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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            .

Commission File Number 000-51282

FAIRFIELD FUTURES FUND L.P. II

 

(Exact name of registrant as specified in its charter)

 

New York		56-2421596
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue — 14^th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(212) 296-1999

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X    No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X    No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		Accelerated filer		Non-accelerated filer X		Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes       No X

As of April 30,2012, 19,668.5964 Limited Partnership Redeemable Units were outstanding.

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FAIRFIELD FUTURES FUND L.P. II

FORM 10-Q

INDEX

 

						Page
PART I - Financial Information:						Number
		Item 1.		Financial Statements:
				Statements of Financial Condition at March 31, 2012 (unaudited) and December 31, 2011		3
				Statements of Income and Expenses and Changes in Partners’ Capital for the three months ended March 31, 2012 and 2011 (unaudited)		4
				Notes to Financial Statements, including the Financial Statements of CMF Graham Capital Master Fund L.P. (unaudited)		5–19
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		20–22
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk		23–24
		Item 4.		Controls and Procedures		25
PART II - Other Information						26-29
Exhibits
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
101.INS   XBRL  Instance Document.
101.SCH  XBRL Taxonomy Extension Schema Document.
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB  XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

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PART I

Item 1. Financial Statements

Fairfield Futures Fund L.P. II

Statements of Financial Condition

 

		(Unaudited) March 31, 2012				December 31, 2011
Assets:
Investment in Master, at fair value		$	18,787,897			$	19,596,546
Cash			191,539				174,708
Total assets		$	18,979,436			$	19,771,254
Liabilities and Partners’ Capital:
Liabilities:
Accrued expenses:
Brokerage fees		$	71,173			$	74,142
Management fees			31,330				32,693
Administrative fees			7,833				8,173
Other			110,138				81,190
Redemptions payable			1,975,230				181,353
Total liabilities			2,195,704				377,551
Partners’ Capital:
General Partner, 295.6400 and unit equivalents outstanding at March 31, 2012 and December 31, 2011			242,537				241,845
Special Limited Partner, 442.4015 units outstanding at March 31, 2012 and December 31, 2011			362,937				361,902
Limited Partners, 19,720.4950 and 22,969.4616 Redeemable Units outstanding at March 31, 2012 and December 31, 2011, respectively			16,178,258				18,789,956
Total partners’ capital			16,783,732				19,393,703
Total liabilities and partners’ capital		$	18,979,436			$	19,771,254
Net asset value per unit		$	820.38			$	818.04

See accompanying notes to financial statements.

 

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Fairfield Futures Fund L.P. II

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

		Three Months Ended March 31,
		2012				2011
Investment Income:
Interest income allocated from Master		$	1,552			$	7,283
Expenses:
Expenses allocated from Master			24,871				41,099
Brokerage fees			218,106				424,974
Management fees			96,089				187,468
Administrative fees			24,023				46,866
Other			40,750				47,279
Total expenses			403,839				747,686
Net investment income (loss)			(402,287	)			(740,403	)
Trading Results:
Net realized gains (losses) on closed contracts allocated from Master			906,488				(5,433	)
Change in net unrealized gains (losses) on open contracts allocated from Master			(446,514	)			(232,405	)
Total trading results allocated from Master			459,974				(237,838	)
Net income (loss)			57,687				(978,241	)
Redemptions — Limited Partners			(2,667,658	)			(2,005,782	)
Net increase (decrease) in Partners’ Capital			(2,609,971	)			(2,984,023	)
Partners’ Capital, beginning of period			19,393,703				37,956,902
Partners’ Capital, end of period		$	16,783,732			$	34,972,879
Net asset value per unit (20,458.5365 and 33,864.2769 units outstanding at March 31, 2012 and 2011, respectively)		$	820.38			$	1,032.74
Net income (loss) per unit*		$	2.34			$	(27.95	)
Weighted average units outstanding			23,215.6098				35,508.6293

*Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

1.    General:

Fairfield Futures Fund L.P. II (the “Partnership”) is a limited partnership organized on December 18, 2003 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, metals and softs. The Partnership commenced trading operations on March 15, 2004. The commodity interests that are traded by the Partnership, through its investment in the Master (as defined below), are volatile and involve a high degree of market risk.

