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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 000-50735

POTOMAC FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York		13-3937275
(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 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No   

Indicate by check mark 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, 27,265.6519 Limited Partnership Redeemable Units were outstanding.

 

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POTOMAC FUTURES FUND L.P.

FORM 10-Q

INDEX

 

				Page Number
PART I - Financial Information:
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 Campbell Master Fund L.P. (unaudited)		5 - 21
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 – 24
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		25 – 26
Item 4.		Controls and Procedures		27
PART II - Other Information				28 – 31

 

Exhibits
Exhibit 31.1 Certification
Exhibit 31.2 Certification
Exhibit 32.1 Certification
Exhibit 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

Potomac Futures Fund L.P.

Statements of Financial Condition

 

		(Unaudited) March 31, 2012				December 31, 2011
Assets:
Investment in Master, at fair value		$	39,369,906			$	40,316,184
Cash			210,959				82,623
Total assets		$	39,580,865			$	40,398,807
Liabilities and Partners’ Capital:
Liabilities:
Accrued expenses:
Brokerage fees		$	181,412			$	185,161
Management fees			65,342				66,834
Other			194,490				113,301
Redemptions payable			1,155,639				548,767
Total liabilities			1,596,883				914,063
Partners’ Capital:
General Partner, 337.4926 unit equivalents outstanding at March 31, 2012 and December 31, 2011			457,876				448,879
Limited Partners, 27,659.7519 and 29,349.3066 Redeemable Units outstanding at March 31, 2012 and December 31, 2011, respectively			37,526,106				39,035,865
Total partners’ capital			37,983,982				39,484,744
Total liabilities and partners’ capital		$	39,580,865			$	40,398,807
Net asset value per unit		$	1,356.70			$	1,330.04

See accompanying notes to financial statements.

 

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Potomac Futures 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 allocated from Master		$	3,139			$	7,384
Expenses:
Expenses allocated from Master			56,894				36,631
Brokerage fees			558,960				526,824
Management fees			201,435				190,385
Other			97,197				60,200
Total expenses			914,486				814,040
Net investment income (loss)			(911,347	)			(806,656	)
Trading Results:
Net realized gains (losses) on closed contracts allocated from Master			2,870,592				(197,686	)
Change in net unrealized gains (losses) on open contracts allocated from Master			(1,148,450	)			(1,258,108	)
Total trading results allocated from Master			1,722,142				(1,455,794	)
Net income (loss)			810,795				(2,262,450	)
Subscriptions — Limited Partners			150,000				5,371,395
Redemptions — Limited Partners			(2,461,557	)			(1,969,079	)
Net increase (decrease) in Partners’ Capital			(1,500,762	)			1,139,866
Partners’ Capital, beginning of period			39,484,744				35,871,031
Partners’ Capital, end of period		$	37,983,982			$	37,010,897
Net asset value per unit (27,997.2445 and 27,134.8891 units outstanding at March 31, 2012 and 2011, respectively)		$	1,356.70			$	1,363.96
Net income (loss) per unit*		$	26.66			$	(83.45	)
Weighted average units outstanding			29,225.0703				26,783.8069

*	Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

1.

General:

Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership which was organized on March 14, 1997 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 commodity interests that are indirectly traded by the Partnership through its investment in the Master (as defined below) are volatile and involve a high degree of market risk. The Partnership was authorized to sell an unlimited number of redeemable units of limited partnership interest (“Redeemable Units”) during its initial offering period. The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). Morgan Stanley, indirectly through various subsidiaries, owns a majority equity interest in MSSB Holdings. Citigroup Inc. (“Citigroup”) indirectly owns a minority equity interest in MSSB Holdings. Citigroup also indirectly owns Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup. As of March 31, 2012, all trading decisions for the Partnership are made by the Advisor (defined below).

On January 1, 2005, the Partnership allocated substantially all of its capital to the CMF Campbell Master Fund L.P. (the “Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 173,788.6446 units of the Master with cash equal to $172,205,653 and a contribution of open commodity futures and forward contracts with a fair value of $1,582,992. The Master was formed in order to permit accounts managed by Campbell & Company, Inc. (“Campbell” or the “Advisor”) using Campbell’s FME Large Portfolio Program (“FME”), a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. 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.

