Exhibit 13.01

 

Nestor Partners

 

(A New Jersey Limited Partnership)

 

Financial Statements for the Years Ended December 31,

2014 and 2013, and Report of Independent Registered

Public Accounting Firm

 

 

NESTOR PARTNERS

TABLE OF CONTENTS

 

	Page(s)
AFFIRMATION OF MILLBURN RIDGEFIELD CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	1
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013:
Statements of Financial Condition	2
Condensed Schedules of Investments	3–6
Statements of Operations	7
Statements of Changes in Partners’ Capital	8
Statements of Financial Highlights	9
Notes to Financial Statements	10–28

 

 

AFFIRMATION OF MILLBURN RIDGEFIELD CORPORATION

 

In compliance with the Commodity Futures Trading Commission’s regulations, I hereby affirm that to the best of my knowledge and belief, the information contained in the statements of financial condition, including the condensed schedules of investments, of Nestor Partners as of December 31, 2014 and 2013, and the related statements of operations, changes in partners’ capital, and financial highlights for each of the two years in the period ended December 31, 2014, are complete and accurate.

 

Harvey Beker, Co-Chief Executive Officer

Millburn Ridgefield Corporation

General Partner of Nestor Partners

 

 

NESTOR PARTNERS

 

STATEMENTS OF FINANCIAL CONDITION

AS OF DECEMBER 31, 2014 AND 2013

 

		2014				2013
ASSETS
EQUITY IN TRADING ACCOUNTS:
Investments in U.S. Treasury notes — at fair value
(amortized cost $14,499,118 and $27,505,889)		$	14,499,918			$	27,509,188
Net unrealized appreciation on open futures and forward
currency contracts			1,396,471				3,134,932
Due from brokers			3,100,309				1,775,697
Cash denominated in foreign currencies (cost $1,529,032
and $3,316,796)			1,413,316				3,319,987
Total equity in trading accounts			20,410,014				35,739,804
INVESTMENTS IN U.S. TREASURY NOTES — at fair value
(amortized cost $92,253,329 and $82,000,337)			92,248,350				82,011,307
CASH AND CASH EQUIVALENTS			18,990,245				4,135,215
ACCRUED INTEREST RECEIVABLE			101,013				261,737
TOTAL		$	131,749,622			$	122,148,063
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Capital contributions received in advance		$	3,139,000			$	225,000
Net unrealized depreciation on open futures and forward
currency contracts			355,846				215,372
Accrued brokerage fees			211,866				218,459
Due to brokers			-				1,698,720
Cash denominated in foreign currencies (cost $179,983 and $0)			183,943				-
Accrued expenses			107,844				111,175
Capital withdrawals payable			1,371,319				2,323,360
Due to General Partner			-				333
Total liabilities			5,369,818				4,792,419
PARTNERS' CAPITAL			126,379,804				117,355,644
TOTAL		$	131,749,622			$	122,148,063

 

See notes to financial statements

 

 

NESTOR PARTNERS

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2014

 

		Net Unrealized Appreciation/ (Depreciation) as a % of Partners' Capital				Net Unrealized Appreciation/ (Depreciation)
FUTURES AND FORWARD CURRENCY CONTRACTS
FUTURES CONTRACTS
Long futures contracts:
Grains			(0.10	)%		$	(132,128	)
Interest rates:
5 Year U.S. Treasury Note (415 contracts, settlement date March 2015)			0.01				17,500
30 Year U.S. Treasury Bond (34 contracts, settlement date March 2015)			0.03				42,875
Other			0.50				624,749
Total interest rates			0.54				685,124
Livestock			(0.01	)			(14,180	)
Metals			(0.75	)			(950,059	)
Softs			0.00				2,730
Stock indices			0.37				469,097
Total long futures contracts			0.05				60,584
Short futures contracts:
Energies			0.31				392,983
Interest rates			(0.10	)			(120,616	)
Livestock			0.03				35,540
Metals			0.49				624,953
Softs			0.23				285,307
Stock indices			0.07				83,917
Total short futures contracts			1.03				1,302,084
TOTAL INVESTMENTS IN FUTURES CONTRACTS — Net			1.08				1,362,668
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts			(0.71	)			(895,510	)
Total short forward currency contracts			0.45				573,467
TOTAL INVESTMENTS IN FORWARD CURRENCY
CONTRACTS — Net			(0.26	)			(322,043	)
TOTAL			0.82	%		$	1,040,625