Between January 12, 2004 (commencement of the offering period) and March 12, 2004, 28,601 redeemable units of limited partnership interest (“Redeemable Units”) and 285 General Partner unit equivalents were sold at $1,000 per unit. The proceeds of the initial offering were held in an escrow account until March 15, 2004 at which time they were remitted to the Partnership for trading. The Partnership was authorized to sell 200,000 Redeemable Units during its initial offering period. Effective January 31, 2011, the Partnership no longer offers Redeemable Units for sale.

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 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 March 31, 2012, all trading decisions for the Partnership are made by the Advisor (defined below).

On June 1, 2006, the Partnership allocated substantially all of its capital to the CMF Graham Capital Master Fund L.P. (the “Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 74,569.3761 units of the Master with cash equal to $75,688,021. The Master was formed in order to permit accounts managed by Graham Capital Management, L.P. (“Graham” or the “Advisor”) using the K4D-15V Program, the Advisor’s proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. In addition, the Advisor is a special limited partner (in its capacity as special limited partner, the “Special Limited Partner”) of the Partnership. The Master’s commodity broker is CGM. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master-feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same and redemption rights are not affected.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended March 31, 2012.

At March 31, 2012, the Partnership owned approximately 14.9% of the Master. At December 31, 2011, the Partnership owned approximately 15.4% of the Master. It is the Partnership’s intention to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. It engages in such trading through a commodity brokerage account maintained with CGM. The Master’s Statements of Financial Condition, Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Partner’s Capital are included herein.

The General Partner and each limited partner share in the profits and losses of the Partnership, after the allocation to the Special Limited Partner, 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 or losses, if any, net of distributions.

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at March 31, 2012 and December 31, 2011, and the results of its operations and changes in partners’ capital for the three months ended March 31, 2012 and

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

2011. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2011.

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.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of March 31, 2012 and December 31, 2011 and Statements of Income and Expenses and Changes in Partners’ Capital for the three months ended March 31, 2012 and 2011 are presented below:

 

CMF Graham Capital Master Fund L.P.

Statements of Financial Condition

 

		(Unaudited) March  31, 2012				December 31, 2011
Assets:
Equity in trading account:
Cash		$	101,485,893			$	100,543,661
Cash margin			24,025,390				23,930,252
Net unrealized appreciation on open futures contracts			903,309				1,542,572
Net unrealized appreciation on open forward contracts			-				1,551,115
Total assets		$	126,414,592			$	127,567,600
Liabilities and Partners’ Capital:
Liabilities:
Net unrealized depreciation on open forward contracts		$	780,789			$	-
Accrued expenses:
Professional fees			34,807				44,426
Total liabilities			815,596				44,426
Partners’ Capital:
General Partner, 0.0000 unit equivalents at March 31, 2012 and December 31, 2011			-				-
Limited Partners, 84,391.3832 and 87,640.9997 units outstanding at March 31, 2012 and December 31, 2011, respectively			125,598,996				127,523,174
Total liabilities and partners’ capital		$	126,414,592			$	127,567,600
Net asset value per unit		$	1,488.29			$	1,455.06

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Condensed Schedule of Investments

March 31, 2012

(Unaudited)

 

		Notional ($)/ Number of Contracts				Fair Value				% of Partners’ Capital
Futures Contracts Purchased
Currencies			150			$	(189,419	)			(0.15	)%
Energy			545				(1,459,199	)			(1.16	)
Grains			338				598,116				0.48
Indices			1,850				2,151,000				1.71
Interest Rates U.S.			572				(118,153	)			(0.09	)
Interest Rates Non-U.S.			3,745				(228,631	)			(0.18	)
Livestock			6				(22,639	)			(0.02	)
Softs			112				(7,215	)			(0.01	)
Total futures contracts purchased							723,860				0.58
Futures Contracts Sold
Currencies			75				(22,483	)			(0.02	)
Energy			199				566,787				0.45
Grains			384				(143,932	)			(0.12	)
Indices			30				(15,771	)			(0.01	)
Interest Rates U.S.			180				(12,675	)			(0.01	)
Interest Rates Non-U.S.			75				8,719				0.01
Metals			85				(79,986	)			(0.06	)
Softs			302				(121,210	)			(0.10	)
Total futures contracts sold							179,449				0.14
Unrealized Appreciation on Open Forward Contracts
Currencies			$200,066,722				1,164,976				0.93
Metals			133				277,647				0.22
Total unrealized appreciation on open forward contracts							1,442,623				1.15
Unrealized Depreciation on Open Forward Contracts
Currencies			$251,041,469				(2,194,980	)			(1.75	)
Metals			29				(28,432	)			(0.02	)
Total unrealized depreciation on open forward contracts							(2,223,412	)			(1.77	)
Net fair value						$	122,520				0.10	%

