Nestor Partners

(A New Jersey Limited Partnership)

 

Financial Statements for the Years Ended December 31,

2011 and 2010, and Report of Independent Registered

Public Accounting Firm

 

 

Nestor Partners

 

TABLE OF CONTENTS

 

	Page(s)
AFFIRMATION OF MILLBURN RIDGEFIELD CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010:
Statements of Financial Condition	2
Condensed Schedules of Investments	3–6
Statements of Operations	7
Statements of Changes in Partners’ Capital	8
Statements of Financial Highlights	9
Notes to Financial Statements	10–23

 

 

AFFIRMATION OF MILLBURN RIDGEFIELD CORPORATION

 

In compliance with the Commodity Futures Trading Commission’s regulations, I hereby affirm that to the best of my knowledge and belief, the information contained in the statements of financial condition, including the condensed schedules of investments, of Nestor Partners as of December 31, 2011 and 2010, and the related statements of operations, changes in partners’ capital, and financial highlights for each of the two years in the period ended December 31, 2011, are complete and accurate.

 

Harvey Beker, Co-Chief Executive Officer

Millburn Ridgefield Corporation

General Partner of Nestor Partners

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Partners of Nestor Partners:

 

We have audited the accompanying statements of financial condition of Nestor Partners (the “Partnership”), including the condensed schedules of investments, as of December 31, 2011 and 2010, and the related statements of operations, changes in partners’ capital and financial highlights for each of the two years in the period ended December 31, 2011. These financial statements and financial highlights are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial highlights 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 audits to obtain reasonable assurance about whether the financial statements and financial highlights 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 and financial highlights referred to above present fairly, in all material respects, the financial position of Nestor Partners as of December 31, 2011 and 2010, and the results of its operations, changes in its partners’ capital and its financial highlights for each of the two 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

 

March 13, 2012

 

 

NESTOR PARTNERS

 

STATEMENTS OF FINANCIAL CONDITION

AS OF DECEMBER 31, 2011 AND 2010

 

		2011				2010
ASSETS
EQUITY IN TRADING ACCOUNTS:
Investments in U.S. Treasury notes — at fair value (amortized cost $16,853,952 and $26,680,345)		$	16,854,836			$	26,694,380
Net unrealized appreciation on open futures and forward currency contracts			2,651,806				6,859,559
Due from brokers			1,432,104				2,628,941
Cash denominated in foreign currencies (cost $347,456 and $1,575,531)			340,923				1,606,537
Total equity in trading accounts			21,279,669				37,789,417
INVESTMENTS IN U.S. TREASURY NOTES — at fair value (amortized cost $128,738,240 and $120,315,587)			128,739,557				120,375,145
CASH AND CASH EQUIVALENTS			10,849,407				7,727,993
ACCRUED INTEREST RECEIVABLE			771,589				258,752
TOTAL		$	161,640,222			$	166,151,307
LIABILITIES AND PARTNERS’ CAPITAL
LIABILITIES:
Capital contributions received in advance		$	3,061,300			$	265,000
Net unrealized depreciation on open futures and forward currency contracts			196,620				-
Accrued brokerage fees			280,454				276,126
Due to brokers			201,403				-
Cash denominated in foreign currencies (cost -$552,152 and -$85,672)			551,021				85,939
Accrued expenses			245,831				252,576
Capital withdrawals payable			485,276				2,749,778
Due to General Partner			21				-
Total liabilities			5,021,926				3,629,419
PARTNERS’ CAPITAL			156,618,296				162,521,888
TOTAL		$	161,640,222			$	166,151,307

 

See notes to financial statements

 

 

NESTOR PARTNERS

 

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2011

 

		Net Unrealized
		Appreciation
		(Depreciation)				Net Unrealized
		as a % of				Appreciation
		Partners’ Capital				(Depreciation)
FUTURES AND FORWARD CURRENCY CONTRACTS
FUTURES CONTRACTS
Long futures contracts:
Energies			(0.05	)%		$	(71,020	)
Grains			0.10				152,750
Interest rates:
2 Year U.S. Treasury Note (545 contracts, settlement date March 2012)			0.05				82,656
5 Year U.S. Treasury Note (503 contracts, settlement date March 2012)			0.08				132,305
10 Year U.S. Treasury Note (238 contracts, settlement date March 2012)			0.09				138,266
30 Year U.S. Treasury Bond (59 contracts, settlement date March 2012)			0.03				41,875
Other interest rates			0.87				1,358,939
Total interest rates			1.12				1,754,041
Metals			(0.14	)			(221,615	)
Softs			(0.05	)			(80,763	)
Stock indices			(0.01	)			(8,545	)
Total long futures contracts			0.97				1,524,848
Short futures contracts:
Energies			0.21				319,860
Grains			(0.31	)			(479,828	)
Interest rates			(0.01	)			(15,404	)
Livestock			(0.00	)			(3,990	)
Metals			0.05				77,690
Softs			0.18				278,569
Stock indices			(0.09	)			(137,823	)
Total short futures contracts			0.03				39,074
TOTAL INVESTMENTS IN FUTURES CONTRACTS — Net			1.00				1,563,922
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts			(0.13	)			(207,427	)
Total short forward currency contracts			0.70				1,098,691
TOTAL INVESTMENTS IN FORWARD CURRENCY CONTRACTS — Net			0.57				891,264
TOTAL			1.57	%		$	2,455,186