As of March 31, 2012 and December 31, 2011, the Partnership owned 100% of the Master. The Partnership intends 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. The Master engages in such trading through a commodity brokerage account maintained with CGM. The Master’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Partners’ Capital are included herein.

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits or losses, if any, net of distributions.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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 2011. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s Annual Report on 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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Potomac Futures Fund L.P.

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 Campbell Master Fund L.P.

Statements of Financial Condition

 

		(Unaudited) March 31, 2012				December 31, 2011
Assets:
Equity in trading account:
Cash		$	32,180,452			$	34,085,954
Cash margin			6,826,202				4,716,760
Net unrealized appreciation on open futures contracts			573,369				591,876
Net unrealized appreciation on open forward contracts			—				975,939
Total assets		$	39,580,023			$	40,370,529
Liabilities and Partners’ Capital:
Liabilities:
Net unrealized depreciation on open forward contracts		$	154,004			$	—
Accrued expenses:
Professional fees			57,601				54,345
Total liabilities			211,605				54,345
Partners’ Capital:
General Partner, 0.0000 unit equivalents at March 31, 2012 and December 31, 2011			—				—
Limited Partners, 29,149.8245 and 31,102.0434 units outstanding at March 31, 2012 and December 31, 2011, respectively			39,368,418				40,316,184
Total liabilities and partners’ capital		$	39,580,023			$	40,370,529
Net asset value per unit		$	1,350.55			$	1,296.26

 

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

CMF Campbell Master Fund L.P.

Condensed Schedule of Investments

March 31, 2012

(Unaudited)

 

		Notional ($)/ Number of Contracts				Fair Value				% of Partners’ Capital
Futures Contracts Purchased
Energy			81			$	(124,427	)			(0.32	)%
Grains			107				122,505				0.31
Indices			512				127,879				0.33
Interest Rates Non-U.S.			1,082				312,593				0.79
Interest Rates U.S.			100				(133,062	)			(0.34	)
Livestock			1				(950	)			(0.00	)*
Metals			6				(5,233	)			(0.01	)
Softs			80				(39,256	)			(0.10	)
Total futures contracts purchased							260,049				0.66
Futures Contracts Sold
Energy			114				271,240				0.69
Grains			58				(51,620	)			(0.13	)
Indices			15				45,617				0.12
Interest Rates Non-U.S.			256				(165,851	)			(0.42	)
Interest Rates U.S.			54				(29,562	)			(0.07	)
Livestock			30				63,380				0.16
Metals			3				(6,585	)			(0.02	)
Softs			66				186,701				0.47
Total futures contracts sold							313,320				0.80
Unrealized Appreciation on Open Forward Contracts
Currencies		$	57,522,239				575,154				1.46
Metals			47				108,714				0.28
Total unrealized appreciation on open forward contracts							683,868				1.74
Unrealized Depreciation on Open Forward Contracts
Currencies		$	78,317,887				(772,817	)			(1.96	)
Metals			39				(65,055	)			(0.17	)
Total unrealized depreciation on open forward contracts							(837,872	)			(2.13	)
Net fair value						$	419,365				1.07	%

 

 

*	Due to rounding.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

CMF Campbell Master Fund L.P.

Condensed Schedule of Investments

December 31, 2011

 

		Notional ($)/ Number of Contracts				Fair Value				% of Partners’ Capital
Futures Contracts Purchased
Energy			48			$	(533	)			(0.00	)%*
Grains			9				9,843				0.02
Indices			73				94,631				0.24
Interest Rates Non-U.S.			1,131				418,802				1.04
Interest Rates U.S.			185				194,093				0.48
Livestock			7				(2,750	)			(0.01	)
Total futures contracts purchased							714,086				1.77
Futures Contracts Sold
Energy			67				98,948				0.25
Grains			121				(284,500	)			(0.70	)
Indices			77				37,623				0.09
Interest Rates Non-U.S.			29				8,957				0.02
Interest Rates U.S.			123				(13,737	)			(0.03	)
Livestock			9				(7,480	)			(0.02	)
Metals			13				53,895				0.13
Softs			74				(15,916	)			(0.04	)
Total futures contracts sold							(122,210	)			(0.30	)
Unrealized Appreciation on Open Forward Contracts
Currencies		$	86,978,000				1,317,888				3.27
Metals			89				211,388				0.52
Total unrealized appreciation on open forward contracts							1,529,276				3.79
Unrealized Depreciation on Open Forward Contracts
Currencies		$	53,420,743				(500,123	)			(1.24	)
Metals			34				(53,214	)			(0.13	)
Total unrealized depreciation on open forward contracts							(553,337	)			(1.37	)
Net fair value						$	1,567,815				3.89	%

