Attached files

file filename
EX-10.3(D) - EX-10.3(D) - FAIRFIELD FUTURES FUND LP IId757250dex103d.htm
EX-31.1 - EX-31.1 - FAIRFIELD FUTURES FUND LP IId757250dex311.htm
EX-31.2 - EX-31.2 - FAIRFIELD FUTURES FUND LP IId757250dex312.htm
EX-32.1 - EX-32.1 - FAIRFIELD FUTURES FUND LP IId757250dex321.htm
EX-32.2 - EX-32.2 - FAIRFIELD FUTURES FUND LP IId757250dex322.htm
EXCEL - IDEA: XBRL DOCUMENT - FAIRFIELD FUTURES FUND LP IIFinancial_Report.xls
Table of Contents

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 June 30, 2014

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 — 14th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672 - 4468

 

(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 July 31, 2014, 10,339.1251 Limited Partnership Redeemable Units were outstanding.


Table of Contents

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 June 30, 2014 (unaudited) and December 31, 2013    3
    Statements of Income and Expenses and Changes in Partners’ Capital for the three and six months ended June 30, 2014 and 2013 (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   
  Item 1.   Legal Proceedings    26-32
  Item 1A.   Risk Factors    33
  Item 2.   Unregistered Sales of Equity and Use of Proceeds    33
  Item 5.   Other Information    34
  Item 6.   Exhibits    35

 

2


Table of Contents

PART I

Item 1. Financial Statements

Fairfield Futures Fund L.P. II

Statements of Financial Condition

 

     (Unaudited)
June 30,

2014
     December 31,
2013
 

Assets:

     

Investment in Master, at fair value

   $ 7,977,299       $ 9,272,030   

Cash

     149,001         161,963   
  

 

 

    

 

 

 

Total assets

   $ 8,126,300       $ 9,433,993   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Ongoing selling agent fees

   $ 16,930       $ 35,377   

Management fees

     11,725         15,540   

Administrative fees

     3,350         3,885   

Other

     69,656         74,372   

Redemptions payable

     181,111         213,837   
  

 

 

    

 

 

 

Total liabilities

     282,772         343,011   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 202.6400 unit equivalents outstanding at June 30, 2014 and December 31, 2013

     149,206         159,178   

Special Limited Partner, 442.4015 units outstanding at June 30, 2014 and December 31, 2013

     325,746         347,515   

Limited Partners, 10,007.4076 and 10,928.1356 Redeemable Units outstanding at June 30, 2014 and December 31, 2013, respectively

     7,368,576         8,584,289   
  

 

 

    

 

 

 

Total partners’ capital

     7,843,528         9,090,982   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 8,126,300       $ 9,433,993   
  

 

 

    

 

 

 

Net asset value per unit

   $ 736.31       $ 785.52   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

3


Table of Contents

Fairfield Futures Fund L.P. II

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Investment Income:

        

Interest income allocated from Master

   $ 261      $ 595      $ 772      $ 2,136   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Expenses allocated from Master

     6,302        13,689        18,923        28,320   

Ongoing selling agent fees

     50,956        137,924        144,742        287,675   

Management fees

     35,254        60,458        76,336        126,239   

Administrative fees

     10,073        15,114        20,344        31,559   

Other

     47,441        40,972        68,904        77,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     150,026        268,157        329,249        551,708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (149,765     (267,562     (328,477     (549,572
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

        

Net realized gains (losses) on closed contracts allocated from Master

   $ 293,559      $ (257,568   $ (198,114   $ 1,095,603   

Change in net unrealized gains (losses) on open contracts allocated from Master

     374,712        (499,737     (61,005     (498,662
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results allocated from Master

     668,271        (757,305     (259,119     596,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     518,506        (1,024,867     (587,596     47,369   

Redemptions — Limited Partners

     (552,555     (750,252     (659,858     (1,824,821
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Partners’ Capital

     (34,049     (1,775,119     (1,247,454     (1,777,452

Partners’ Capital, beginning of period

     7,877,577        12,634,709        9,090,982        12,637,042   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, end of period

   $ 7,843,528      $ 10,859,590      $ 7,843,528      $ 10,859,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (10,652.4491 and 15,318.1101 units outstanding at June 30, 2014 and 2013, respectively)

   $ 736.31      $ 708.94      $ 736.31      $ 708.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

   $ 46.41      $ (68.34   $ (49.21   $ 6.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

     11,184.5948        15,725.7568        11,375.0556        16,602.4398   
  

 

 

   

 

 

   

 

 

   

 

 

 

*Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

4


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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 CMF Graham Capital Master Fund L.P. (“the Master”), 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”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. 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 Inc. As of June 30, 2014, all trading decisions for the Partnership are made by Graham Capital Management, L.P. (the “Advisor”).

On June 1, 2006, the Partnership allocated substantially all of its capital to 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 the Advisor using the K4D-15V Program, the Advisor’s proprietary, systematic trading program, to invest together in one trading vehicle. In addition, the Advisor is a special limited partner of the Partnership (in its capacity as special limited partner, the “Special Limited Partner”). 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.

During the three and six months ended June 30, 2014, the Partnership’s/Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During the prior periods included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended June 30, 2014.

During the second quarter of 2013, the Master entered into a foreign exchange brokerage account agreement with MS&Co. During the second quarter of 2013, the Master also entered into a futures brokerage account agreement with MS&Co. The Master commenced foreign exchange trading through accounts at MS&Co. on or about May 1, 2013 and the Master commenced futures trading through an account at MS&Co. on or about June 17, 2013. Effective August 2, 2013, the Partnership entered into a futures brokerage account agreement with MS&Co. and began transferring the brokerage account of the Partnership from CGM to MS&Co. The Partnership, through its investment in the Master, pays MS&Co. trading fees for the clearing and, where applicable, execution of transactions.