 

(Continued)

 

 

NESTOR PARTNERS

 

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2011

 

U.S. TREASURY NOTES

 

						Fair Value
						as a % of
Face						Partners’				Fair
Amount				Description		Capital				Value
$	37,990,000			U.S. Treasury notes, 0.875%, 02/29/2012			24.29	%		$	38,040,455
	39,720,000			U.S. Treasury notes, 0.375%, 08/31/2012			25.41				39,791,372
	55,980,000			U.S. Treasury notes, 4.250%, 09/30/2012			36.83				57,690,014
	10,040,000			U.S. Treasury notes, 0.500%, 11/30/2012			6.43				10,072,552
				TOTAL INVESTMENTS IN U.S. TREASURY
				NOTES (amortized cost $145,592,192)			92.96	%		$	145,594,393

 

See notes to financial statements

(Concluded)

 

 

NESTOR PARTNERS

 

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2010

 

		Net Unrealized
		Appreciation
		(Depreciation)				Net Unrealized
		as a % of				Appreciation
		Partners’ Capital				(Depreciation)
FUTURES AND FORWARD CURRENCY CONTRACTS
FUTURES CONTRACTS
Long futures contracts:
Energies			0.33	%		$	535,871
Grains			0.73				1,185,251
Interest rates:
2 Year U.S. Treasury Note (313 contracts, settlement date March 2011)			(0.03	)			(59,531	)
Other interest rates			0.20				328,950
Total interest rates			0.17				269,419
Livestock			0.06				102,440
Metals			1.18				1,917,417
Softs			0.32				528,094
Stock indices			0.57				921,935
Total long futures contracts			3.36				5,460,427
Short futures contracts:
Energies			(0.15	)			(242,600	)
Grains			(0.08	)			(127,613	)
Interest rates			(0.01	)			(16,482	)
Livestock			(0.03	)			(53,150	)
Metals			(0.13	)			(208,450	)
Softs			(0.03	)			(48,384	)
Stock indices			0.06				90,872
Total short futures contracts			(0.37	)			(605,807	)
TOTAL INVESTMENTS IN FUTURES CONTRACTS — Net			2.99				4,854,620
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts			1.61				2,617,508
Total short forward currency contracts			(0.38	)			(612,569	)
TOTAL INVESTMENTS IN FORWARD CURRENCY CONTRACTS — Net			1.23				2,004,939
TOTAL			4.22	%		$	6,859,559

 

(Continued)

 

 

NESTOR PARTNERS

 

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2010

 

U.S. TREASURY NOTES

 

						Fair Value
						as a % of
Face						Partners’				Fair
Amount				Description		Capital				Value
$	36,640,000			U.S. Treasury notes, 0.875%, 03/31/2011			22.58	%		$	36,702,975
	36,640,000			U.S. Treasury notes, 0.875%, 05/31/2011			22.61				36,748,775
	36,640,000			U.S. Treasury notes, 1.000%, 08/31/2011			22.66				36,828,925
	36,640,000			U.S. Treasury notes, 0.750%, 11/30/2011			22.64				36,788,850
				TOTAL INVESTMENTS IN U.S. TREASURY
				NOTES (amortized cost $146,995,932)			90.49	%		$	147,069,525

 

See notes to financial statements

(Concluded)

 

 

 

NESTOR PARTNERS
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2011 AND 2010

 

		2011				2010
INVESTMENT INCOME — Interest income		$	374,054			$	556,040
EXPENSES:
Brokerage fees			3,368,858				3,290,432
Administrative expenses			400,917				381,720
Custody fees			29,759				27,835
Total expenses			3,799,534				3,699,987
NET INVESTMENT LOSS			(3,425,480	)			(3,143,947	)
NET REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) on closed positions:
Futures and forward currency contracts			(2,158,132	)			16,287,692
Foreign exchange translation			(14,485	)			55,308
Net change in unrealized:
Futures and forward currency contracts			(4,404,373	)			7,653,215
Foreign exchange translation			(36,141	)			(40,864	)
Net gains (losses) from U.S. Treasury notes:
Realized			4,650				1,202
Net change in unrealized			(71,392	)			(21,553	)
Total net realized and unrealized gains (losses)			(6,679,873	)			23,935,000
NET INCOME (LOSS)			(10,105,353	)			20,791,053
LESS PROFIT SHARE TO GENERAL PARTNER			8,692				625,835
NET INCOME (LOSS) AFTER PROFIT SHARE TO GENERAL PARTNER		$	(10,114,045	)		$	20,165,218