 

(Continued)

 

 

NESTOR PARTNERS

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2014

 

U.S. TREASURY NOTES

 

Face  Amount				Description		Fair Value as a % of Partners' Capital				Fair Value
$	34,890,000			U.S. Treasury notes, 0.375%, 03/15/2015			27.63	%		$	34,915,213
	10,040,000			U.S. Treasury notes, 0.250%, 05/15/2015			7.95				10,047,452
	30,970,000			U.S. Treasury notes, 0.250%, 07/15/2015			24.52				30,991,776
	30,780,000			U.S. Treasury notes, 0.250%, 09/15/2015			24.37				30,793,827
				TOTAL INVESTMENTS IN U.S. TREASURY
				NOTES (amortized cost $106,752,447)			84.47	%		$	106,748,268

 

See notes to financial statements

(Concluded)

 

 

NESTOR PARTNERS

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2013

 

		Net Unrealized Appreciation/ (Depreciation) as a % of Partners' Capital				Net Unrealized Appreciation/ (Depreciation)
FUTURES AND FORWARD CURRENCY CONTRACTS
FUTURES CONTRACTS
Long futures contracts:
Energies			(0.06	)%		$	(73,768	)
Grains			(0.29	)			(340,967	)
Interest rates			(0.79	)			(926,200	)
Livestock			0.02				20,440
Metals			1.28				1,510,274
Softs			(0.02	)			(28,512	)
Stock indices			2.55				2,992,958
Total long futures contracts			2.69				3,154,225
Short futures contracts:
Energies			(0.05	)			(62,968	)
Grains			0.24				278,024
Interest rates
5 Year U.S. Treasury Note (-246 contracts, settlement date March 2014)			0.00				4,438
10 Year U.S. Treasury Note (-44 contracts, settlement date March 2014)			0.01				5,672
Other			(0.05	)			(58,963	)
Total interest rates			(0.04	)			(48,853	)
Livestock			(0.01	)			(6,250	)
Metals			(0.44	)			(521,505	)
Softs			0.03				41,728
Stock indices			0.05				62,660
Total short futures contracts			(0.22	)			(257,164	)
TOTAL INVESTMENTS IN FUTURES CONTRACTS — Net			2.47				2,897,061
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts			(0.09	)			(106,168	)
Total short forward currency contracts			0.11				128,667
TOTAL INVESTMENTS IN FORWARD CURRENCY  CONTRACTS — Net			0.02				22,499
TOTAL			2.49	%		$	2,919,560

 

(Continued)

 

 

NESTOR PARTNERS

CONDENSED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2013

U.S. TREASURY NOTES

 

Face  Amount				Description		Fair Value as a % of Partners' Capital				Fair Value
$	34,890,000			U.S. Treasury notes, 1.250%, 03/15/2014			29.80	%		$	34,973,136
	10,040,000			U.S. Treasury notes, 1.000%, 05/15/2014			8.58				10,073,924
	32,970,000			U.S. Treasury notes, 0.625%, 07/15/2014			28.18				33,064,016
	31,380,000			U.S. Treasury notes, 0.250%, 09/15/2014			26.76				31,409,419
				TOTAL INVESTMENTS IN U.S. TREASURY
				NOTES (amortized cost $109,506,226)			93.32	%		$	109,520,495

 

See notes to financial statements

(Concluded)

 

 

NESTOR PARTNERS

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

		2014				2013
INVESTMENT INCOME — Interest income		$	133,007			$	211,792
EXPENSES:
Brokerage fees			2,821,666				3,418,662
Administrative expenses			305,679				332,718
Custody fees and other expenses			29,920				28,814
Total expenses			3,157,265				3,780,194
NET INVESTMENT LOSS			(3,024,258	)			(3,568,402	)
NET REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) on closed positions:
Futures and forward currency contracts			24,933,097				(6,524,991	)
Foreign exchange translation			41,091				(78,602	)
Net change in unrealized:
Futures and forward currency contracts			(1,878,935	)			1,367,401
Foreign exchange translation			(122,867	)			4,540
Net gains (losses) from U.S. Treasury notes:
Realized			170				4,041
Net change in unrealized			(18,448	)			(18,074	)
Total net realized and unrealized gains (losses)			22,954,108				(5,245,685	)
NET INCOME (LOSS)			19,929,850				(8,814,087	)
LESS PROFIT SHARE TO GENERAL PARTNER			124,849				751
NET INCOME (LOSS) AFTER PROFIT SHARE TO GENERAL PARTNER		$	19,805,001			$	(8,814,838	)