Effective October 1, 2013, the Partnership ceased paying a brokerage fee to CGM. Also effective October 1, 2013, the Partnership entered into a selling agreement with Morgan Stanley Smith Barney LLC (d/b/a Morgan Stanley Wealth Management). Pursuant to the selling agreement, Morgan Stanley Wealth Management received a selling agent fee equal to 9/24 of 1% (4.5% per year) of the Partnership’s month-end net assets. The selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisers of Morgan Stanley Wealth Management who sold redeemable units in the Partnership.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 4.5% to an annual rate of 2.5%.

Also effective April 1, 2014, the management fee paid to the Advisor was reduced from an annual rate of 2.0% to an annual rate of 1.75%.

Certain prior period amounts have been reclassified to conform to current period presentation. Amounts reported on the Statements of Income and Expenses and Changes in Partners’ Capital as ongoing selling agent fees were previously presented as brokerage fees.

At June 30, 2014, the Partnership owned approximately 15.2% of the Master. At December 31, 2013, the Partnership owned approximately 15.5% 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. During the three and six months ended June 30, 2014, the Master engaged in such trading through a commodity brokerage account maintained with MS&Co. During prior periods covered in this report, the Master engaged in such trading through commodity brokerage accounts maintained with CGM. The Master’s Statements of Financial Condition, 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, 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, if any, net of distributions and losses, if any.

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 June 30, 2014 and December 31, 2013, and the results of its operations and changes in partners’ capital for the three and six months ended June 30, 2014 and

 

5


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

2013. 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, 2013.

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.

 

6


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of June 30, 2014 and December 31, 2013 and Statements of Income and Expenses and Changes in Partners’ Capital for the three and six months ended June 30, 2014 and 2013 are presented below:

 

CMF Graham Capital Master Fund L.P.

Statements of Financial Condition

 

     (Unaudited)
June 30,
2014
     December 31,
2013
 

Assets:

     

Equity in trading account:

     

Cash

   $ 37,246,252       $ 42,710,411   

Cash margin

     13,090,990         14,573,336   

Net unrealized appreciation on open futures contracts

     1,655,775         2,261,805   

Net unrealized appreciation on open forward contracts

     661,677         403,240   
  

 

 

    

 

 

 

Total assets

   $ 52,654,694       $ 59,948,792   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Clearing fees due to MS&Co.

   $ 3,667       $ 4,171   

Professional fees

     19,687         25,181   

Redemptions payable

     —           2,967,584   
  

 

 

    

 

 

 

Total liabilities

     23,354         2,996,936   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 0.0000 unit equivalents at June 30, 2014 and December 31, 2013

     —           —     

Limited Partners, 32,987.5603 and 34,746.3392 Redeemable Units outstanding at June 30, 2014 and December 31, 2013, respectively

     52,631,340         56,951,856   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 52,654,694       $ 59,948,792   
  

 

 

    

 

 

 

Net asset value per unit

   $ 1,595.49       $ 1,639.08   
  

 

 

    

 

 

 

 

7


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Condensed Schedule of Investments

June 30, 2014

(Unaudited)

 

     Notional ($)/Number
of Contracts
     Fair Value     % of Partners’
Capital
 

Futures Contracts Purchased

       

Currencies

     50       $ 87,994        0.17

Energy

     350         479,833        0.91   

Grains

     128         (300,047     (0.57

Indices

     846         136,319        0.26   

Interest Rates U.S.

     892         118,158        0.23   

Interest Rates Non-U.S.

     1,137         810,909        1.54   

Metals

     10         1,440        0.00

Softs

     81         (36,164     (0.07
     

 

 

   

 

 

 

Total futures contracts purchased

        1,298,442        2.47   
     

 

 

   

 

 

 

Futures Contracts Sold

       

Currencies

     138         87,852        0.17   

Energy

     25         (75,013     (0.14

Grains

     285         329,108        0.62   

Indices

     19         (3,780     (0.01

Interest Rates U.S.

     120         (45,969     (0.09

Interest Rates Non-U.S.

     340         72,401        0.14   

Metals

     17         (6,535     (0.01

Softs

     67         (731     (0.00 )* 
     

 

 

   

 

 

 

Total futures contracts sold

        357,333        0.68   
     

 

 

   

 

 

 

Net unrealized appreciation on open futures contracts

        1,655,775        3.15   
     

 

 

   

 

 

 

Unrealized Appreciation on Open Forward Contracts

       

Currencies

   $ 92,431,119         929,832        1.76   

Metals

     75         208,699        0.40   
     

 

 

   

 

 

 

Total unrealized appreciation on open forward contracts

        1,138,531        2.16   
     

 

 

   

 

 

 

Unrealized Depreciation on Open Forward Contracts

       

Currencies

   $ 20,566,748         (150,533     (0.29

Metals

     87         (326,321     (0.62
     

 

 

   

 

 

 

Total unrealized depreciation on open forward contracts

        (476,854     (0.91
     

 

 

   

 

 

 

Net unrealized appreciation on open forward contracts

        661,677        1.25
     

 

 

   

 

 

 

Net fair value

      $ 2,317,452        4.40
     

 

 

   

 

 

 

 

* Due to rounding.

 

8


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Condensed Schedule of Investments

December 31, 2013

 

     Notional ($)/Number
of Contracts
     Fair Value     % of Partners’
Capital
 

Futures Contracts Purchased

       

Currencies

     19       $ 16,650        0.03

Energy

     164         (162,395     (0.29

Grains

     112         89,725        0.16   

Indices

     661         1,840,293        3.23   

Interest Rates U.S.