 

See notes to financial statements

 

NESTOR PARTNERS 

 

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL YEARS ENDED DECEMBER 31, 2011 AND 2010

 

					Special			New Profit
		Limited			Limited			Memo			General
		Partners			Partners			Account			Partner			Total
PARTNERS’ CAPITAL — January 1, 2010	$	81,832,304		$	61,688,413		$	-		$	3,732,571		$	147,253,288
Contributions		947,700			876,459			-			-			1,824,159
Withdrawals		(4,959,626	)		(1,261,151	)		-			(1,125,835	)		(7,346,612	)
Net income		10,186,658			10,011,265			-			593,130			20,791,053
General Partner’s allocation — profit share		(625,835	)		-			625,835			-			-
Transfer of New Profit Memo Account to
General Partner		-			-			(625,835	)		625,835			-
PARTNERS’ CAPITAL — December 31, 2010		87,381,201			71,314,986			-			3,825,701			162,521,888
Contributions		22,825,712			-			-			-			22,825,712
Withdrawals		(14,366,700	)		(3,749,246	)		-			(508,005	)		(18,623,951	)
Net loss		(6,679,657	)		(3,249,537	)		(687	)		(175,472	)		(10,105,353	)
General Partner’s allocation — profit share		(8,692	)		-			8,692			-			-
Transfer of New Profit Memo Account to
General Partner		-			-			(8,005	)		8,005			-
PARTNERS’ CAPITAL — December 31, 2011	$	89,151,864		$	64,316,203		$	-		$	3,150,229		$	156,618,296

 

See notes to financial statements

 

 

NESTOR PARTNERS

 

STATEMENTS OF FINANCIAL HIGHLIGHTS

YEARS ENDED DECEMBER 31, 2011 AND 2010

 

										Special
		Limited Partners								Limited Partners
		2011				2010				2011				2010
Ratios to average capital — Net investment loss			(3.51	)%			(3.41	)%			(0.50	)%			(0.42	)%
Total expenses			3.74	%			3.77	%			0.73	%			0.78	%
Profit share allocation			0.01				0.75				-				-
Total expenses and profit share allocation			3.75	%			4.52	%			0.73	%			0.78	%
Total return before profit share allocation			(7.53	)%			12.69	%			(4.71	)%			16.11	%
Profit share allocation			(0.01	)			(0.79	)			-				-
Total return after profit share allocation			(7.54	)%			11.90	%			(4.71	)%			16.11	%

 

See notes to financial statements

 

 

Nestor Partners

 

NOTES TO FINANCIAL STATEMENTS 

Years ENDED dECEMBER 31, 2011 AND 2010

 

1.

ORGANIZATION

 

Nestor Partners (the “Partnership”) is a limited partnership which was organized in 1976 under the New Jersey Uniform Limited Partnership Act. The Limited Partnership Agreement (the “Agreement”) was amended and restated as of April 5, 2004. The Partnership engages in the speculative trading of futures and forward currency contracts. The instruments that are traded by the Partnership are volatile and involve a high degree of market risk.

 

The General Partner of the Partnership is Millburn Ridgefield Corporation (the “General Partner”). Principals, employees, former employees and other affiliates of the General Partner have invested in the Partnership as special limited partners.

 

The Agreement provides that subject to certain limitations, the General Partner shall conduct and manage the business of the Partnership. The General Partner has the right to make all investment decisions regarding the Partnership, authorize the payments of distributions to partners, enter into customer agreements with brokers and take such other actions as it deems necessary or desirable to manage the business of the Partnership.

 

The limited partners, special limited partners, New Profit Memo Account (see Note 3) and the General Partner share in the profits and losses of the Partnership which are determined before brokerage fees (Note 2) and profit share allocations on the basis of their proportionate interests of Partnership capital (Note 3). The General Partner and special limited partners are charged lower brokerage fees than limited partners in accordance with the Agreement. No limited partner or special limited partner shall be liable for Partnership obligations in excess of their capital contribution plus profits allocated to their capital accounts, if any.

 

Subject to certain conditions, a partner has the right to redeem all or a portion of its partnership capital as of any month-end upon fifteen days’ prior written notice to the General Partner. In its sole discretion, the General Partner may permit redemptions on shorter notice or as of a date other than month-end. Partners who purchased their interests through certain selling agents and redeem their partnership capital prior to the one-year anniversary of their subscription will pay the applicable early redemption fee. Redemptions will be made as of the last day of the month for an amount equal to the net asset value of the portion of a partner’s capital being redeemed; a redeeming partner shall receive such redeemed capital less the redemption fee, if any.

 

The General Partner, subject to Commodity Futures Trading Commission requirements, may (at its discretion) sell additional Limited Partnership Interests to persons desiring to become limited partners.

 

The Partnership will dissolve on October 31, 2017 or in the event of certain conditions set forth in the Agreement.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation — The financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“Codification”).