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Condensed Schedule of Investments

December 31, 2011

 

		Notional ($)/Number of Contracts				Fair Value				% of  Partners’ Capital
Futures Contracts Purchased
Currencies			249			$	51,702				0.04	%
Energy			368				4,773				0.00	*
Indices			738				316,701				0.25
Interest Rates U.S.			1,541				551,183				0.43
Interest Rates Non-U.S.			3,766				1,619,360				1.27
Metals			5				(6,150	)			(0.00	)*
Total futures contracts purchased							2,537,569				1.99
Futures Contracts Sold
Currencies			31				34,625				0.03
Energy			220				401,845				0.32
Grains			914				(1,733,509	)			(1.36	)
Indices			396				68,313				0.05
Interest Rates U.S.			1,122				(141,881	)			(0.11	)
Interest Rates Non-U.S.			38				(814	)			(0.00	)*
Livestock			9				4,072				0.00	*
Metals			21				(11,155	)			(0.01	)
Softs			465				383,507				0.30
Total futures contracts sold							(994,997	)			(0.78	)
Unrealized Appreciation on Open Forward Contracts
Currencies			$526,807,997				4,782,600				3.75
Metals			233				441,722				0.35
Total unrealized appreciation on open forward contracts							5,224,322				4.10
Unrealized Depreciation on Open Forward Contracts
Currencies			$465,258,085				(3,555,243	)			(2.79	)
Metals			109				(117,964	)			(0.09	)
Total unrealized depreciation on open forward contracts							(3,673,207	)			(2.88	)
Net fair value						$	3,093,687				2.43	%

 

*	Due to rounding.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

 

 

		Three Months Ended March 31,
		2012				2011
Investment Income:
Interest income		$	10,356			$	31,454
Expenses:
Clearing fees			150,128				155,078
Professional fees			15,101				22,632
Total expenses			165,229				177,710
Net investment income (loss)			(154,873	)			(146,256	)
Trading Results:
Net gains (losses) on trading of commodity interests:
Net realized gains (losses) on closed contracts			6,032,836				(48,218	)
Change in net unrealized gains (losses) on open contracts			(2,971,167	)			(1,022,502	)
Total trading results			3,061,669				(1,070,720	)
Net income (loss)			2,906,796				(1,216,976	)
Redemptions — Limited Partners			(4,820,618	)			(9,469,411	)
Distribution of interest income to feeder funds			(10,356	)			(31,454	)
Net increase (decrease) in Partners’ capital			(1,924,178	)			(10,717,841	)
Partners’ Capital, beginning of period			127,523,174				168,924,671
Partners’ Capital, end of period		$	125,598,996			$	158,206,830
Net asset value per unit (84,391.3832 and 90,873.9466 units outstanding at March 31, 2012 and 2011, respectively)		$	1,488.29			$	1,740.95
Net income (loss) per unit*		$	33.35			$	(13.80	)
Weighted average units outstanding			86,776.3748				93,736.6352

*Based on change in net asset value per unit.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

2.    Financial Highlights:

Changes in the net asset value per unit for the three months ended March 31, 2012 and 2011 were as follows:

 

		Three Months Ended March 31,
		2012				2011
Net realized and unrealized gains (losses) *		$	9.30			$	(20.08	)
Interest income			0.07				0.20
Expenses **			(7.03	)			(8.07	)
Increase (decrease) for the period			2.34				(27.95	)
Net asset value per unit, beginning of period			818.04				1,060.69
Net asset value per unit, end of period		$	820.38			$	1,032.74

 

*	Includes Partnership brokerage fees and expenses allocated from the Master.