     820         (271,853     (0.48

Interest Rates Non-U.S.

     425         (336,167     (0.59

Softs

     59         (2,369     (0.00 )* 
     

 

 

   

 

 

 

Total futures contracts purchased

        1,173,884        2.06   
     

 

 

   

 

 

 

Futures Contracts Sold

       

Currencies

     138         13,198        0.02   

Energy

     116         (77,221     (0.14

Grains

     336         544,677        0.96   

Indices

     111         (164,608     (0.29

Interest Rates U.S.

     480         229,901        0.40   

Interest Rates Non-U.S.

     553         151,062        0.27   

Metals

     111         362,560        0.64   

Softs

     150         28,352        0.05   
     

 

 

   

 

 

 

Total futures contracts sold

        1,087,921        1.91   
     

 

 

   

 

 

 

Net unrealized appreciation on open futures contracts

        2,261,805        3.97   
     

 

 

   

 

 

 

Unrealized Appreciation on Open Forward Contracts

       

Currencies

   $ 87,016,625         995,341        1.75   

Metals

     140         233,499        0.41   
     

 

 

   

 

 

 

Total unrealized appreciation on open forward contracts

        1,228,840        2.16   
     

 

 

   

 

 

 

Unrealized Depreciation on Open Forward Contracts

       

Currencies

   $ 56,594,437         (233,394     (0.41

Metals

     215         (592,206     (1.04
     

 

 

   

 

 

 

Total unrealized depreciation on open forward contracts

        (825,600     (1.45
     

 

 

   

 

 

 

Net unrealized appreciation on open forward contracts

        403,240        0.71   
     

 

 

   

 

 

 

Net fair value

      $ 2,665,045        4.68
     

 

 

   

 

 

 

 

* Due to rounding.

 

9


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

 

CMF Graham Capital Master Fund L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Investment Income:

        

Interest income

   $ 1,786      $ 3,126      $ 5,128      $ 11,700   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Clearing fees

     29,996        55,142        65,513        115,325   

Professional fees

     10,816        15,886        54,323        37,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     40,812        71,028        119,836        152,495   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (39,026     (67,902     (114,708     (140,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

        

Net gains (losses) on trading of commodity interests:

        

Net realized gains (losses) on closed contracts

     1,930,030        (1,223,656     (1,148,007     6,176,545   

Change in net unrealized gains (losses) on open contracts

     2,381,660        (2,541,394     (347,593     (2,406,037
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

     4,311,690        (3,765,050     (1,495,600     3,770,508   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     4,272,664        (3,832,952     (1,610,308     3,629,713   

Subscriptions - Limited Partners

     —          1,000,000        —          6,079,778   

Redemptions - Limited Partners

     (1,291,668     (14,248,100     (2,705,080     (39,011,932

Distribution of interest income to feeder funds

     (1,786     (3,126     (5,128     (11,700
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in Partners’ capital

     2,979,210        (17,084,178     (4,320,516     (29,314,141

Partners’ Capital, beginning of period

     49,652,130        72,706,088        56,951,856        84,936,051   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, end of period

   $ 52,631,340      $ 55,621,910      $ 52,631,340      $ 55,621,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit (32,987.5603 and 39,162.5239 units outstanding at June 30, 2014 and 2013, respectively)

   $ 1,595.49      $ 1,420.28      $ 1,595.49      $ 1,420.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

   $ 128.45      $ (105.44   $ (43.44   $ 44.74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

     33,568.9981        44,078.2440        33,990.3242        50,012.6962   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*Based on change in net asset value per unit before distribution of interest income to feeder funds.

 

10


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

2.    Financial Highlights:

Changes in the net asset value per unit for the three and six months ended June 30, 2014 and 2013 were as follows:

 

                                                                   
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net realized and unrealized gains (losses) *

   $ 54.83      $ (60.77   $ (33.94   $ 7.70   

Interest income allocated from Master

     0.03        0.03        0.08        0.12   

Expenses **

     (8.45     (7.60     (15.35     (14.64
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     46.41        (68.34     (49.21     (6.82

Net asset value per unit, beginning of period

     689.90        777.28        785.52        715.76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 736.31      $ 708.94      $ 736.31      $ 708.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes ongoing selling agent fees and clearing fees allocated from the Master. Net realized and unrealized gains (losses) excluding ongoing selling agent fees and clearing fees allocated from the Master for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $59.80, $(51.33), $(20.37), and $26.33, respectively.

 

** Excludes ongoing selling agent fees and clearing fees allocated from the Master and includes allocation to Special Limited Partner in the three and six months ended June 30, 2014 and 2013, if any. Total expenses including ongoing selling agent fees and clearing fees allocated from the Master for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $(13.42), $(17.04), $(28.92), and $(33.27), respectively.

 

                                                                   
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Ratios to average net assets:***

        

  Net investment income (loss)

     (7.6 )%      (8.9 )%      (8.1 )%      (9.0 )% 

  Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Net investment income (loss) before allocation to Special Limited Partner****

     (7.6 )%      (8.9 )%      (8.1 )%      (9.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

  Operating expenses

     7.7     8.9     8.1     9.0

  Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Total expenses

     7.7     8.9     8.1     9.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

  Total return before allocation to Special Limited Partner

     6.7     (8.8 )%      (6.3 )%      (1.0 )% 

  Allocation to Special Limited Partner

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

  Total return after allocation to Special Limited Partner

     6.7     (8.8 )%      (6.3 )%      (1.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
*** Annualized (except for allocation to Special Limited Partner, if applicable).
**** Interest income allocated from the Master less total expenses (exclusive of allocation to Special Limited Partner, if applicable).