 

Investments — The Partnership records its transactions in futures and forward currency contracts and United States (“U.S.”) Treasury notes, including related income and expenses, on a trade-date basis.

 

Open futures contracts are valued at quoted market values. Open forward currency contracts are valued at fair value which is based on pricing models that consider the time value of money and the current market and contractual prices of the underlying financial instruments. Brokerage commissions on open futures contracts are expensed when contracts are opened. Realized gains (losses) and changes in unrealized appreciation (depreciation) on futures and forward currency contracts are recognized in the periods in which the contracts are closed or the changes in the value of open contracts occur and are included in net realized and unrealized gains (losses) in the Statements of Operations.

 

Investments in U.S. Treasury notes are valued at fair value based on the midpoint of bid/ask quotations reported daily at 3 pm EST by Bloomberg. The Partnership amortizes premiums and accretes discounts on U.S. Treasury notes. Such securities are normally on deposit with financial institutions (see Note 6) as collateral for performance of the Partnership’s trading obligations with respect to derivative contracts or are held for safekeeping in a custody account at HSBC Bank USA, N.A.

 

Cash and Cash Equivalents — Cash and cash equivalents includes cash and investments in Dreyfus Treasury Prime Cash Management, a short term U.S. government securities and related instruments money market fund.

 

Foreign Currency Translation — Assets and liabilities denominated in foreign currencies are translated to U.S. Dollars at prevailing exchange rates of such currencies. Purchases and sales of investments are translated to U.S. Dollars at the exchange rate prevailing when such transactions occurred.

 

Brokerage Fees — The Agreement provides that the Partnership shall charge the limited partners’ capital accounts and pay the General Partner brokerage fees at a fixed rate of 0.542% per month of net asset value (6.5% per annum) of limited partnership interests. Effective July 1, 2003, the General Partner reduced the brokerage fee rate to 0.458% per month of net asset value (5.5% per annum). The General Partner retains the right to charge less than the annual brokerage rate except as specified in the Agreement.

 

Administrative Expenses — The Partnership bears expenses, including periodic legal, accounting and filing fees, up to an amount equal to 1/4 of 1% per annum of the average net assets of the Partnership. The General Partner bears any excess over such amounts. The Partnership will pay any extraordinary expenses applicable to it.

 

The Partnership’s administrative expenses included $89,711 and $217,925 in 2011 and 2010, respectively, which relates to legal and accounting services provided to the Partnership by an affiliate of the General Partner.

 

 

Income Taxes — The Income Taxes topic of the Codification clarifies the accounting for uncertainty in tax positions. This requires that the Partnership recognize in its financial statements the impact of any uncertain tax positions. Based on a review of the Partnership’s open tax years, 2008 to 2011, for the U.S. Federal jurisdiction, the New York, New Jersey and Connecticut State jurisdictions and the New York City jurisdiction, there are no uncertain tax positions. The Partnership is treated as a limited partnership for federal and state income tax reporting purposes and therefore the limited partners are responsible for the payment of taxes.

 

Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements. Actual results could differ from these estimates.

 

Right of Offset — The customer agreements between the Partnership and its brokers give the Partnership the legal right to net unrealized gains and losses with each broker. Unrealized gains and losses related to offsetting transactions with these brokers are reflected on a net basis in the equity in trading accounts in the Statements of Financial Condition.

 

Fair Value of Financial Instruments — The fair value of the Partnership’s assets and liabilities, which qualify as financial instruments under the Fair Value Measurements and Disclosures topic of the Codification, approximates the carrying amounts presented in the Statements of Financial Condition. The topic defines fair value, establishes a framework for measurement of fair value and expands disclosures about fair value measurements. The three levels of the fair value hierarchy are described below:

 

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2 — Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

 

Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

In determining fair value, the Partnership separates its investments into two categories: cash instruments and derivative contracts.

 

Cash Instruments — The Partnership’s cash instruments are generally classified within Level 1 of the fair value hierarchy because they are typically valued using quoted market prices. The types of instruments valued based on quoted market prices in active markets include U.S. government obligations and an investment in a quoted short-term U.S. government securities and related instruments money market fund. The General Partner of the Partnership does not adjust the quoted price for such instruments even in situations where the Partnership holds a large position and a sale could reasonably impact the quoted price.

 

Derivative Contracts — Derivative contracts can be exchange-traded or over-the-counter (“OTC”). Exchange-traded futures contracts are valued based on quoted closing settlement prices and typically fall within Level 1 of the fair value hierarchy.

 

 

OTC derivatives or forward currency contracts are valued based on pricing models that consider the current market prices (“spot prices”) plus the time value of money (“forward points”) and contractual prices of the underlying financial instruments. The forward points from the quotation service providers are generally in periods of one month, two months, three months and six months forward while the contractual forward delivery dates for the foreign forward currency contracts traded by the Partnership may be in between these periods. The General Partner’s policy is to calculate the forward points for each contract being valued by determining the number of days from the date the forward currency contract is being valued to its maturity date and then using straight-line interpolation to calculate the valuation of forward points for the applicable forward currency contract. Model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.