 

**	Excludes Partnership brokerage fees and expenses allocated from the Master.

 

 

		Three Months Ended March 31,
		2012				2011*****
Ratios to average net assets:***
Net investment income (loss)			(8.7	)%			(8.1	)%
Allocation to Special Limited Partner			—	%			—	%
Net investment income (loss) before allocation to Special Limited Partner****			(8.7	)%			(8.1	)%
Operating expenses			8.7	%			8.2	%
Allocation to Special Limited Partner			—	%			—	%
Total expenses			8.7	%			8.2	%
Total return:
Total return before allocation to Special Limited Partner			0.3	%			(2.6	)%
Allocation to Special Limited Partner			—	%			—	%
Total return after allocation to Special Limited Partner			0.3	%			(2.6	)%

***	Annualized (except for allocation to Special Limited Partner, if applicable).

****	Interest income allocated from the Master less total expenses.

*****

The ratios are shown net and gross of allocation to Special Limited Partner to conform to current year presentation.

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Financial Highlights of the Master:

 

		Three Months Ended March 31,
		2012				2011
Net realized and unrealized gains (losses) *		$	33.41			$	(13.90)
Interest income			0.12				0.34
Expenses **			(0.18)				(0.24)
Increase (decrease) for the period			33.35				(13.80)
Distribution of interest income to feeder funds			(0.12)				(0.34)
Net asset value per unit, beginning of period			1,455.06				1,755.09
Net asset value per unit, end of period		$	1,488.29			$	1,740.95

 

*	Includes clearing fees.

 

**	Excludes clearing fees.

 

		Three Months Ended March 31,
		2012				2011
Ratios to average net assets:***
Net investment income (loss)****			(0.5	)%			(0.4	)%
Operating expenses			0.5	%			0.4	%
Total return			2.3	%			(0.8	)%

 

***	Annualized.

 

****	Interest income less total expenses.

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

3.    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 instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure.

The Partnership’s pro-rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The customer agreements between the Partnership and CGM and the Master and CGM give the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and on open forward contracts on the Statements of Financial Condition, as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

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 and redemptions.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

All of the commodity interests owned by the Master are held for trading purposes. The monthly average number of futures contracts traded during the three months ended March 31, 2012 and 2011 were 9,798 and 7,656, respectively. The monthly average number of metals forward contracts traded during the three months ended March 31, 2012 and 2011 were 505 and 269, respectively. The monthly average notional values of currency forward contracts during the three months ended March 31, 2012 and 2011 were $1,494,066,611 and $1,313,684,022 respectively. The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of March 31, 2012 and December 31, 2011.

 

		March 31, 2012
Assets
Futures Contracts
Currencies		$	31,905
Energy			566,847
Grains			825,184
Indices			3,032,885
Interest Rates U.S.			33,247
Interest Rates Non-U.S.			532,421
Metals			36,832
Softs			120,355
Total unrealized appreciation on open futures contracts		$	5,179,676
Liabilities
Futures Contracts
Currencies		$	(243,807	)
Energy			(1,459,259	)
Grains			(371,000	)
Indices			(897,656	)
Interest Rates U.S.			(164,075	)
Interest Rates Non-U.S.			(752,333	)
Livestock			(22,639	)
Metals			(116,818	)
Softs			(248,780	)
Total unrealized depreciation on open futures contracts		$	(4,276,367	)
Net unrealized appreciation on open futures contracts		$	903,309	*
Assets
Forward Contracts
Currencies		$	1,164,976
Metals			277,647
Total unrealized appreciation on open forward contracts		$	1,442,623
Liabilities
Forward Contracts
Currencies		$	(2,194,980	)
Metals			(28,432	)
Total unrealized depreciation on open forward contracts		$	(2,223,412	)
Net unrealized depreciation on open forward contracts		$	(780,789	)**

 

 

 

*	This amount is in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.