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 each limited partner’s share of income, expenses and average net assets.

 

11


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

Financial Highlights of the Master:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
        

Net realized and unrealized gains (losses) *

   $ 128.73      $ (105.12   $ (41.96   $ 45.32   

Interest Income

     0.06        0.08        0.15        0.24   

Expenses **

     (0.34     (0.40     (1.63     (0.82
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     128.45        (105.44     (43.44     44.74   

Distribution of interest income to feeder funds

     (0.06     (0.08     (0.15     (0.24

Net asset value per unit, beginning of period

     1,467.10        1,525.80        1,639.08        1,375.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 1,595.49      $ 1,420.28      $ 1,595.49      $ 1,420.28   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Includes clearing fees.

 

** Excludes clearing fees.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Ratios to Average Net Assets:***

        

Net investment income (loss) ****

     (0.3 )%      (0.4 )%      (0.4 )%      (0.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

     0.3     0.4     0.5     0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return

     8.8     (6.9 )%      (2.7 )%      3.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*** 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 each limited partner’s 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 agreement among the Partnership, MS&Co. and the Master gives, and the customer agreement between CGM and the Partnership and the customer agreement between CGM and the Master each gave, 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 previously paid to CGM were calculated as a percentage of the Partnership’s adjusted net asset value as of the last day of each month and were affected by trading performance and redemptions.

Trading and transaction fees are based on the number of trades executed by the Advisor and the Partnership’s percentage ownership in the Master.

All trading, exchange, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “clearing fees”) are borne by the Master and allocated to its limited partners, including the Partnership.

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 June 30, 2014 and 2013 were 4,172 and 5,166, respectively. The monthly average number of futures contracts traded during the six months ended June 30, 2014 and 2013 were 3,866 and 5,679, respectively. The monthly average number of metals forward contracts traded during the three months ended June 30, 2014 and 2013 were 324 and 723, respectively. The monthly average number of metals forward contracts traded during the six months ended June 30, 2014 and 2013 were 381 and 627, respectively. The monthly average notional values of currency forward contracts during the three months ended June 30, 2014 and 2013 were $182,705,324 and $505,827,184, respectively. The monthly average notional values of currency forward contracts during the six months ended June 30, 2014 and 2013 were $196,263,862 and $474,254,522, respectively.

On January 1, 2013, the Master adopted Accounting Standards Update (“ASU”) 2011-11, “Disclosure about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 created a new disclosure requirement about the nature of an entity’s rights to setoff and the related arrangements associated with its financial instruments and derivative instruments, while ASU 2013-01 clarified the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. 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 these disclosures 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 International Financial Reporting Standards (“IFRS”). The new guidance did not have a significant impact on the Master’s financial statements.

The following table summarizes the valuation of the Master’s investments as of June 30, 2014 and December 31, 2013, respectively.

 

June 30, 2014

   Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statement of
Financial
Condition
    Net Amounts
Presented in the
Statement of
Financial
Condition
 

Assets

      

Futures

   $ 2,776,399      $ (1,120,624   $ 1,655,775   

Forwards

     1,138,531        (476,854     661,677   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,914,930      $ (1,597,478   $ 2,317,452   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Futures

   $ (1,120,624   $ 1,120,624      $ —     

Forwards

     (476,854     476,854        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

   $ (1,597,478   $ 1,597,478      $ —     
  

 

 

   

 

 

   

 

 

 

Net fair value

       $ 2,317,452   
      

 

 

 
December 31, 2013    Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statements of
Financial
Condition
    Net Amounts
Presented in the
Statements of
Financial
Condition
 

Assets

      

Futures

   $ 3,528,729      $ (1,266,924   $ 2,261,805   

Forwards

     1,228,840        (825,600     403,240   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 4,757,569      $ (2,092,524   $ 2,665,045   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Futures

   $ (1,266,924   $ 1,266,924      $ —     

Forwards

     (825,600     825,600        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

   $ (2,092,524   $ 2,092,524      $ —     
  

 

 

   

 

 

   

 

 

 

Net fair value

       $ 2,665,045   
      

 

 

 
      

 

12


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014  

Assets

  

Futures Contracts

  

Currencies

   $ 205,804   

Energy

     761,901   

Grains

     329,750   

Indices

     410,563   

Interest Rates U.S.

     153,917   

Interest Rates Non-U.S.

     901,041   

Metals

     1,635   

Softs

     11,788   
  

 

 

 

Total unrealized appreciation on open futures contracts

   $ 2,776,399   
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

   $ (29,958

Energy

     (357,081

Grains

     (300,689

Indices

     (278,024

Interest Rates U.S.

     (81,728

Interest Rates Non-U.S.

     (17,731

Metals

     (6,730

Softs

     (48,683
  

 

 

 

Total unrealized depreciation on open futures contracts

   $ (1,120,624
  

 

 

 

Net unrealized appreciation on open futures contracts

   $ 1,655,775
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 929,832   

Metals

     208,699   
  

 

 

 

Total unrealized appreciation on open forward contracts

   $ 1,138,531   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

   $ (150,533

Metals

     (326,321
  

 

 

 

Total unrealized depreciation on open forward contracts

   $ (476,854
  

 

 

 

Net unrealized appreciation on open forward contracts

   $ 661,677 ** 
  

 

 

 

 

 

* 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.

 

13


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

     December 31, 2013  

Assets

  

Futures Contracts

  

Currencies

   $ 41,711   

Energy

     12,911   

Grains

     662,980   

Indices

     1,845,247   

Interest Rates U.S.