 

 

During the years ended December 31, 2011 and 2010 there were no transfers of assets or liabilities between Level 1 and Level 2. The following table represents the Partnership’s investments by hierarchical level as of December 31, 2011 and 2010 in valuing the Partnership’s investments at fair value. At December 31, 2011 and 2010, the Partnership held no assets or liabilities classified in Level 3.

 

Financial Assets at Fair Value as of December 31, 2011

		Level 1				Level 2				Total
U.S. Treasury Notes (1)		$	145,594,393			$	-			$	145,594,393
Short-Term Money Market Fund*			10,689,407				-				10,689,407
Exchange-Traded Futures Contracts
Energies			248,840				-				248,840
Grains			(327,078	)			-				(327,078	)
Interest rates			1,738,637				-				1,738,637
Livestock			(3,990	)			-				(3,990	)
Metals			(143,925	)			-				(143,925	)
Softs			197,806				-				197,806
Stock indices			(146,368	)			-				(146,368	)
Total exchange-traded future contracts			1,563,922				-				1,563,922
Over-the-Counter Forward Currency Contracts			-				891,264				891,264
Total futures and forward currency contracts (2)			1,563,922				891,264				2,455,186
Total financial assets at fair value		$	157,847,722			$	891,264			$	158,738,986

 

Per line item in Statements of Financial Condition
(1)
Investments in U.S. Treasury notes held in brokers' trading accounts as collateral		$	16,854,836
Investments in U.S. Treasury notes held in custody			128,739,557
Total investments in U.S. Treasury notes		$	145,594,393
(2)
Net unrealized appreciation on futures and forward currency contracts		$	2,651,806
Net unrealized depreciation on futures and forward currency contracts			(196,620	)
Total unrealized appreciation and depreciation on futures and forward currency contracts		$	2,455,186

 

*

The short-term money market fund is included in Cash and Cash Equivalents on the Statements of Financial Condition.

 

 

Financial Assets at Fair Value as of December 31, 2010

		Level 1				Level 2				Total
U.S. Treasury Notes (1)		$	147,069,525			$	-			$	147,069,525
Short-Term Money Market Fund*			7,567,993				-				7,567,993
Exchange-Traded Futures Contracts
Energies			293,271				-				293,271
Grains			1,057,638				-				1,057,638
Interest rates			252,937				-				252,937
Livestock			49,290				-				49,290
Metals			1,708,967				-				1,708,967
Softs			479,710				-				479,710
Stock indices			1,012,807				-				1,012,807
Total exchange-traded future contracts			4,854,620				-				4,854,620
Over-the-Counter Forward Currency Contracts			-				2,004,939				2,004,939
Total futures and forward currency contracts (2)			4,854,620				2,004,939				6,859,559
Total financial assets at fair value		$	159,492,138			$	2,004,939			$	161,497,077

 

Per line item in Statements of Financial Condition
(1)
Investments in U.S. Treasury notes held in brokers' trading accounts as collateral		$	26,694,380
Investments in U.S. Treasury notes held in custody			120,375,145
Total investments in U.S. Treasury notes		$	147,069,525
(2)
Net unrealized appreciation on futures and forward currency contracts		$	6,859,559
Net unrealized depreciation on futures and forward currency contracts			-
Total unrealized appreciation and depreciation on futures and forward currency contracts		$	6,859,559

 

*

The short-term money market fund is included in Cash and Cash Equivalents on the Statements of Financial Condition.

 

Recent Accounting Standards — 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 arrangement associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the Statements of Financial Condition and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. 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 General Partner is currently evaluating the impact that the standard would have on the financial statements.

 

 

3.

PROFIT SHARE ALLOCATION

 

The Agreement provides that the General Partner’s profit share equal to 20% of Trading Profits at the end of each year is charged to the limited partners’ capital accounts. New Trading Profits includes realized and unrealized trading profits (losses), interest income, brokerage fees, trading-related expenses and administrative expenses. For limited partners’ withdrawals during the year, the profit share calculation shall be computed as though the withdrawal date was at year-end. Profit share attributable to interests redeemed during a year is tentatively credited to an account maintained for bookkeeping purposes called New Profit Memo Account. Because limited partners may purchase their partnership interests at different times, they may recognize different amounts of Trading Profits. Each limited partner pays a profit share only on Trading Profits applicable to its partnership interest. Limited partners who make multiple investments in the Partnership receive separate partnership interests for purposes of tracking the profit share. Accordingly, in any given year some limited partners may experience net gains and be charged the 20% profit share allocation for all or a portion of their interests where limited partners in the aggregate experienced net losses.