* Due to rounding.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

CMF Campbell 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		$	3,139			$	7,384
Expenses:
Clearing fees			31,618				17,352
Professional fees			25,276				19,279
Total expenses			56,894				36,631
Net investment income (loss)			(53,755	)			(29,247	)
Trading Results:
Net gains (losses) on trading of commodity interests:
Net realized gains (losses) on closed contracts			2,870,592				(197,686	)
Change in net unrealized gains (losses) on open contracts			(1,148,450	)			(1,258,108	)
Total trading results			1,722,142				(1,455,794	)
Net income (loss)			1,668,387				(1,485,041	)
Subscriptions — Limited Partners			150,000				5,371,395
Redemptions — Limited Partners			(2,763,014	)			(2,504,344	)
Distribution of interest income to feeder funds			(3,139	)			(7,384	)
Net increase (decrease) in Partners’ Capital			(947,766	)			1,374,626
Partners’ Capital, beginning of period			40,316,184				36,375,992
Partners’ Capital, end of period		$	39,368,418			$	37,750,618
Net asset value per unit (29,149.8245 and 30,215.8214 units outstanding at March 31, 2012 and 2011, respectively)		$	1,350.55			$	1,249.37
Net income (loss) per unit*		$	54.40			$	(49.71	)
Weighted average units outstanding			30,431.0357				30,239.9191

 

*	Based on change in net asset value per unit.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

2.	Financial Highlights:

Changes in 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) allocated from Master*		$	37.59			$	(73.61	)
Interest income allocated from Master			0.11				0.28
Expenses **			(11.04	)			(10.12	)
Increase (decrease) for the period			26.66				(83.45	)
Net asset value per unit, beginning of period			1,330.04				1,447.41
Net asset value per unit, end of period		$	1,356.70			$	1,363.96

 

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

 

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

 

		Three Months Ended March 31,
		2012				2011***
Ratio to average net assets:****
Net investment income (loss)			(9.3	)%			(8.9	)%
Incentive fees			—	%			—	%
Net investment income (loss) before incentive fees*****			(9.3	)%			(8.9	)%
Operating expenses			9.3	%			8.9	%
Incentive fees			—	%			—	%
Total expenses			9.3	%			8.9	%
Total return:
Total return before incentive fees			2.0	%			(5.8	)%
Incentive fees			—	%			—	%
Total return after incentive fees			2.0	%			(5.8	)%

 

***	The ratios are shown net and gross of incentive fees to conform to current period presentation.

 

****	Annualized (other than incentive fees).

 

*****

Interest income allocated from the Master 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.

 

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Potomac Futures Fund L.P.

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)*		$	55.14			$	(49.31	)
Interest income			0.11				0.25
Expenses **			(0.85	)			(0.65	)
Increase (decrease) for the period			54.40				(49.71	)
Distribution of interest income to feeder funds			(0.11	)			(0.25	)
Net asset value per unit, beginning of period			1,296.26				1,299.33
Net asset value per unit, end of period		$	1,350.55			$	1,249.37

 

*	Includes clearing fees.

 

**	Excludes clearing fees.

 

		Three Months Ended March 31,
		2012				2011
Ratios to Average Net Assets:***
Net investment income (loss)****			(0.5	)%			(0.3	)%
Operating expenses			0.6	%			0.4	%
Total return			4.2	%			(3.8	)%

 

***	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 on open 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, subscriptions and redemptions.

 

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Potomac Futures Fund L.P.

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 2,314 and 1,149, respectively. The monthly average number of metals forward contracts traded during the three months ended March 31, 2012 and 2011 were 261 and 104, respectively. The monthly average notional values of currency forward contracts during the three months ended March 31, 2012 and 2011 were $281,967,153 and $477,891,035, respectively. The monthly average notional values of currency option contracts during the three months ended March 31, 2012 and 2011 were $0 and $30,370,089,242, respectively. The following tables indicate the gross fair values of derivative instruments of futures, forward and options contracts as separate assets and liabilities as of March 31, 2012 and December 31, 2011.