 

See notes to financial statements

 

 

NESTOR PARTNERS

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

		Limited Partners				Special Limited Partners				New Profit Memo Account				General Partner				Total
PARTNERS' CAPITAL — January 1, 2013		$	81,662,298			$	58,343,188			$	-			$	3,037,871			$	143,043,357
Contributions			4,507,000				2,131,417				-				-				6,638,417
Withdrawals			(18,221,797	)			(4,589,498	)			-				(700,748	)			(23,512,043	)
Net loss			(6,070,764	)			(2,621,748	)			(3	)			(121,572	)			(8,814,087	)
General Partner's allocation — profit share			(751	)			-				751				-				-
Transfer of New Profit Memo Account to
General Partner			-				-				(748	)			748				-
PARTNERS' CAPITAL — December 31, 2013			61,875,986				53,263,359				-				2,216,299				117,355,644
Contributions			1,855,905				-				-				-				1,855,905
Withdrawals			(9,794,173	)			(2,642,594	)			-				(324,828	)			(12,761,595	)
Net income			9,219,300				10,260,684				(21	)			449,887				19,929,850
General Partner's allocation — profit share			(124,849	)			-				124,849				-				-
Transfer of New Profit Memo Account to
General Partner			-				-				(124,828	)			124,828				-
PARTNERS' CAPITAL — December 31, 2014		$	63,032,169			$	60,881,449			$	-			$	2,466,186			$	126,379,804

 

See notes to financial statements

 

 

NESTOR PARTNERS

STATEMENTS OF FINANCIAL HIGHLIGHTS

YEARS ENDED DECEMBER 31, 2014 AND 2013

 

		Limited Partners								Special Limited Partners
		2014				2013				2014				2013
Ratios to average capital —
Net investment loss			(3.88	)%			(4.19	)%			(1.07	)%			(0.83	)%
Total expenses			3.99	%			4.35	%			1.18	%			0.99	%
Profit share allocation			0.20	%			0.00	%			0.00	%			0.00	%
Total expenses and profit share allocation			4.19	%			4.35	%			1.18	%			0.99	%
Total return before profit share allocation			16.34	%			(7.65	)%			19.66	%			(4.50	)%
Less profit share allocation			0.20	%			0.00	%			0.00	%			0.00	%
Total return after profit share allocation			16.14	%			(7.65	)%			19.66	%			(4.50	)%

 

See notes to financial statements

 

 

NESTOR PARTNERS

 

NOTES TO FINANCIAL STATEMENTS

Years ENDED DECEMBER 31, 2014 AND 2013

 

1.

ORGANIZATION

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

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

 

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

 

Cash Denominated in Foreign Currencies — Includes foreign currency cash held at the Partnership’s trading counterparties.

 

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

 

Brokerage Fees — The Agreement provides that the Partnership shall charge the limited partners’ capital accounts and pay the General Partner brokerage fees at a fixed rate of 0.542% per month of net asset value (6.5% per annum) of limited partnership interests. Effective July 1, 2003, the General Partner reduced the brokerage fee rate to 0.458% per month of net asset value (5.5% per annum) and effective January 1, 2014, the General Partner reduced the brokerage fee rate to 0.417% per month of net asset value (5.0% per annum). The General Partner retains the right to charge less than the annual brokerage rate except as specified in the Agreement.

 

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

 

The Partnership’s administrative expenses included $107,844 and $111,175 in 2014 and 2013, respectively, which relates to legal and accounting services provided to the Partnership by The Millburn Corporation, an affiliate of the General Partner.