 

Any profit share charged is added to the General Partner’s capital account to the extent net taxable capital gains are allocated to the General Partner and the remainder, if any, of such profit share is added to the New Profit Memo Account. The General Partner may not make any withdrawal from the balance in the New Profit Memo Account. If, at the end of a subsequent year, net taxable gains are allocated to the General Partner in excess of such year’s profit share, a corresponding amount is transferred from the New Profit Memo Account to the General Partner’s capital account.

 

4.

DUE FROM/to BROKERS

 

At December 31, 2011 and 2010, due from and due to brokers balances in the Statements of Financial Condition include net cash receivable from each broker and net cash payable to each broker, respectively.

 

5.

TRADING ACTIVITIES

 

The Partnership conducts its futures trading with various futures commission merchants (“FCMs”) on futures exchanges and its forward currency trading with various banks or dealers (“Dealers”) in the interbank markets. Substantially all assets included in the Partnership’s equity in trading accounts and certain liability accounts, as discussed below, were held as collateral by such FCMs in either U.S. regulated segregated accounts (for futures contracts traded on U.S. exchanges) or non-U.S. secured accounts (for futures contracts traded on non-U.S. exchanges) as required by U.S. Commodity Futures Trading Commission’s regulations, or held as collateral by the Dealers.

 

Liabilities in the Statements of Financial Condition that are components of “Total equity in trading accounts” include net unrealized depreciation on open futures and forward currency contracts, cash denominated in foreign currencies and due to brokers.

 

The Partnership enters into contracts with various institutions that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is unknown. However, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

 

 

6.

DERIVATIVE INSTRUMENTS

 

The Partnership is party to derivative financial instruments in the normal course of its business. These financial instruments include futures and forward currency contracts which may be traded on an exchange or OTC contracts.

 

The Partnership records its derivative activities on a mark-to-market basis as described in Note 2. For OTC contracts, the Partnership enters into master netting agreements with its counterparties. Therefore, assets represent the Partnership’s unrealized gains less unrealized losses for OTC contracts in which the Partnership has a master netting agreement. Similarly, liabilities represent net amounts owed to counterparties on OTC contracts.

 

Futures contracts are agreements to buy or sell an underlying asset or index for a set price in the future. Initial margin deposits are made upon entering into futures contracts and can be either in cash or treasury securities. Open futures contracts are revalued on a daily basis to reflect the market value of the contracts at the end of each trading day. Variation margin payments are received or made depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the time it was closed. The Partnership bears the market risk that arises from changes in the value of these financial instruments.

 

Forward currency contracts entered into by the Partnership represent a firm commitment to buy or sell an underlying currency at a specified value and point in time based upon an agreed or contracted quantity. The ultimate gain or loss is equal to the difference between the value of the contract at the onset and the value of the contract at settlement date.

 

Each of these financial instruments is subject to various risks similar to those related to the underlying financial instruments including market risk, credit risk and sovereign risk.

 

Market risk is the potential change in the value of the instruments traded by the Partnership due to market changes including interest and foreign exchange rate movements and fluctuations in futures 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 financial instruments traded by the Partnership contain varying degrees of off-balance sheet risk whereby changes in the market values of the futures and forward currency contracts and the Partnership’s satisfaction of its obligations related to such market value changes may exceed the amount recognized in the Statements of Financial Condition.

 

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk is normally reduced to the extent that an exchange or clearing organization acts as a counterparty to futures transactions since typically the collective credit of the members of the exchange is pledged to support the financial integrity of the exchange. In the case of OTC transactions, the Partnership must rely solely on the credit of the individual counterparties. The contract amounts of the forward currency and futures contracts do not represent the Partnership’s risk of loss due to counterparty nonperformance. The Partnership’s exposure to credit risk associated with counterparty nonperformance of these contracts is limited to the unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition, plus the value of margin or collateral held by the counterparty. The amount of such credit risk was $6,330,970 and $16,420,836 at December 31, 2011 and 2010, respectively.

 

 

The General Partner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will in fact succeed in doing so. The General Partner’s market risk control procedures include diversification of the Partnership’s portfolio and continuously monitoring the portfolio’s open positions, historical volatility and maximum historical loss. The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and brokers which the General Partner believes to be creditworthy. The Partnership’s trading activities are primarily with brokers and other financial institutions located in North America, Europe and Asia. All futures transactions of the Partnership are cleared by major securities firms, pursuant to customer agreements, including Barclays Capital Inc., Deutsche Bank Securities Inc. (a wholly owned subsidiary of Deutsche Bank AG), J.P. Morgan Securities LLC., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Newedge USA, LLC (a wholly owned subsidiary of Newedge Group which is owned by Société Générale (50%) and Calyon (50%)). For all forward currency transactions, the Partnership utilizes three prime brokers, Barclays Bank PLC, Deutsche Bank AG and Morgan Stanley & Co., LLC.

 

The Partnership is subject to sovereign risk such as the risk of restrictions being imposed by foreign governments on the repatriation of cash and the effects of political or economic uncertainties. Net unrealized appreciation (depreciation) on futures and forward currency contracts are denominated in the Partnership’s functional currency (U.S. Dollar). Cash settlement of futures and forward currency contracts is made in the local currency (settlement currency) and then translated to U.S. Dollars.