 

Assets		March 31, 2012
Futures Contracts
Energy		$	281,970
Grains			127,295
Indices			386,950
Interest Rates Non-U.S.			361,849
Interest Rates U.S.			22,266
Livestock			63,380
Metals			1,587
Softs			241,830
Total unrealized appreciation on open futures contracts		$	1,487,127
Liabilities
Futures Contracts
Energy		$	(135,157	)
Grains			(56,410	)
Indices			(213,454	)
Interest Rates Non-U.S.			(215,107	)
Interest Rates U.S.			(184,890	)
Livestock			(950	)
Metals			(13,405	)
Softs			(94,385	)
Total unrealized depreciation on open futures contracts		$	(913,758	)
Net unrealized appreciation on open futures contracts		$	573,369	*
Assets
Forward Contracts
Currencies		$	575,154
Metals			108,714
Total unrealized appreciation on open forward contracts		$	683,868
Liabilities
Forward Contracts
Currencies		$	(772,817	)
Metals			(65,055	)
Total unrealized depreciation on open forward contracts		$	(837,872	)
Net unrealized depreciation on open forward contracts		$	(154,004	)**

 

*	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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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

Assets		December 31, 2011
Futures Contracts
Energy		$	120,537
Grains			9,843
Indices			145,602
Interest Rates Non-U.S.			494,099
Interest Rates U.S.			195,796
Livestock			700
Metals			53,895
Softs			45,714
Total unrealized appreciation on open futures contracts		$	1,066,186
Liabilities
Futures Contracts
Energy		$	(22,122	)
Grains			(284,500	)
Indices			(13,348	)
Interest Rates Non-U.S.			(66,339	)
Interest Rates U.S.			(15,441	)
Livestock			(10,930	)
Softs			(61,630	)
Total unrealized depreciation on open futures contracts		$	(474,310	)
Net unrealized appreciation on open futures contracts		$	591,876	*
Assets
Forward Contracts
Currencies		$	1,317,888
Metals			211,388
Total unrealized appreciation on open forward contracts		$	1,529,276
Liabilities
Forward Contracts
Currencies		$	(500,123	)
Metals			(53,214	)
Total unrealized depreciation on open forward contracts		$	(553,337	)
Net unrealized appreciation on open forward contracts		$	975,939	**
*       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.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

The following table indicates 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,
Sector		2012				2011
Currencies		$	178,272			$	(721,447	)
Energy			1,626,871				804,281
Grains			(31,299	)			(261,074	)
Indices			1,437,633				(795,217	)
Interest Rates U.S.			(409,487	)			(229,757	)
Interest Rates Non-U.S.			(818,013	)			(378,016	)
Livestock			(55,395	)			(27,350	)
Metals			(533,458	)			(130,337	)
Softs			327,018				283,123
Total		$	1,722,142	***		$	(1,455,794	)***

 

 

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

 

4.	Fair Value Measurements:

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.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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		$	39,369,906			$	—			$	39,369,906			$	—
Net fair value		$	39,369,906			$	—			$	39,369,906			$	—
		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		$	40,316,184			$	—			$	40,316,184			$	—
Net fair value		$	40,316,184			$	—			$	40,316,184			$	—

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.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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 (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets 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		$	1,487,127			$	1,487,127			$	—			$	—
Forwards			683,868				108,714				575,154				—
Total assets			2,170,995				1,595,841				575,154				—
Liabilities
Futures		$	913,758			$	913,758			$	—			$	—
Forwards			837,872				65,055				772,817				—
Total liabilities			1,751,630				978,813				772,817				—
Net fair value		$	419,365			$	617,028			$	(197,663	)		$	—
		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		$	1,066,186			$	1,066,186			$	—			$	—
Forwards			1,529,276				211,388				1,317,888				—
Total assets			2,595,462				1,277,574				1,317,888				—
Liabilities
Futures		$	474,310			$	474,310			$	—			$	—
Forwards			553,337				53,214				500,123				—
Total liabilities			1,027,647				527,524				500,123				—
Net fair value		$	1,567,815			$	750,050			$	817,765			$	—

 

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Potomac Futures Fund L.P.