 

 

Income Taxes — The Partnership is treated as a limited partnership for federal and state income tax reporting purposes. Accordingly, the Partnership prepares calendar year U.S. federal and applicable state tax returns and reports to the partners their allocable shares of the Partnership’s income, expenses and trading gains or losses. No provision for income taxes has been made in the accompanying financial statements as the partners are responsible for the payment of taxes.

 

The Income Taxes topic of the Codification clarifies the accounting for uncertainty in tax positions. This requires that the Partnership recognize in its financial statements the impact of any uncertain tax positions. Based on a review of the Partnership’s open tax years, 2011 to 2014, the General Partner has determined that no reserves for uncertain tax positions were required.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Spot currency contracts are valued based on current market prices (“Spot Price”). Forward currency contracts are valued based on pricing models that consider the Spot Price plus the financing cost or benefit (“Forward Point”). Forward Points from the quotation service providers are generally in periods of one month, two months, three months, six months, nine months and twelve months forward while the contractual forward delivery dates for the forward currency contracts traded by the Partnership may be in between these periods. The General Partner’s policy to determine fair value for forward currency contracts involves first calculating the number of months from the date the forward currency contract is being valued to its maturity date (“Months to Maturity”), then identifying the forward currency contracts for the two forward months that are closest to the Months to Maturity (“Forward Month Contracts”). Linear interpolation is then performed between the dates of these two Forward Month Contracts to calculate the interpolated forward point. Model inputs can generally be verified and model selection does not involve significant management judgment. Such instruments are typically classified within Level 2 of the fair value hierarchy.

 

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.

 

 

During the years ended December 31, 2014 and 2013 there were no transfers of assets or liabilities between Level 1 and Level 2. The following table represents the Partnership’s investments by hierarchical level as of December 31, 2014 and 2013 in valuing the Partnership’s investments at fair value. At December 31, 2014 and 2013, the Partnership held no assets or liabilities classified in Level 3.

 

Financial assets and liabilities at fair value as of December 31, 2014

 

		Level 1				Level 2				Total
U.S. Treasury Notes (1)		$	106,748,268			$	-			$	106,748,268
Short-Term Money Market Fund*			18,740,245				-				18,740,245
Exchange-Traded Futures Contracts
Energies			392,983				-				392,983
Grains			(132,128	)			-				(132,128	)
Interest rates			564,508				-				564,508
Livestock			21,360				-				21,360
Metals			(325,106	)			-				(325,106	)
Softs			288,037				-				288,037
Stock indices			553,014				-				553,014
Total exchange-traded futures contracts			1,362,668				-				1,362,668
Over-the-Counter Forward Currency Contracts			-				(322,043	)			(322,043	)
Total futures and forward currency contracts (2)			1,362,668				(322,043	)			1,040,625
Total financial assets at fair value		$	126,851,181			$	(322,043	)		$	126,529,138
Per line item in Statements of Financial Condition
(1)
Investments in U.S. Treasury notes held in equity trading accounts (as collateral)										$	14,499,918
Investments in U.S. Treasury notes											92,248,350
Total investments in U.S. Treasury notes										$	106,748,268
(2)
Net unrealized appreciation on open futures and forward currency contracts										$	1,396,471
Net unrealized depreciation on open futures and forward currency contracts											(355,846	)
Total unrealized appreciation on open futures and forward currency contracts										$	1,040,625

 

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

Condition.

 

 

Financial assets and liabilities at fair value as of December 31, 2013

 

		Level 1				Level 2				Total
U.S. Treasury Notes (1)		$	109,520,495			$	-			$	109,520,495
Short-Term Money Market Fund*			3,885,215				-				3,885,215
Exchange-Traded Futures Contracts
Energies			(136,736	)			-				(136,736	)
Grains			(62,943	)			-				(62,943	)
Interest rates			(975,053	)			-				(975,053	)
Livestock			14,190				-				14,190
Metals			988,769				-				988,769
Softs			13,216				-				13,216
Stock indices			3,055,618				-				3,055,618
Total exchange-traded futures contracts			2,897,061				-				2,897,061
Over-the-Counter Forward Currency Contracts			-				22,499				22,499
Total futures and forward currency contracts (2)			2,897,061				22,499				2,919,560
Total financial assets at fair value		$	116,302,771			$	22,499			$	116,325,270
Per line item in Statements of Financial Condition
(1)
Investments in U.S. Treasury notes held in equity trading accounts (as collateral)										$	27,509,188
Investments in U.S. Treasury notes											82,011,307
Total investments in U.S. Treasury notes										$	109,520,495
(2)
Net unrealized appreciation on open futures and forward currency contracts										$	3,134,932
Net unrealized depreciation on open futures and forward currency contracts											(215,372	)
Total unrealized appreciation on open futures and forward currency contracts										$	2,919,560

 

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

Financial Condition.