     236,549   

Interest Rates Non-U.S.

     279,234   

Metals

     363,334   

Softs

     86,763   
  

 

 

 

Total unrealized appreciation on open futures contracts

   $ 3,528,729   
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

   $ (11,863

Energy

     (252,527

Grains

     (28,578

Indices

     (169,562

Interest Rates U.S.

     (278,501

Interest Rates Non-U.S.

     (464,339

Metals

     (774

Softs

     (60,780
  

 

 

 

Total unrealized depreciation on open futures contracts

   $ (1,266,924
  

 

 

 

Net unrealized appreciation on open futures contracts

   $ 2,261,805
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 995,341   

Metals

     233,499   
  

 

 

 

Total unrealized appreciation on open forward contracts

   $ 1,228,840   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

   $ (233,394

Metals

     (592,206
  

 

 

 

Total unrealized depreciation on open forward contracts

   $ (825,600
  

 

 

 

Net unrealized appreciation on open forward contracts

   $ 403,240 ** 
  

 

 

 

 

* This amount is included in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.
** This amount is included 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 and six months ended June 30, 2014 and 2013.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Sector

   2014     2013     2014     2013  

Currencies

   $ 441,947      $ (3,976,545   $ 979,286      $ (3,004,092

Energy

     181,577        (1,657,156     (809,013     (3,690,046

Grains

     (62,853     776,941        (243,861     470,002   

Indices

     1,802,097        1,785,609        (646,119     9,263,688   

Interest Rates U.S.

     358,114        (2,183,259     (504,550     (2,292,010

Interest Rates Non-U.S.

     2,594,854        (3,342,116     3,609,401        (2,742,539

Metals

     (903,307     4,294,985        (2,076,239     4,796,412   

Softs

     (100,739     536,491        (1,804,505     969,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,311,690 ***    $ (3,765,050 )***    $ (1,495,600 )***    $ 3,770,508 *** 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

14


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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, 2013.

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.

On October 1, 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-04, “Technical Corrections and Improvements,” which makes minor technical corrections and clarifications to ASC 820, “Fair Value Measurements and Disclosures.” When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. ASU 2012-04 also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820.

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 June 30, 2014 and December 31, 2013, the Partnership did not hold any derivative instruments that were based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) or priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). During the six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets and liabilities between Level 1 and Level 2.

 

    June 30, 2014     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 
Assets        

Investment in Master

  $ 7,977,299      $                 —        $ 7,977,299      $                 —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

  $ 7,977,299      $ —        $ 7,977,299      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2013     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
 
Assets        

Investment in Master

  $ 9,272,030      $ —        $ 9,272,030      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

  $ 9,272,030      $ —        $ 9,272,030      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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, options and swaps 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 June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

     June 30, 2014      Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 
Assets            

Futures

   $ 2,776,399       $ 2,776,399       $ —         $ —     

Forwards

     1,138,531         208,699         929,832         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,914,930       $ 2,985,098       $ 929,832       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Liabilities            

Futures

   $ 1,120,624       $ 1,120,624       $ —         $ —     

Forwards

     476,854         326,321         150,533         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     1,597,478         1,446,945         150,533         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Fair value

   $ 2,317,452       $ 1,538,153       $ 779,299       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013      Quoted Prices in
Active Markets for
Identical Assets

and Liabilities
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable Inputs

(Level 3)
 

Assets

           

Futures

   $ 3,528,729       $ 3,528,729       $ —         $ —     

Forwards

     1,228,840         233,499         995,341         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,757,569       $ 3,762,228       $ 995,341       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

   $ 1,266,924       $ 1,266,924       $ —         $ —     

Forwards

     825,600         592,206         233,394         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     2,092,524         1,859,130         233,394         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Fair value

   $ 2,665,045       $ 1,903,098       $ 761,947       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot be accurately predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. OTC contracts are negotiated between contracting parties and include swaps and certain forward 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 30.7% to 46.0% 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 net 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 had credit risk and concentration risk during the reporting period and prior periods included in this report, as CGM and/or MS&Co. or their affiliates were the sole counterparties or brokers with respect to the Partnership’s/Master’s assets. Credit risk with respect to exchange-traded instruments was reduced to the extent that through CGM or MS&Co., the Partnership’s/Master’s counterparty was an exchange or clearing organization. The Master/Partnership continue to be subject to such risks with respect to MS&Co.

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.

 

17


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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 the Master’s 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, 2013.

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

The Partnership 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 June 30, 2014 and December 31, 2013, 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). During the six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

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 June 30, 2014 and December 31, 2013, 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 six months ended June 30, 2014 and for the year ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

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 on 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.

 

18


Table of Contents

Fairfield Futures Fund L.P. II

Notes to Financial Statements

June 30, 2014

(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-upon 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.

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.

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 on 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.

Investment Company Status. Effective January 1, 2014, the Partnership adopted ASU 2013-08, “Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 changes the approach to the investment company assessment, requires non-controlling ownership interests in other investment companies to be measured at fair value, and requires additional disclosures about the investment company’s status as an investment company. ASU 2013-08 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on the Partnership’s financial statements. Based on management’s assessment, the Partnership has been deemed to be an investment company since inception. It has all of the fundamental characteristics of an investment company. Although the Partnership does not possess all of the typical characteristics of an investment company, its activities are consistent with those of an investment company.

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 2010 through 2013 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.

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

Subsequent Events. The General Partner evaluates events that occur after the balance sheet date but before financial statements are issued. The General Partner has assessed the subsequent events through the date of issuance and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.