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 forward and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards, swaps and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicated. 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 21.8% to 34.3% of the Partnership’s/Master’s 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.

As both a buyer and seller of options, the Partnership/Master pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Master to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Master does not consider these contracts to be guarantees.

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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Potomac Futures Fund L.P.

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 Masters’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 Partnership’s and Master’s Level 2 assets and liabilities.

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

The Partnership values its investment 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 (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets 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).

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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.

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.

Options. The Master may purchase and write (sell) both exchange–listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in 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.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

March 31, 2012

(Unaudited)

 

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. The General Partner 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 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 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 account, consisting of cash, cash margin, net unrealized appreciation on open futures contracts and net unrealized appreciation on open 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 the capital contributions of the partners, as increased or decreased by income (loss) from its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the three months ended March 31, 2012, Partnership capital decreased 3.8% from $39,484,744 to $37,983,982. This decrease was attributable to the redemption of 1,802.3333 Redeemable Units totaling $2,461,557, which was partially offset by a net gain from operations of $810,795 coupled with the additional subscriptions of 112.7786 Redeemable Units totaling $150,000. 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 realized and/or unrealized gains or losses commodity interest on trading, expenses, interest income, redemptions of units and distributions of profits, if any.

For the three months ended March 31, 2012, the Master’s capital decreased 2.4% from $40,316,184 to $39,368,418. This decrease was attributable to the redemption of 2,067.9369 units totaling $2,763,014 and distribution of interest income to feeder funds totaling $3,139, which was partially offset by a net gain from operations of $1,668,387 coupled with the additional subscriptions of 115.7180 units totaling $150,000. 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 2.0% from $1,330.04 to $1,356.70 as compared to a decrease of 5.8% 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 $1,722,142. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, indices and softs and were partially offset by losses in U.S. and non-U.S. interest rates, grains, livestock and metals. 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 $1,455,794. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, grains, U.S. and non-U.S. interest rates, livestock, metals, and indices and were partially offset by gains in energy and softs.

The most significant gains were recorded within the energy markets during January and March 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) gasoline, Brent crude, and gas oil as prices increased on concerns over inventory levels and rising tensions in the Middle East. Within the global stock index sector, gains were achieved during January and February from long positions in U.S., European, and Pacific Rim 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. Further gains were recorded in this sector during March. Within the agricultural complex, gains were recorded during February and March from short positions in coffee futures as prices declined on signs of abundant supplies from Brazil, the world’s biggest grower of coffee. Additional gains were achieved within the currency markets during January and February from long positions in the New Zealand dollar, Australian dollar, and Canadian dollar versus the U.S. dollar as the value of these commodity-linked currencies moved higher against the U.S. dollar following positive economic news out of China and on optimism Greece will receive a second bailout package, which boosted demand for higher-yielding currencies.

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., Australian, and Japanese fixed-income futures. During February, prices fell amid the aforementioned 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 their U.S. economic outlook. Within the metals markets, losses were recorded primarily in January from short positions in zinc and aluminum 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. Smaller losses were experienced in this sector during February and March.

 

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Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the 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 (and the 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 $4,245, as compared to the corresponding period in 2011. The decrease in interest income is primarily due to lower U.S. Treasury bill rates 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 on the average daily equity in the 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, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Brokerage fees for the three months ended March 31, 2012 increased by $32,136, as compared to the corresponding period in 2011. The increase in brokerage fees is due to an increase in the 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 net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Management fees for the three months ended March 31, 2012 increased by $11,050 as compared to the corresponding period in 2011. The increase in management fees is due to an increase in average net assets during the three months ended March 31, 2012 as compared to the corresponding period in 2011.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreements between the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three months ended March 31, 2012 and 2011. The Advisor will not be paid incentive fees 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, in 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 they trade.