 

 

3.

PROFIT SHARE ALLOCATION

 

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

 

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

 

4.

DUE FROM/to BROKERS

 

At December 31, 2014 and 2013, due from and due to brokers balances in the Statements of Financial Condition include net cash receivable from each broker and net cash payable to each broker, respectively.

 

5.

TRADING ACTIVITIES

 

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

 

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

 

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

 

 

6.

DERIVATIVE INSTRUMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. Credit risk is normally reduced to the extent that an exchange or clearing organization acts as a counterparty to futures transactions since typically the collective credit of the members of the exchange is pledged to support the financial integrity of the exchange. In the case of OTC transactions, the Partnership must rely solely on the credit of the individual counterparties. The contract amounts of the forward currency and futures contracts do not represent the Partnership’s risk of loss due to counterparty nonperformance. The Partnership’s exposure to credit risk associated with counterparty nonperformance of these forward currency contracts is limited to the unrealized gains inherent in such contracts, which are recognized in the Statements of Financial Condition, plus the value of margin or collateral held in cash and U.S. Treasury Notes by the counterparty. The amount of such credit risk was $6,737,537 and $9,139,654 at December 31, 2014 and 2013, respectively.

 

 

The General Partner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will in fact succeed in doing so. The General Partner’s market risk control procedures include diversification of the Partnership’s portfolio and continuously monitoring the portfolio’s open positions, historical volatility and maximum historical loss. The General Partner seeks to minimize credit risk primarily by depositing and maintaining the Partnership’s assets at financial institutions and brokers which the General Partner believes to be creditworthy. The Partnership’s trading activities are primarily with brokers and other financial institutions located in North America, Europe and Asia. All futures transactions of the Partnership are cleared by major securities firms, pursuant to customer agreements, including Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. (a wholly owned subsidiary of Deutsche Bank AG), J.P. Morgan Securities LLC., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Newedge USA, LLC (a wholly owned subsidiary of Newedge Group which is owned by Société Générale (50%) and Calyon (50%)), collectively the “Futures Clearing Brokers.” The Partnership ceased clearing trades through Barclays Capital Inc., Credit Suisse Securities (USA) LLC, and Merrill Lynch, Pierce, Fenner & Smith Incorporated during April 2014, July 2013, and June 2013, respectively. For all forward currency transactions, the Partnership utilizes three prime brokers, Barclays Bank PLC, Deutsche Bank AG and Morgan Stanley & Co., LLC, collectively the “FX Prime Brokers.” The Partnership ceased clearing trades through Barclays Bank PLC during October 2014.

 

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

 

 

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

 

		As of December 31,
		2014								2013
		Total Net								Total Net
		Unrealized								Unrealized
		Appreciation				Percent of				Appreciation				Percent of
Currency type		(Depreciation)				Total				(Depreciation)				Total
Australian dollar		$	68,719				6.60	%		$	237,593				8.14	%
British pound			425,639				40.90				75,711				2.59
Canadian dollar			93,652				9.00				165,864				5.68
Czech koruna			4,844				0.47				(4,219	)			(0.15	)
Euro			329,548				31.67				731,360				25.05
Hong Kong dollar			28,912				2.78				125,970				4.31
Hungarian forint			(104,646	)			(10.06	)			6,931				0.24
Japanese yen			30,058				2.89				457,232				15.66
Korean won			115,656				11.11				86,754				2.97
Malaysian ringgit			(114	)			(0.01	)			13,169				0.45
Norwegian krone			6,730				0.65				(14,366	)			(0.49	)
Polish zloty			(182,867	)			(17.57	)			39,628				1.36
Singapore dollar			3,036				0.29				36,708				1.26
South African rand			(18,310	)			(1.76	)			165,131				5.66
Swedish krona			16,152				1.55				(33,359	)			(1.14	)
Turkish lira			(103,872	)			(9.98	)			240,052				8.22
U.S. dollar			327,488				31.47				589,401				20.19
Total		$	1,040,625				100.00	%		$	2,919,560				100.00	%