 

19


Table of Contents
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, 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 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 second quarter of 2014.

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 six months ended June 30, 2014, Partnership capital decreased 13.7% from $9,090,982 to $7,843,528. This decrease was attributable to the redemptions of 920.7280 Redeemable Units totaling $659,858, coupled with the net loss from operations of $587,596. 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 six months ended June 30, 2014, the Master’s capital decreased 7.6% from $56,951,856 to $52,631,340. This decrease was attributable to the redemptions of 1,758.7789 units totaling $2,705,080 and distribution of interest income to feeder funds totaling $5,128, coupled with the net loss from operations of $1,610,308. 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 related 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.

 

20


Table of Contents

Results of Operations

During the Partnership’s second quarter of 2014, the net asset value per unit increased 6.7% from $689.90 to $736.31, as compared to a decrease of 8.8% in the second quarter of 2013. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses in the second quarter of 2014 of $668,271. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, indices and U.S and non-U.S interest rates, and were partially offset by losses in grains, metals and softs. The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses in the second quarter of 2013 of $757,305. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy and U.S and non-U.S interest rates, and were partially offset by gains in grains, indices, metals and softs.

The most significant gains were achieved within the global interest rates sector during April, May, and June from long positions in European fixed income futures as prices moved higher after the European Central Bank indicated that it would increase stimulus measures to raise inflation. During May additional gains in the global interest rate sector were recorded from long positions in U.S. Treasury bond and Treasury note futures as prices increased amid easing investor concern that the U.S. Federal Reserve would raise borrowing costs. Within the global stock index markets, gains were achieved during May from long positions in U.S. and European equity index futures as prices rallied amid speculation that stronger than expected retail sales and manufacturing job growth figures during April predicted a rebound in the U.S. economy. Additional gains were experienced during June from long positions in U.S. equity index futures as prices moved higher as indicators of increased manufacturing output signaled renewed economic strength in the U.S. Within the currency markets, gains were achieved primarily during June from long positions in the British pound versus the U.S. dollar as the relative value of the British pound advanced after a report from the U.K. Office for National Statistics showed that British business investment surged during the first quarter. Long positions in the British pound were also profitable during April. Within the energy sector, gains were recorded during June from long positions in crude oil and its related contracts as prices rallied on speculation that tensions in Iraq and Libya would curtail oil exports from the Middle East. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the metals markets during June from short positions in silver and gold futures as prices rose after geopolitical unrest in the Ukraine and the Middle East increased investor demand. Within the agricultural markets, losses were recorded during June from long positions in the soybean complex as prices declined after favorable weather throughout much of the U.S. Midwest boosted soybean plantings to near record levels.

During the Partnership’s six months ended June 30, 2014, the net asset value per unit decreased 6.3% from $785.52 to $736.31, as compared to a decrease of 1.0% for the six months ended June 30, 2013. The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses in the six months ended June 30, 2014 of $259,119. Losses were primarily attributable to the trading of commodity futures in energy, grains, indices, U.S interest rates, metals and softs, and were partially offset by gains in currencies and non-U.S. interest rates. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses in the six months ended June 30, 2013 of $596,941. Gains were primarily attributable to the trading of commodity futures in grains, metals, softs and indices, and were partially offset by losses in currencies, energy and U.S and non-U.S. interest rates.

The most significant losses were incurred within the metals complex during June from short positions in silver and gold futures as prices rose after geopolitical unrest in the Ukraine and the Middle East increased investor demand. Additional losses were recorded during February from short positions in gold and silver futures as prices climbed higher after the release of discouraging economic reports in the U.S. Within the agricultural markets, losses were experienced during February from short positions in coffee futures as prices advanced dramatically as severe drought conditions threatened crops in Brazil. Additional losses were recorded during March from short positions in wheat futures as prices advanced over concern that South American crop totals would be adversely affected by drought conditions in Brazil. Within the global stock index sector, losses were incurred primarily during January from long positions in U.S., Asian, and European equity index futures as prices declined as economic growth momentum in China weakened and the U.S. Federal Reserve announced measures to further taper its quantitative easing program. Losses within the energy markets were experienced, primarily during February, from short positions in crude oil and its related contracts as prices rallied late in the month on increased consumer demand. A portion of the Partnership’s losses for the first six months of the year was offset by gains achieved within the global interest rate markets during May from long positions in European fixed income futures as prices moved higher after the European Central Bank indicated that it would increase stimulus measures to raise inflation. During May additional gains in the global interest rate sector were recorded from long positions in U.S. Treasury bond and Treasury note futures as prices increased amid easing investor concern that the U.S. Federal Reserve would raise borrowing costs. Within the currency markets, gains were achieved during February from long positions in the British pound and euro versus the U.S. dollar as the relative value of the European currencies strengthened against the dollar after the release of weaker-than-expected economic data in the U.S. Additional gains were recorded during June from long positions in the British pound versus the U.S. dollar as the relative value of the pound advanced.

 

21


Table of Contents

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 during each month was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average noncompetitive yield on 3-month Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury bill discount rate, as applicable. Interest income allocated from the Master for the three and six months ended June 30, 2014 decreased by $334 and $1,364, respectively, as compared to the corresponding periods in 2013. The decrease in interest income is primarily due to lower U.S. Treasury bill rates as well as lower average daily equity for the Partnership during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership during the reporting periods depended on the average daily equity in the Partnership’s (or the Partnership’s allocable portion of the Master’s) account and upon interest rates over which the Partnership, the Master and MS&Co. had no control.