 

 

Net unrealized appreciation (depreciation) on futures and forward currency contracts by settlement currency type, denominated in U.S. Dollars, is detailed below:

		December 31,
		2011								2010
		Total Net								Total Net
		Unrealized								Unrealized
		Appreciation				Percent of				Appreciation				Percent of
Currency type		(Depreciation)				Total				(Depreciation)				Total
Australian dollar		$	245,535				10.00	%		$	302,465				4.41	%
British pound			53,687				2.19				175,361				2.56
Canadian dollar			166,121				6.77				243,022				3.54
Czech koruna			30,579				1.25				(6,446	)			(0.09	)
Euro			708,815				28.87				126,010				1.84
Hong Kong dollar			(8,962	)			(0.37	)			55,285				0.81
Hungarian forint			23,693				0.96				(8,628	)			(0.13	)
Japanese yen			547,310				22.29				(198,322	)			(2.89	)
Korean won			(37,697	)			(1.54	)			352,173				5.13
Mexican peso			(8	)			(0.00	)			8,922				0.13
New Zealand dollar			112,166				4.57				(88,763	)			(1.29	)
Norwegian krone			(178,074	)			(7.25	)			288,604				4.21
Polish zloty			(5,586	)			(0.23	)			33,193				0.48
Romanian leu			5,693				0.23				1,217				0.02
Singapore dollar			17,681				0.72				32,162				0.47
South African rand			(2,005	)			(0.08	)			70,154				1.02
Swedish krona			(70,087	)			(2.85	)			142,891				2.08
Swiss franc			123,026				5.01				(97,770	)			(1.42	)
Taiwan dollar			(31,746	)			(1.29	)			124,402				1.81
Thai baht			1,457				0.06				2,980				0.04
Turkish lira			(11,436	)			(0.47	)			(246,723	)			(3.60	)
U.S. dollar			765,024				31.16				5,547,370				80.87
Total		$	2,455,186				100.00	%		$	6,859,559				100.00	%

 

The Derivatives and Hedging topic of the Codification requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.

 

The Partnership’s market risk is influenced by a wide variety of factors including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s open positions and the liquidity of the markets in which it trades.

 

 

The Partnership engages in the speculative trading of futures and forward contracts on agricultural commodities, currencies, energies, interest rates, metals and stock indices. The following were the primary trading risk exposures of the Partnership at December 31, 2011 and 2010 by market sector:

 

Agricultural (grains, livestock and softs) — The Partnership’s primary exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions as well as supply and demand factors.

 

Currencies — Exchange rate risk is a principal market exposure of the Partnership. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. The fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Partnership trades in a large number of currencies including cross-rates — e.g., positions between two currencies other than the U.S. dollar.

 

Energies — The Partnership’s primary energy market exposure is to gas and oil price movements often resulting from political developments in the Middle East and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.

 

Interest Rates — Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in countries or regions including Australia, Canada, Japan, Switzerland, the United Kingdom, the U.S. and the Eurozone. However, the Partnership also may take positions in futures contracts on the government debt of other nations. The General Partner anticipates that interest rates in the industrialized countries, both long-term and short-term, will remain the primary interest rate market exposure of the Partnership for the foreseeable future.

 

Metals — The Partnership’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, palladium, platinum, silver, tin and zinc.

 

Stock Indices — The Partnership’s equity exposure, through stock index futures, is to equity price risk in the major industrialized countries as well as other countries.

 

The Derivatives and Hedging topic of the Codification requires entities to recognize in the Statements of Financial Condition all derivative contracts as assets or liabilities. Fair values of futures and forward currency contracts in an asset position are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair value of futures and forward currency contracts in a liability position are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.” The Partnership’s policy regarding fair value measurement is discussed in Note 2.

 

Since the derivatives held or sold by the Partnership are for speculative trading purposes, the derivative instruments are not designated as hedging instruments under the provisions of the Derivatives and Hedging guidance. Accordingly, all realized gains and losses, as well as any change in net unrealized gains or losses on open positions from the preceding period, are recognized as part of the Partnership’s trading gains and losses in the Statements of Operations.

 

 

The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at December 31, 2011 and 2010. Fair value is presented on a gross basis even though the contracts are subject to master netting agreements and qualify for net presentation in the Statements of Financial Condition.