**	This amount is in “Net unrealized depreciation on open forward contracts” on the Master’s Statements of Financial Condition.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

 

				December 31, 2011
Assets
Futures Contracts
Currencies				$	110,852
Energy					656,626
Grains					72,365
Indices					614,767
Interest Rates U.S.					601,629
Interest Rates Non-U.S.					1,756,091
Livestock					4,072
Metals					25,266
Softs					442,014
Total unrealized appreciation on open futures contracts				$	4,283,682
Liabilities
Futures Contracts
Currencies				$	(24,525	)
Energy					(250,008	)
Grains					(1,805,874	)
Indices					(229,753	)
Interest Rates U.S.					(192,327	)
Interest Rates Non-U.S.					(137,545	)
Metals					(42,571	)
Softs					(58,507	)
Total unrealized depreciation on open futures contracts				$	(2,741,110	)
Net unrealized appreciation on open futures contracts				$	1,542,572	*
Assets
Forward Contracts
Currencies				$	4,782,600
Metals					441,722
Total unrealized appreciation on open forward contracts				$	5,224,322
Liabilities
Forward Contracts
Currencies				$	(3,555,243	)
Metals					(117,964	)
Total unrealized depreciation on open forward contracts				$	(3,673,207	)
Net unrealized appreciation open forward contracts				$	1,551,115	**

 

*	This amount is in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.

**	This amount is in “Net unrealized appreciation on open forward contracts” on the Master’s Statements of Financial Condition.

The following tables indicate the trading gains and losses, by market sector, on derivative instruments for the three months ended March 31, 2012 and 2011.

 

		Three Months Ended March 31, 2012						Three Months Ended March 31, 2011
Sector				Gain (loss) from trading				Gain (loss) from trading
Currencies		$			(2,853,812	)		$			(1,718,471	)
Energy					5,838,219						1,146,153
Grains					(356,651	)					(109,559	)
Indices					9,303,276						(1,267,640	)
Interest Rates U.S.					(3,291,535	)					(1,337,400	)
Interest Rates Non-U.S.					(1,846,271	)					269,082
Livestock					(58,017	)					132,388
Metals					(3,024,539	)					870,154
Softs					(649,001	)					944,573
Total		$			(3,061,669	)***		$			(1,070,720	)		***

 

 

***	This amount is in “Total trading results” on the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

4.    Fair Value Measurement:

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

GAAP also requires the 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 Level 2 assets and liabilities.

The Partnership will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

Effective January 1, 2012, the Partnership adopted 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. This new guidance did not have a significant impact on the Partnership’s financial statements.

The Partnership values its investment in the Master with no rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended March 31, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). There were no transfers of assets and liabilities between Level 1 and Level 2 during the quarter ended March 31, 2012.

 

		March 31, 2012				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Investment in Master		$	18,787,897			$	—			$	18,787,897			$	—
Net fair value		$	18,787,897			$	—			$	18,787,897			$	—
		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 Master		$	19,596,546			$	—			$	19,596,546			$	—
Net fair value		$	19,596,546			$	—			$	19,596,546			$	—

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Master’s Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Master’s 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 Master’s Level 2 assets and liabilities.

The Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Master considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (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). As of and for the periods ended March 31, 2012 and December 31, 2011, the Master 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). During the period January 1, 2012 to March 31, 2012, there were no Level 3 assets and liabilities, and there were no transfers of assets or liabilities between Level 1 and Level 2.

 

		March 31, 2012				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets
Futures		$	5,179,676			$	5,179,676			$	—			$	—
Forwards			1,442,623				277,647				1,164,976				—
Total assets		$	6,622,299			$	5,457,323			$	1,164,976			$	—
Liabilities
Futures		$	4,276,367			$	4,276,367			$	—			$	—
Forwards			2,223,412				28,432				2,194,980				—
Total liabilities			6,499,779				4,304,799				2,194,980				—
Net fair value		$	122,520			$	1,152,524			$	(1,030,004	)		$	—
		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
Futures		$	4,283,682			$	4,283,682			$	—			$	—
Forwards			5,224,322				441,722				4,782,600				—
Total assets		$	9,508,004			$	4,725,404			$	4,782,600			$	—
Liabilities
Futures		$	2,741,110			$	2,741,110			$	—			$	—
Forwards			3,673,207				117,964				3,555,243				—
Total liabilities			6,414,317				2,859,074				3,555,243				—
Net fair value		$	3,093,687			$	1,866,330			$	1,227,357			$	—

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

5.    Financial Instrument Risks:

In the normal course of business, the Partnership, through its investment in the Master, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards, swaps and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 19.9% to 10.3% of the Partnership’s/Master contracts are traded OTC.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of 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/Master 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/Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Master’s 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/Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Master has credit risk and concentration risk as CGM or a CGM affiliate is the sole counterparty or broker with respect to the Partnership’s/Master’s assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through CGM, the Partnership’s/Master’s counterparty is an exchange or clearing organization.