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 of 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 for 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 $39,368,418 and the Partnership owned 100.0% 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		$	1,666,904				4.23	%		$	2,527,349			$	883,986			$	1,830,356
Energy			635,650				1.62	%			724,900				160,800				515,608
Grains			182,917				0.47	%			250,567				43,400				125,896
Indices			1,611,906				4.09	%			2,014,273				341,913				1,171,207
Interest Rates U.S.			164,818				0.42	%			654,025				23,777				268,448
Interest Rates Non-U.S.			1,552,026				3.94	%			2,393,733				142,967				1,480,077
Livestock			36,025				0.09	%			37,350				2,450				20,200
Metals			432,833				1.10	%			835,646				129,472				395,852
Softs			310,300				0.79	%			349,350				69,550				213,817
Total		$	6,593,379				16.75	%

 

 

*	Average of month-end Values at Risk.

As of December 31, 2011, the Master’s total capitalization was $40,316,184 and the Partnership owned 100.0% 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		$	1,720,183				4.27	%		$	2,962,979			$	771,765			$	1,731,613
Energy			369,050				0.92	%			670,680				138,902				332,788
Grains			226,625				0.56	%			391,825				31,425				128,589
Indices			730,850				1.81	%			2,014,273				341,913				874,845
Interest Rates U.S.			269,002				0.67	%			1,022,250				23,777				346,651
Interest Rates Non-U.S.			1,481,068				3.67	%			1,912,464				142,967				1,036,787
Livestock			10,975				0.03	%			173,150				2,400				39,698
Metals			738,537				1.83	%			811,572				155,338				479,829
Softs			234,900				0.58	%			279,000				13,950				127,271
Total		$	5,781,190				14.34	%

 

 

*	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

For the three months ended March 31, 2012, there were additional subscriptions of 112.7786 Redeemable Units totaling $150,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

Proceeds of net offering were used for the trading of commodity interests, including futures contracts, options, forwards and swap contracts.

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			772.9908			$	1,366.64				N/A				N/A
February 1, 2012 - February 29, 2012			177.5408			$	1,405.41				N/A				N/A
March 1, 2012 - March 31, 2012			851.8017			$	1,356.70				N/A				N/A
			1,802.3333			$	1,365.76

* 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		Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated March 13, 1997 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(a)		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 February 26, 1999 (filed as Exhibit 3.4 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(b)		Certificate of Change of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.3 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(c)		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 April 1, 2001 (filed as Exhibit 3.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 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 April 21, 2003 (filed as Exhibit 3.5 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 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 21, 2005 (filed as Exhibit 3.1(e) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(f)		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 19, 2008 (filed as Exhibit 3.1(f) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(g)		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 28, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference).
(h)		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 3.1(h) to the Form 8-K filed on June 30, 2010 and incorporated herein by reference).
(i)		Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Form 8-K filed on September 7, 2011 and incorporated herein by reference).
3.2		Third Amended and Restated Limited Partnership Agreement, dated February 22, 2010 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on February 25, 2010 and incorporated herein by reference).
10.1		Form of Subscription Agreement (filed as Exhibit 10.1 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
10.2		Second Amended and Restated Customer Agreement between the Partnership and Salomon Smith Barney Inc., dated April 1, 2001 (filed as Exhibit 10.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
10.3		Second Amended and Restated Agency Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated July 29, 2010 (filed as Exhibit 10.3 to the Form 8-K filed on August 3, 2010 and incorporated herein by reference).
10.4		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		Escrow Agreement among the Partnership, Smith Barney Futures Management Inc., Smith Barney Inc. and European American Bank, dated April 15, 1997 (filed as Exhibit 10.5 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

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10.6		Management Agreement among the Partnership, Smith Barney Futures Management Inc. and Campbell & Company, Inc., dated April 1, 1997 (filed as Exhibit 10.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(a)		First Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management Inc., Campbell & Company, Inc. and SFG Global Investments, Inc., dated March 1, 1999 (filed as Exhibit 10.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(b)		Second Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management LLC and Campbell & Company, Inc., dated April 1, 2001 (filed as Exhibit 10.1(b) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
(c)		Letter extending Management Agreement between the General Partner and Campbell & Company, Inc. for 2011, dated June 1, 2011 (filed as Exhibit 10.6(c) to the Form 10-K filed on March 30, 2012 and incorporated herein by reference).
31.1		Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
31.2		Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer).
32.1		Section 1350 Certification (Certification of President and Director).
32.2		Section 1350 Certification (Certification of Chief Financial Officer).
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of 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.

 

POTOMAC FUTURES FUND L.P.
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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