 

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

 

 

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

 

The Partnership engages in the speculative trading of futures and forward contracts on agricultural commodities, currencies, energies, interest rates, metals and stock indices. The following were the primary trading risk exposures of the Partnership at December 31, 2014 and 2013 by market sector:

 

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

 

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

 

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

 

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

 

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

 

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

 

The Derivatives and Hedging topic of the Codification requires entities to recognize in the Statements of Financial Condition all derivative contracts as assets or liabilities. Fair values of futures and forward currency contracts in a net asset position are recorded in the Statements of Financial Condition as “Net unrealized appreciation on open futures and forward currency contracts.” Fair value of futures and forward currency contracts in a liability position are recorded in the Statements of Financial Condition as “Net unrealized depreciation on open futures and forward currency contracts.”

 

 

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

 

The following tables present the fair value of open futures and forward currency contracts, held long or sold short, at December 31, 2014 and 2013. Fair value is presented on a gross basis even though the contracts are subject to master netting agreements and qualify for net presentation in the Statements of Financial Condition.

 

Fair Value of Futures and Forward Currency Contracts at December 31, 2014

 

																		Net Unrealized
																		Gain (Loss) on
		Fair Value - Long Positions								Fair Value - Short Positions								Open
Sector		Gains				Losses				Gains				Losses				Positions
Futures contracts:
Energies		$	-			$	-			$	409,768			$	(16,785	)		$	392,983
Grains			275				(132,403	)			-				-				(132,128	)
Interest rates			1,143,514				(458,390	)			-				(120,616	)			564,508
Livestock			1,280				(15,460	)			35,540				-				21,360
Metals			8,401				(958,460	)			645,172				(20,219	)			(325,106	)
Softs			3,120				(390	)			294,048				(8,741	)			288,037
Stock indices			726,711				(257,614	)			115,655				(31,738	)			553,014
Total futures contracts			1,883,301				(1,822,717	)			1,500,183				(198,099	)			1,362,668
Forward currency contracts			347,015				(1,242,525	)			1,347,542				(774,075	)			(322,043	)
Total futures and forward currency contracts		$	2,230,316			$	(3,065,242	)		$	2,847,725			$	(972,174	)		$	1,040,625

 

 

Fair Value of Futures and Forward Currency Contracts at December 31, 2013

 

																		Net Unrealized
																		Gain (Loss) on
		Fair Value - Long Positions								Fair Value - Short Positions								Open
Sector		Gains				Losses				Gains				Losses				Positions
Futures contracts:
Energies		$	156,261			$	(230,029	)		$	56,410			$	(119,378	)		$	(136,736	)
Grains			4,673				(345,640	)			283,023				(4,999	)			(62,943	)
Interest rates			148,106				(1,074,306	)			44,116				(92,969	)			(975,053	)
Livestock			22,330				(1,890	)			3,780				(10,030	)			14,190
Metals			1,644,571				(134,297	)			58,546				(580,051	)			988,769
Softs			5,479				(33,991	)			53,863				(12,135	)			13,216
Stock indices			3,010,177				(17,219	)			72,260				(9,600	)			3,055,618
Total futures contracts			4,991,597				(1,837,372	)			571,998				(829,162	)			2,897,061
Forward currency contracts			936,496				(1,042,664	)			371,418				(242,751	)			22,499
Total futures and  forward currency contracts		$	5,928,093			$	(2,880,036	)		$	943,416			$	(1,071,913	)		$	2,919,560

 

The effect of trading futures and forward currency contracts is represented on the Statements of Operations for the years ended December 31, 2014 and 2013, as “Net realized gains (losses) on closed positions: Futures and forward currency contracts” and “Net change in unrealized: Futures and forward currency contracts.” These trading gains and losses are detailed below:

 