The General Partner monitors and attempts to control the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master 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.

The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

6.	Critical Accounting Policies

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Partnership’s Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2 of the Master’s notes to the annual financial statements as of December 31, 2011.

Partnership’s and Master’s Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Master’s Level 1 assets and liabilities are actively traded.

GAAP also requires the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Master’s Level 2 assets and liabilities.

The Partnership and the Master will separately present purchases, sales, issuances and settlements in its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Partnership values investments in the Master where there are no other rights or obligations inherent within the ownership interest held by the Partnership based on the end of the day net asset value of the Master (Level 2). The value of the Partnership’s investment in the Master reflects its proportional interest in the Master. As of and for the periods ended March 31, 2012 and December 31, 2011, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

The Master considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (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). As of and for the periods ended March 31, 2012 and December 31, 2011, the Master 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).

Futures Contracts. The Master trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master 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 Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Fairfield Futures Fund L.P. II

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Master agrees 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 Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on 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 and Changes in Partners’ Capital.

The Master does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses and Changes in Partners’ Capital.

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 Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master 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 Master. 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 Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in 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 and Changes in Partners’ Capital.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.

GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.

The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities. Management does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Subsequent Events. The General Partner evaluates events that occur after the balance sheet date but before financial statements are filed. 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.

Recent Accounting Pronouncements. 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 the 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 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 comparison 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.

Net Income (Loss) per unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights.”

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in sales of goods or services. The Master’s only assets are its equity in its trading accounts consisting of cash and cash equivalents, net unrealized appreciation on open futures contracts and net unrealized appreciation on forward contracts. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the first quarter of 2012.

The Partnership’s capital consists of capital contributions of the partners, as increased or decreased by income(loss) from investment in the Master on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the three months ended March 31, 2012, Partnership capital decreased 13.5% from $19,393,703 to $16,783,732. This decrease was attributable to the redemptions of 3,248.9666 Redeemable Units totaling $2,667,658 coupled with a net gain from operations of $57,687. Future redemptions can impact the amount of funds available for investment in the Master in subsequent periods.

The Master’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, redemptions of units and distribution of profits, if any.

For the three months ended March 31, 2012, the Master’s capital decreased 1.5% from $127,523,174 to $125,598,996. This decrease was attributable to a net gain from operations of $2,906,796 coupled with redemptions of 3,249.6165 units totaling $4,820,618 and distribution of interest income to feeder funds totaling $10,356. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 6 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Results of Operations

During the Partnership’s first quarter of 2012, the net asset value per unit increased 0.3% from $818.04 to $820.38 as compared to a decrease of 2.6% in the first quarter of 2011. The Partnership, through its investment in the Master, experienced a net trading gain before brokerage fees and related fees in the first quarter of 2012 of $459,974. Gains were primarily attributable to the Master’s trading of commodity futures in energy and indices and were partially offset by losses in currencies, grains, U.S. and non-U.S. interest rates, livestock, metals and softs. The Partnership, through its investment in the Master, experienced a net trading loss before brokerage fees and related fees in the first quarter of 2011 of $237,838. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, grains, indices and U.S. interest rates and were partially offset by gains in energy, non-U.S. interest rates, livestock, metals and softs.

The most significant gains were recorded within the global stock index sector throughout the majority of the quarter from long positions in U.S., European, and Japanese equity index futures as prices were buoyed by better-than-expected economic reports in these regions. Prices also rose after China cut banks’ reserve requirements to fuel lending and the U.S. Federal Reserve Board raised its assessment of the U.S. economy. Within the energy markets, gains were achieved throughout the majority of the quarter from short positions in natural gas futures as prices dropped amid ample inventories and mild weather across the U.S. Additional gains were experienced during February from long futures positions in RBOB (unleaded) gas and brent crude as prices increased on concerns over inventory levels and rising tensions in the Middle East.