Ongoing selling agent fees/brokerage 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. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees/brokerage fees for the three and six months ended June 30, 2014 decreased by $86,968 and $142,933, respectively, as compared to the corresponding periods in 2013. This decrease is due to lower average net assets as compared to the corresponding periods in 2013, as well as a reduction in ongoing selling agent fees from an annual rate of 4.5% to an annual rate of 2.5% effective April 1, 2014.

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. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three and six months ended June 30, 2014 decreased by $25,204 and $49,903, respectively, as compared to the corresponding periods in 2013. The decrease in management fees is due to lower average net assets as compared to the corresponding periods in 2013, as well as a reduction in management fees paid to the Advisor from an annual rate of 2.0% to an annual rate of 1.75% effective April 1, 2014.

Administrative 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. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Administrative fees for the three and six months ended June 30, 2014 decreased by $5,041 and $11,215, respectively, as compared to the corresponding periods in 2013. The decrease in administrative fees is due to lower average net assets as compared to the corresponding periods in 2013.

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 earned for the three and six months ended June 30, 2014 and 2013. The Special Limited Partner 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.

 

22


Table of Contents
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.

Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term-one-day price fluctuation.

 

23


Table of Contents

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 June 30, 2014 and December 31, 2013, and the highest, lowest and average values during the three months ended June 30, 2014 and the twelve months ended December 31, 2013. 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, 2013.

As of June 30, 2014, the Master’s total capitalization was $52,631,340 and the Partnership owned approximately 15.2% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of June 30, 2014 was as follows:

June 30, 2014

 

                  Three Months Ended June 30, 2014  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

   $ 4,192,725         7.97   $ 6,396,381       $ 4,192,725       $ 5,146,840   

Energy

     1,072,954         2.04     1,106,141         161,238         736,723   

Grains

     367,732         0.70     594,374         268,571         452,518   

Indices

     4,267,882         8.11     4,267,882         2,232,582         3,530,307   

Interest Rates U.S.

     641,949         1.22     817,740         401,116         670,342   

Interest Rates Non-U.S.

     1,542,388         2.93     1,742,463         1,317,501         1,569,516   

Metals

     914,573         1.74     1,483,092         716,778         967,823   

Softs

     265,707         0.50     310,127         153,249         248,176   
  

 

 

    

 

 

         

Total

   $ 13,265,910         25.21        
  

 

 

    

 

 

         

 

*    Average month-end Values at Risk.

As of December 31, 2013, the Master’s total capitalization was $56,951,856 and the Partnership owned approximately 15.5% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2013 was as follows:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

   $ 5,451,393         9.57   $ 6,263,455       $ 2,692,964       $ 3,780,586   

Energy

     918,449         1.61     1,447,490         398,490         924,600   

Grains

     707,595         1.24     746,819         350,474         585,416   

Indices

     3,480,698         6.11     5,882,185         1,786,311         4,253,445   

Interest Rates U.S.

     579,675         1.02     947,075         219,252         551,160   

Interest Rates Non-U.S.

     1,218,251         2.14     2,659,126         449,052         1,491,188   

Metals

     2,082,858         3.66     2,293,849         545,530         1,461,478   

Softs

     284,243         0.50     511,259         231,428         390,411   
  

 

 

    

 

 

         

Total

   $ 14,723,162         25.85 %         
  

 

 

    

 

 

         

 

* Annual average of month-end Values at Risk.

 

24


Table of Contents
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 (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 President 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 President 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 June 30, 2014 and, based on that evaluation, the General Partner’s President 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 President 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 and correction 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 June 30, 2014 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

25


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

There are no material legal proceedings pending against the Partnership nor the General Partner.

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, 2013, as updated by the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC.

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the Securities and Exchange Commission as required by the Exchange Act, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2013, 2012, 2011, 2010 and 2009.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of NFA.

On May 7, 2009, MS&Co. was named as a defendant in a purported class action lawsuit brought under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, which is now styled In re Morgan Stanley Mortgage Pass-Through Certificates Litigation and is pending in the United States District Court for the Southern District of New York (“SDNY”). The third amended complaint, filed on September 30, 2011, alleges, among other things, that the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 contained false and misleading information concerning the pools of residential loans that backed these securitizations. The plaintiffs seek, among other relief, class certification, unspecified compensatory and rescissionary damages, costs, interest and fees. On July 22, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

 

26


Table of Contents

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied MS&Co.’s individual motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $55 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against MS&Co. and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s claims brought under the Securities Act of 1933, as amended, were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. A bellwether trial is currently scheduled to begin in January 2015. MS&Co. is not a defendant in connection with the securitizations at issue in that trial. On May 23, 2014, plaintiff and the defendants in the bellwether trial filed motions for summary adjudication. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $301 million, and the certificates had incurred actual losses of approximately $6 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $301 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

27


Table of Contents

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. MS&Co. filed its answer on December 21, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle, were named as defendants in a purported class action related to securities issued by the special purpose vehicle in Singapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and is pending in the SDNY. An amended complaint was filed on October 22, 2012. The court denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted class certification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal the court’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amended complaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraud investors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. In addition, the second amended complaint alleges that the securities’ offering materials contained material misstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interest between the defendants and the investors. The second amended complaint asserts common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the

 

28


Table of Contents

case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. On July 16, 2014, plaintiff voluntarily dismissed its claims against MS&Co. with respect to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $67 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $67 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of the State of New York, New York County (“Supreme Court of NY, NY County”), styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to plaintiffs by MS&Co. was approximately $104 million. The complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order MS&Co. appealed on April 11, 2013. On May 3, 2013, MS&Co. filed its answer to the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $99 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $99 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. MS&Co. filed its answer on August 17, 2012. Trial is currently scheduled to begin in July 2015. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $113 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently

 

29


Table of Contents

available information, MS&Co. believes it could incur a loss in this action up to the difference between the $113 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B., filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B. v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to the plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. The complaints each raised claims under both federal securities law and the Texas Securities Act and each seeks, among other things, compensatory damages associated with plaintiff’s purchase of such certificates. On March 20, 2012, MS&Co. filed answers to the complaints in both cases. On June 7, 2012, the two cases were consolidated. On January 10, 2013, MS&Co. filed a motion for summary judgment and special exceptions with respect to plaintiff’s claims. On February 6, 2013, the FDIC filed an amended consolidated complaint. On February 25, 2013, MS&Co. filed a motion for summary judgment and special exceptions, which motion was denied in substantial part on April 26, 2013. On May 3, 2013, the FDIC filed a second amended consolidated complaint. Trial is currently scheduled to begin in November 2014. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $46 million, and the certificates had incurred actual losses of approximately $5 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $46 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. is approximately $1 billion. The complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud and tortious interference with contract and seeks, among other things, compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’ purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among other things, increases the total amount of the certificates at issue by approximately $80 million, adds causes of action for fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On April 26, 2013, the defendants

 

30


Table of Contents

filed an answer to the amended complaint. On June 5, 2014, the defendants filed a renewed motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $623 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $623 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On April 22, 2014, the defendants’ motion to dismiss was denied in substantial part. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $75 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $75 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $694 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court denied defendants’ motion to dismiss. On July 10, 2014, MS&Co. filed a renewed motion to dismiss with respect to two certificates at issue in the case. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $284 million, and the certificates had incurred actual losses of approximately $52 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $284 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY.

 

31


Table of Contents

The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs was approximately $417 million. The complaint alleges causes of action against MS&Co. for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things, rescissory and compensatory damages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014, the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended, and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On April 28, 2014, the court granted in part and denied in part plaintiff’s motion to strike certain of the defendants’ affirmative defenses. On July 11, 2014, the defendants filed a motion for reconsideration of the court’s order on the motion to dismiss the complaint or, in the alternative, for certification of interlocutory appeal and a stay of all proceedings. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $215 million, and the certificates had incurred actual losses of approximately $26 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $215 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime residential mortgage-backed security transactions sponsored and underwritten by those entities in 2007. Pursuant to the settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

 

32


Table of Contents

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under Part 1, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

 

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

April 1, 2014 –

April 30, 2014

 

181.5920

  $          699.84       N/A     N/A

May 1, 2014 –

May 31, 2014

 

338.4660

  $          721.96       N/A     N/A

June 1, 2014 –

June 30, 2014

 

245.9710

  $          736.31       N/A     N/A
   

766.0290

  $          721.32       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. No fee will be charged for redemptions.

 

Item 3. Defaults Upon Senior Securities – None.

 

Item 4. Mine Safety Disclosures – Not Applicable.

 

33


Table of Contents
Item 5. Other Information –

Effective October 1, 2014, the monthly ongoing selling agent fee will be reduced from an annual rate of 2.50% to an annual rate of 2.00%. As of the same date, the administrative fee will be increased from an annual rate of 0.50% to an annual rate of 1.00%. The October 1, 2014 fee changes will offset each other and, accordingly, there will be no change to the aggregate fees incurred by the Partnership.

 

34


Table of Contents
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).

 

  (f) Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated August 7, 2013 (filed as Exhibit 3.2(f) to the quarterly report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

 

 10.1(a)   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).

 

  (b) Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August 2, 2013 (filed as Exhibit 10.1(b) to the Quarterly Report on Form 10-Q filed on September 30, 2013 and incorporated herein by reference).

 

  10.2 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).

 

 10.3(a)   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).

 

  (b) Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2013 (filed as Exhibit 10.3(b) to the Quarterly Report on Form 10-Q filed on September 30, 2013 and incorporated herein by reference).

 

  (c) Letter amending the Alternate Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective April 1, 2014 (filed as Exhibit (10.3)(c) to the Quarterly Report on Form 10-Q filed May 14, 2014 and incorporated herein by reference).

 

  (d) Letter amending the Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2014 (filed herewith).

 

  10.4 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 from June 30, 2013 to June 30, 2014 (filed as Exhibit 10.4(a) to the Annual Report on Form 10-K filed on March 27, 2014 and incorporated herein by reference).

 

  (b) Amendment to the Management Agreement between the Partnership, the General Partner and the Advisor, effective April 1, 2014 as Exhibit 10.4(b) to the Quarterly Report on Form 10-Q (filed as Exhibit 10.4(b) to the quarterly report on Form 10-Q filed on May 14, 2014 and incorporated herein by reference).

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

Exhibit 31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director) (filed herewith).

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

Exhibit 32.2 — Section 1350 Certification (Certification of Chief Financial Officer and Director) (filed herewith).

101.INS  XBRL   Instance Document.

101.SCH XBRL  Taxonomy Extension Schema Document.

101.CAL XBRL  Taxonomy Extension Calculation Linkbase Document.

101.LAB XBRL  Taxonomy Extension Label Linkbase Document.

101.PRE XBRL   Taxonomy Extension Presentation Linkbase Document.

101.DEF XBRL   Taxonomy Extension Definition Linkbase Document.

 

35


Table of Contents

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/ Alper Daglioglu

 

Alper Daglioglu

President and Director

Date: August 13, 2014
By:   /s/ Steven Ross                                
 

Steven Ross

Chief Financial Officer

(Principal Accounting Officer)

Date: August 13, 2014

 

36