Sector		2014				2013
Futures contracts:
Energies		$	1,428,307			$	(3,222,271	)
Grains			1,642,866				1,021,696
Interest rates			17,590,184				(10,725,452	)
Livestock			391,990				4,340
Metals			(936,861	)			(1,102,965	)
Softs			989,722				387,531
Stock indices			1,317,982				13,926,067
Total futures contracts			22,424,190				288,946
Forward currency contracts			629,972				(5,446,536	)
Total futures and  forward currency contracts		$	23,054,162			$	(5,157,590	)

 

 

The following table presents the average notional value by sector of open futures and forward currency contracts in U.S. dollars for the years ended December 31, 2014 and 2013. The Partnership’s average net asset value during 2014 and 2013 was approximately $122,000,000 and $133,000,000, respectively.

 

		2014								2013
Sector		Long positions				Short positions				Long positions				Short positions
Futures contracts:
Energies		$	25,953,471			$	17,481,347			$	25,504,935			$	15,997,596
Grains			8,352,184				7,919,243				8,752,502				9,742,036
Interest rates			332,235,960				12,602,876				249,567,718				35,194,835
Livestock			2,727,146				1,224,068				1,459,638				2,619,588
Metals			14,243,221				6,255,817				12,584,635				12,188,975
Softs			2,622,864				3,329,674				3,090,433				5,968,367
Stock indices			123,363,160				3,376,290				136,385,750				1,430,570
Total futures contracts			509,498,006				52,189,315				437,345,611				83,141,967
Forward currency contracts			103,635,073				33,109,469				132,389,740				45,239,532
Total futures and forward currency contracts		$	613,133,079			$	85,298,784			$	569,735,351			$	128,381,499

 

Notional values in the interest rate sector were calculated by converting the notional value in local currency of all open interest rate futures positions to 10-year equivalent fixed income instruments, translated to U.S. Dollars at each quarter end during 2014 and 2013. The 10-year note is often used as a benchmark for many types of fixed-income instruments and the General Partner believes it is a more meaningful representation of notional values of the Partnership’s open interest rate positions.

 

The customer agreements between the Partnership, the Futures Clearing Brokers and the FX Prime Brokers gives the Partnership the legal right to net unrealized gains and losses on open futures and foreign currency contracts. The Partnership netted, for financial reporting purposes, the unrealized gains and losses on open futures and forward currency contracts on the Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” were met.

 

On January 1, 2013, the Trust adopted 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 and ASU 2013-01 did not have a significant impact on the Trust’s financial statements.

 

 

The following tables summarize the valuation of the Partnership’s investments as December 31, 2014 and 2013.

 

Offsetting derivative assets and liabilities at December 31, 2014

 

Assets		Gross amounts of recognized assets				Gross amounts offset in the Statement of Financial Condition				Net amounts of assets presented in the Statement of Financial Condition
Futures contracts
Counterparty C		$	1,755,738			$	(487,705	)		$	1,268,033
Counterparty D			1,627,746				(1,533,111	)			94,635
Total futures contracts			3,383,484				(2,020,816	)			1,362,668
Forward currency contracts
Counterparty G			566,228				(532,425	)			33,803
Total forward currency contracts			566,228				(532,425	)			33,803
Total assets		$	3,949,712			$	(2,553,241	)		$	1,396,471

 

Liabilities		Gross amounts of recognized liabilities				Gross amounts offset in the Statement of Financial Condition				Net amounts of liabilities presented in the Statement of Financial Condition
Forward currency contracts
Counterparty H		$	1,484,175			$	(1,128,329	)		$	355,846
Total liabilities		$	1,484,175			$	(1,128,329	)		$	355,846

 

(Continued)

 

 

						Amounts Not Offset in the Statement of Financial Condition
Counterparty		Net amounts of Assets presented in the Statement of Financial Condition				Financial Instruments				Collateral Received(1)(2)				Net Amount(3)(4)
Counterparty C		$	1,268,033			$	-			$	(1,268,033	)		$	-
Counterparty D			94,635				-				(94,635	)			-
Counterparty G			33,803				-				(33,803	)			-
Total		$	1,396,471			$	-			$	(1,396,471	)		$	-
						Amounts Not Offset in the Statement of Financial Condition
Counterparty		Net amounts of Liabilities presented in the Statement of Financial Condition				Financial Instruments				Collateral Pledged(1)(2)				Net Amount(3)(4)
Counterparty H		$	355,846			$	-			$	(355,846	)		$	-
Total		$	355,846			$	-			$	(355,846	)		$	-

 

⁽¹⁾ Collateral received and pledged includes both cash and U.S. Treasury notes held at each respective broker.