A portion of the Partnership’s gains for the quarter was offset by losses incurred within the global interest rate sector in February and March from long positions in U.S., European, and Australian fixed-income futures. During February, prices fell amid optimism that Greece would receive a second bailout, thereby diminishing demand for the relative “safety” of government bonds. Meanwhile, prices fell further during March after the U.S. Federal Reserve upwardly revised the U.S. economic outlook. Losses were experienced within the currency markets during January from short positions in the British pound and Swiss franc versus the U.S. dollar as the value of these currencies reversed higher against the U.S. dollar. During March, long positions in the Australian dollar and New Zealand dollar versus the U.S. dollar resulted in losses as the value of these commodity-linked currencies fell against the U.S. dollar after concern over earnings in China reduced demand for higher-yielding currency assets. Within the metals markets, losses were recorded primarily in January from short positions in zinc, aluminum, and copper futures as prices advanced on speculation metals demand will be supported by economic expansion in the U.S. and an easing credit policy in China. Additional losses were incurred within the agricultural complex, primarily during January, from short positions in cocoa futures as prices advanced on concern supplies from the Ivory Coast, the world’s largest cocoa growing country, may weaken.

 

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Commodity futures markets are highly volatile. Broad and rapid price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility for profit or loss. The profitability of the Partnership (and the Master) depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. 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 Advisor is able to identify them, the Partnership/Master expects to increase capital through operations.

Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master, was earned 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. Interest income allocated from the Master for the three months ended March 31, 2012 decreased by $5,731, as compared to the corresponding period in 2011. The decrease in interest income is primarily due to lower U.S. Treasury bill rates and lower average net assets during the three months ended March 31,2012 as compared to the corresponding period in 2011. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends upon the average daily equity in the Partnership’s/Master’s account and upon interest rates over which neither the Partnership/Master 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 and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage fees for the three months ended March 31, 2012 decreased by $206,868 as compared to the corresponding period in 2011. The decrease in brokerage fees is due to lower average net assets during the three months ended March 31, 2012 as compared to the corresponding period in 2011.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance and redemptions. Management fees for the three months ended March 31, 2012 decreased by $91,379 as compared to the corresponding period in 2011. The decrease in management fees is due to lower average net assets during the three months ended March 31, 2012 as compared to the corresponding period in 2011.

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 as of the end of each month and are affected by trading performance and redemptions. Administrative fees for the three months ended March 31, 2012 decreased by $22,843 as compared to the corresponding period in 2011. The decrease in administrative fees is due to lower average net assets during the three months ended March 31, 2012 as compared to the corresponding period in 2011.

Special Limited Partner profit share allocations are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the management agreement among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three and months ended March 31, 2012 and 2011. The Advisor will not be allocated a profit share until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

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

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

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

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

“Value at Risk” is a measure of the maximum amount which the Master could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Master’s speculative trading and the recurrence in the markets traded by the Master of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Master’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Master’s losses in any market sector will be limited to Value at Risk or by the Master’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Master as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

 

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Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Master’s open positions by market category as of March 31, 2012 and December 31, 2011, and the highest, lowest and average values during the three months ended March 31, 2012 and the twelve months ended December 31, 2011. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

As of March 31, 2012, the Master’s total capitalization was $125,598,996 and the Partnership owned approximately 14.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of March 31, 2012 was as follows:

March 31, 2012

 

										Three Months Ended March 31, 2012
Market Sector		Value at Risk				% of Total Capitalization				High Value at Risk				Low Value at  Risk				Average Value at Risk*
Currencies		$	2,932,243				2.33	%		$	14,645,028			$	2,932,243			$	4,034,576
Energy			3,313,986				2.64	%			3,576,694				430,473				2,846,436
Grains			808,031				0.65	%			1,548,650				436,750				904,239
Indices			7,212,315				5.74	%			11,180,261				3,276,704				7,274,223
Interest Rates U.S.			190,045				0.15	%			2,390,488				91,689				1,243,390
Interest Rates Non-U.S.			5,163,732				4.11	%			6,411,562				813,077				5,317,338
Livestock			7,200				0.01	%			63,600				1,200				10,400
Metals			1,595,641				1.27	%			2,278,016				616,825				1,259,297
Softs			946,658				0.75	%			999,000				241,774				739,956
Total		$	22,169,851				17.65	%

 

 

*    Average month-end Values at Risk.