 

Fair Value of Futures and Forward Currency Contracts at December 31, 2011

																		Net Unrealized
		Fair Value - Long Positions								Fair Value - Short Positions								Gain (Loss) on
Sector		Gains				Losses				Gains				Losses				Open Positions
Futures contracts:
Energies		$	4,507			$	(75,527	)		$	326,720			$	(6,860	)		$	248,840
Grains			152,750				-				-				(479,828	)			(327,078	)
Interest rates			1,856,055				(102,014	)			3,571				(18,975	)			1,738,637
Livestock			-				-				10,250				(14,240	)			(3,990	)
Metals			35,053				(256,668	)			391,024				(313,334	)			(143,925	)
Softs			1,478				(82,241	)			313,036				(34,467	)			197,806
Stock indices			-				(8,545	)			200,392				(338,215	)			(146,368	)
Total futures contracts			2,049,843				(524,995	)			1,244,993				(1,205,919	)			1,563,922
Forward currency contracts			545,371				(752,798	)			1,768,206				(669,515	)			891,264
Total futures and forward currency contracts		$	2,595,214			$	(1,277,793	)		$	3,013,199			$	(1,875,434	)		$	2,455,186

 

Fair Value of Futures and Forward Currency Contracts at December 31, 2010

																		Net Unrealized
		Fair Value - Long Positions								Fair Value - Short Positions								Gain on
Sector		Gains				Losses				Gains				Losses				Open Positions
Futures contracts:
Energies		$	648,021			$	(112,150	)		$	-			$	(242,600	)		$	293,271
Grains			1,185,251				-				-				(127,613	)			1,057,638
Interest rates			350,149				(80,730	)			16,584				(33,066	)			252,937
Livestock			102,440				-				-				(53,150	)			49,290
Metals			1,917,417				-				-				(208,450	)			1,708,967
Softs			529,281				(1,187	)			3,046				(51,430	)			479,710
Stock indices			1,116,187				(194,252	)			91,892				(1,020	)			1,012,807
Total futures contracts			5,848,746				(388,319	)			111,522				(717,329	)			4,854,620
Forward currency contracts			3,159,489				(541,981	)			896,617				(1,509,186	)			2,004,939
Total futures and forward currency contracts		$	9,008,235			$	(930,300	)		$	1,008,139			$	(2,226,515	)		$	6,859,559

 

 

The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the years ended December 31, 2011 and 2010, as “Net realized gains (losses) on closed positions: Futures and forward currency contracts” and “Net change in unrealized: Futures and forward currency contracts.” These trading gains and losses are detailed below:

 

Sector		2011				2010
Futures contracts:
Energies		$	1,346,177			$	(378,306	)
Grains			(2,083,083	)			2,620,758
Interest rates			14,294,439				13,303,526
Livestock			(546,970	)			(74,760	)
Metals			(304,743	)			2,405,205
Softs			(333,859	)			1,426,988
Stock indices			(12,477,064	)			52,790
Total futures contracts			(105,103	)			19,356,201
Forward currency contracts			(6,457,402	)			4,584,706
Total futures and forward currency contracts		$	(6,562,505	)		$	23,940,907

 

The following table presents the average notional value by sector of open futures and forward currency contracts in U.S. dollars for the years ended December 31, 2011 and 2010. The Partnership’s average net asset value during 2011 and 2010 was approximately $160,000,000 and $153,000,000, respectively.

 

		2011								2010
Sector		Long Positions				Short Positions				Long Positions				Short Positions
Futures contracts:
Energies		$	23,735,030			$	9,210,803			$	32,190,501			$	20,365,648
Grains			9,927,143				7,850,193				10,361,819				7,035,001
Interest rates			209,902,126				11,354,337				223,472,191				8,256,160
Livestock			1,069,706				1,473,250				2,919,060				898,394
Metals			14,906,326				8,041,000				20,337,887				1,960,006
Softs			3,278,980				2,093,887				5,133,305				1,253,533
Stock indices			44,688,417				14,185,773				84,065,157				2,568,160
Total futures contracts			307,507,728				54,209,243				378,479,920				42,336,902
Forward currency contracts			132,476,460				57,185,914				150,976,563				61,567,798
Total average notional		$	439,984,188			$	111,395,157			$	529,456,483			$	103,904,700

 

 

Notional values in the interest rate sector were calculated by converting the notional value in local currency of all open interest rate futures positions to 10-year equivalent fixed income instruments, translated to U.S. Dollars at each quarter end during 2011 and 2010. The 10-year note is often used as a benchmark for many types of fixed-income instruments and the General Partner believes it is a more meaningful representation of notional values of the Partnership’s open interest rate positions.

 

7.

FINANCIAL HIGHLIGHTS

 

The ratios are calculated based on limited partners’ capital and special limited partners’ capital taken as a whole. The computation of such ratios based on the amount of expenses and profit share allocation assessed to an individual partner’s capital account may vary from these ratios based on the timing of capital transactions and differences in individual partner’s brokerage fees and profit share allocation arrangements.

 

Returns are calculated for limited partners and special limited partners taken as a whole. An individual partner’s returns may vary from these returns based on the timing of capital transactions and differences in individual partner’s brokerage fees and profit share allocation arrangements.

 

8.

redemption payable to general partner

 

At December 31, 2011 and 2010, capital withdrawals payable of $8,005 and $625,835, respectively, was related to profit share allocated to the General Partner at each year-end and was subsequently paid.

 

******