-K filed on November 1, 2010 and incorporated herein by reference). | |||
| 10.1(a) | Management Agreement among the Partnership, the General Partner and Altis (filed as Exhibit 10.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference). | |||
| (b) | Letter from the General Partner to Altis extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |||
| 10.2(a) | Management Agreement among the Partnership, the General Partner and Waypoint Capital Management LLC (filed as Exhibit 10.4 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference). | |||
| (b) | Letter from the General Partner to Waypoint Capital Management LLC extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |||
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| 10.3 | Customer Agreement between the Partnership, the General Partner and CGM (filed as Exhibit 10.9 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference). | |
| 10.4 | Amended and Restated Agency Agreement between the Partnership, the General Partner, CGM and MSSB (filed as Exhibit 10.8 to the Current Report on Form 8-K filed on August 4, 2010 and incorporated herein by reference). | |
| 10.5 | Form of Subscription Agreement (filed as Exhibit 10.11 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | |
| 10.6 | Joinder Agreement among the Partnership, the General Partner, CGM and MSSB (filed as Exhibit 10 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 filed on August 14, 2009 and incorporated herein by reference). | |
| 10.7(a) | Management Agreement among the Partnership, the General Partner and PGR Capital LLP (filed as Exhibit 10.12 to the Current Report on Form 8-K filed on November 4, 2010 and incorporated herein by reference). | |
| (b) | Letter from the General Partner to PGR Capital LLP extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |
| 10.8(a) | Management Agreement among the Partnership, the General Partner and Blackwater Capital Management LLC (filed as Exhibit 10.13 to the Current Report on Form 8-K filed on November 4, 2010 and incorporated herein by reference). | |
| (b) | Letter from the General Partner to Blackwater Capital Management LLC extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |
| 10.9(a) | Management Agreement among the Partnership, the General Partner and J E Moody & Company LLC (filed as Exhibit 10.14 on Form 8-K filed on January 3, 2011 and incorporated herein by reference) | |
| (b) | Letter from the General Partner to J E Moody & Company LLC extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |
| 10.10(a) | Management Agreement among the Partnership, the General Partner and Cirrus Capital Management LLC (filed as Exhibit 10.1 on Form 8-K filed on January 3, 2011 and incorporated herein by reference). | |
| (b) | Letter from the General Partner to Cirrus Capital Management LLC extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |
| 10.11(a) | Management Agreement among the Partnership, the General Partner and Flintlock Capital Asset Management, LLC (filed as Exhibit 10.16 on Form 8-K filed on December 1, 2010 and incorporated herein by reference). | |
| (b) | Letter from the General Partner to Flintlock Capital Asset Management LLC extending the Management Agreement from June 30, 2011 to June 30, 2012 (filed herein). | |
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| 10.12 | Management Agreement among the Partnership, the General Partner and Willowbridge Associates Inc. (filed as Exhibit 10.17 to the Current Report on Form 8-K filed on June 2, 2011 and incorporated herein by reference). | |
| 99.1 — Financial Statements of CMF Altis Partners Master Fund L.P.
99.2 — Financial Statements of Waypoint Master Fund L.P.
99.3 — Financial Statements of Blackwater Master Fund L.P.
99.4 — Financial Statements of PGR Master Fund L.P.
99.5 — Financial Statements of JEM Master Fund L.P.
99.6 — Financial Statements of CMF Cirrus Master Fund L.P.
99.7 — Financial Statements of FL Master Fund L.P.
The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by reference | ||
| (a) |
31.1 — Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) | |
| 31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer) | ||
| 32.1 — Section 1350 Certification (Certification of President and Director) | ||
| 32.2 — Section 1350 Certification (Certification of Chief Financial Officer) | ||
| 101.INS XBRL Instance Document. | ||
| 101.SCH XBRL Taxonomy Extension Schema Document. | ||
| 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. | ||
| 101.LAB XBRL Taxonomy Extension Label Linkbase Document. | ||
| 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. | ||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Emerging CTA Portfolio L.P. | ||
| By: | Ceres Managed Futures LLC | |
| (General Partner) | ||
| By: | /s/ Walter Davis | |
| Walter Davis | ||
| President & Director | ||
| Date: March 30, 2012 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
| /s/ Walter Davis |
/s/ Colbert Narcisse |
/s/ Patrick T. Egan | ||||||
| Walter Davis | Colbert Narcisse | Patrick T. Egan | ||||||
| President and Director | Director | Director | ||||||
| Ceres Managed Futures LLC | Ceres Managed Futures LLC | Ceres Managed Futures LLC | ||||||
| Date: March 30, 2012 | Date: March 30, 2012 | Date: March 30, 2012 | ||||||
| /s/ Brian Centner |
/s/ Douglas J. Ketterer |
/s/ Alper Daglioglu | ||||||
| Brian Centner | Douglas J. Ketterer | Alper Daglioglu | ||||||
| Chief Financial Officer (Principal Accounting Officer) |
Director | Director | ||||||
| Ceres Managed Futures LLC | Ceres Managed Futures LLC | Ceres Managed Futures LLC | ||||||
| Date: March 30, 2012 | Date: March 30, 2012 | Date: March 30, 2012 | ||||||
| /s/ Ian Bernstein |
/s/ Harry Handler |
|||||||
| Ian Bernstein | Harry Handler | |||||||
| Director | Director | |||||||
| Ceres Managed Futures LLC | Ceres Managed Futures LLC | |||||||
| Date: March 30, 2012 | Date: March 30, 2012 | |||||||
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Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
Annual Report to Limited Partners
No proxy material has been sent to Limited Partners.
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