⁽²⁾ Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in

the Statement of Financial Condition, for each respective counterparty.

⁽³⁾ Net amount represents the amounts owed to the Partnership by each counterparty as of December 31, 2014. Net amount represents the amount that is subject to loss in the event of a counterparty failure as of December 31, 2014

⁽⁴⁾ Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2014

 

(Concluded)

 

 

Offsetting derivative assets and liabilities at December 31, 2013

 

Assets		Gross amounts of recognized assets				Gross amounts offset in the Statement of Financial Condition				Net amounts of assets presented in the Statement of Financial Condition
Futures contracts
Counterparty A		$	1,439,459			$	(509,651	)		$	929,808
Counterparty C			2,721,786				(1,302,169	)			1,419,617
Counterparty D			1,402,350				(854,714	)			547,636
Total futures contracts			5,563,595				(2,666,534	)			2,897,061
Forward currency contracts
Counterparty F			428,000				(277,225	)			150,775
Counterparty G			194,464				(107,368	)			87,096
Total forward currency contracts			622,464				(384,593	)			237,871
Total assets		$	6,186,059			$	(3,051,127	)		$	3,134,932

 

Liabilities		Gross amounts of recognized liabilities				Gross amounts offset in the Statement of Financial Condition				Net amounts of liabilities presented in the Statement of Financial Condition
Forward currency contracts
Counterparty H		$	900,822			$	(685,450	)		$	215,372
Total liabilities		$	900,822			$	(685,450	)		$	215,372

 

(Continued)

 

 

						Amounts Not Offset in the Statement of Financial Condition
Counterparty		Net amounts of Assets presented in the Statement of Financial Condition				Financial Instruments				Collateral Received(1)(2)				Net Amount(3)(4)
Counterparty A		$	929,808			$	-			$	(929,808	)		$	-
Counterparty C			1,419,617				-				(1,419,617	)			-
Counterparty D			547,636				-				(547,636	)			-
Counterparty F			150,775				-				(150,775	)			-
Counterparty G			87,096				-				(87,096	)			-
Total		$	3,134,932			$	-			$	(3,134,932	)		$	-
						Amounts Not Offset in the Statement of Financial Condition
Counterparty		Net amounts of Liabilities presented in the Statement of Financial Condition				Financial Instruments				Collateral Pledged(1)(2)				Net Amount(3)(4)
Counterparty H			215,372				-				(215,372	)			-
Total		$	215,372			$	-			$	(215,372	)		$	-

 

(1) Collateral received and pledged includes both cash and U.S. Treasury notes held at each respective broker.

(2) Collateral disclosed is limited to an amount not to exceed 100% of the net amount of assets presented in

the Statement of Financial Condition, for each respective counterparty.

(3) Net amount represents the amounts owed to the Partnership by each counterparty as of December 31, 2013. Net amount represents the amount that is subject to loss in the event of a counterparty failure as of December 31, 2013

(4) Net amount represents the amounts owed by the Partnership to each counterparty as of December 31, 2013

 

(Concluded)

 

 

7.

FINANCIAL HIGHLIGHTS

 

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

 

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

 

8.

REDEMPTION PAYABLE TO GENERAL PARTNER

 

At December 31, 2014 and 2013, capital withdrawals payable of $124,829 and $748, respectively, was related to profit share allocated to the General Partner at each year-end and subsequently paid.

 

9.

SUBSEQUENT EVENTS

 

During the period from January 1, 2015 to March 20, 2015, contributions of $7,494,094 were made to the Partnership and withdrawals of $567,792 were made from the Partnership. The General Partner has performed its evaluation of subsequent events through March 20, 2015, the date the financial statements were issued. Based on such evaluation, no further events were discovered that required disclosure or adjustment to the financial statements.