As of December 31, 2011, the Master’s total capitalization was $127,523,174 and the Partnership owned approximately 15.4% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2011 was as follows:

December 31, 2011

 

										Twelve Months Ended December 31, 2011
Market Sector		Value at Risk				% of Total Capitalization				High Value at Risk				Low Value at  Risk				Average Value at Risk*
Currencies		$	5,181,686				4.06	%		$	14,715,746			$	1,934,690			$	8,500,010
Energy			2,114,289				1.66	%			2,114,289				430,473				1,224,336
Grains			1,611,500				1.27	%			1,783,300				325,891				633,165
Indices			4,513,393				3.54	%			11,180,261				924,448				3,873,039
Interest Rates U.S.			1,636,222				1.28	%			4,564,925				91,689				1,397,376
Interest Rates Non-U.S.			5,486,252				4.30	%			5,647,770				813,077				2,296,485
Livestock			10,800				0.01	%			127,950				2,400				35,984
Metals			2,117,496				1.66	%			2,219,604				616,825				1,237,109
Softs			987,729				0.77	%			987,729				161,005				421,227
Total		$	23,659,367				18.55	%

 

 

*	Annual average of month-end Values at Risk.

 

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Item 4.

Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s CEO and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012 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.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

The following information supplements and amends the discussion set forth under Part I, Item 3. “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There are no material legal proceedings pending against the Partnership and the General Partner.

Subprime Mortgage-Related Litigation and Other Matters

On March 15, 2012, the United States Court of Appeals for the Second Circuit granted a stay of the district court proceedings pending resolution of the appeals in SEC v. CGMI. Additional information relating to this matter is publicly available in court filings under docket numbers 11 Civ. 7387 (S.D.N.Y.) (Rakoff, J.) and 11-5227 (2d Cir.).

 

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Item 1A. Risk Factors

  There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Partnership no longer offers Redeemable Units for sale.

The following chart sets forth the purchases of Redeemable Units by the Partnership.

 

Period		(a) Total Number           of Redeemable           Units Purchased*		(b) Average     Price Paid       per Redeemable     Unit**		(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
January 1, 2012 – January 31, 2012		634.4141		$          817.34		N/A		N/A
February 1, 2012 – February 29, 2012		206.8517		$          840.68		N/A		N/A
March 1, 2012 – March 31, 2012		2,407.7008		$          820.38		N/A		N/A
		3,248.9666		$          821.08		N/A		N/A

* 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.

 

Item 3.

Defaults Upon Senior Securities – None.

 

Item 4.

Mine Safety Disclosures – None.

 

Item 5.

Other Information – None.

 

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Item 6.

Exhibits

 

3.1

Limited Partnership Agreement (filed as Exhibit 3.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

3.2

Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

(a)

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 21, 2005 (filed as Exhibit 3.2A to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(b)

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 19, 2008 (filed as Exhibit 3.2B to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

(c)

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 28, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference).

 

(d)

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 29, 2010 (filed as Exhibit 3.2(d) to the Form 8-K filed on July 2, 2010 and incorporated herein by reference).

 

(e)

Certificate of Amendment of 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).

 

10.1

Customer Agreement between the Partnership and CGM (filed as Exhibit 10.2 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

10.2

Form of Subscription Agreement (filed as Exhibit 10.4 to the Partnership’s Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

10.3

Escrow Instructions relating to escrow of subscription funds (filed as Exhibit 10.3 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

10.4

Agency Agreement among the Partnership, the General Partner and CGM (filed as Exhibit 10.3 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

(a)

Joinder Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated June 1, 2009 (filed as Exhibit 10 to the Form 10-Q filed on August 14, 2009 and incorporated herein by reference).

 

10.5

Management Agreement among the Partnership, the General Partner and Graham (filed as Exhibit 10.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference).

 

(a)

Letter extending the Management Agreement between the General Partner and Graham for 2011 (filed as Exhibit 10.4(a) to the Form 10-K filed March 30, 2012 and incorporated herein by reference).

Exhibit 31.1 — Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director)

Exhibit 31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer)

Exhibit 32.1 — Section 1350 Certification (Certification of President and Director)

Exhibit 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 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.

FAIRFIELD FUTURES FUND L.P. II

 

By:		Ceres Managed Futures LLC
		(General Partner)
By:		/s/ Walter Davis
		Walter Davis President and Director
Date: May 15, 2012
By:		/s/ Brian Centner
		Brian Centner Chief Financial Officer (Principal Accounting Officer)

Date: May 15, 2012

 

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