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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, 2015

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 000-54284

MANAGED FUTURES PREMIER BHM L.P.

 

(Exact name of registrant as specified in its charter)

 

Delaware 27-3371689

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

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

Yes X   No   

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

 

Large accelerated filer   

Accelerated filer    Non-accelerated filer X Smaller reporting company   

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

Yes      No X

As of July 31, 2015, 171,895.121 Limited Partnership Redeemable Units Class A were outstanding, 692.389 Limited Partnership Redeemable Units Class D were outstanding and 1,214.224 Limited Partnership Redeemable Units Class Z were outstanding.


Table of Contents

MANAGED FUTURES PREMIER BHM L.P.

FORM 10-Q

INDEX

 

     Page
Number
 

PART I — Financial Information:

  

Item 1. Financial Statements:

  

Statements of Financial Condition at June 30, 2015 (unaudited) and December 31, 2014

     3   

Statements of Income and Expenses for the three and six months ended June 30, 2015 and 2014 (unaudited)

     4   

Statement of Changes in Partners’ Capital for the six months ended June 30, 2015 and 2014 (unaudited)

     5   

Notes to Financial Statements, including the Financial Statements of BHM I, LLC (unaudited)

     6-22   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23-26   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     27-29   

Item 4. Controls and Procedures

     30   

PART II — Other Information

  

Item 1. Legal Proceedings

     31-39   

Item 1A. Risk Factors

     40   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     40   

Item 3. Defaults Upon Senior Securities

     40   

Item 4. Mine Safety Disclosures

     40   

Item 6. Exhibits

     41   

 

 

2


Table of Contents

PART I

Item1. Financial Statements

Managed Futures Premier BHM L.P.

Statements of Financial Condition

 

     (Unaudited)
June 30,

2015
     December 31,
2014
 

Assets:

     

Investment in Trading Company(1), at fair value

   $ 120,107,378       $ 190,332,186   
  

 

 

    

 

 

 

Total assets

   $ 120,107,378       $ 190,332,186   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Redemptions payable to Limited Partners

   $ 5,891,543       $ 4,206,289   
  

 

 

    

 

 

 

Total liabilities

     5,891,543         4,206,289   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, Class A (0.000 Redeemable Units outstanding at June 30, 2015 and December 31, 2014)

               

General Partner, Class D (0.000 Redeemable Units outstanding at June 30, 2015 and December 31, 2014)

               

General Partner, Class Z (2,120.612 and 2,870.787 Redeemable Units outstanding at June 30, 2015 and December 31, 2014, respectively)

     1,389,469         2,203,947   

Limited Partner, Class A (178,978.940 and 248,403.999 Redeemable Units outstanding at June 30, 2015 and December 31, 2014, respectively)

     108,493,030         178,254,779   

Limited Partner, Class D (5,819.883 Redeemable Units outstanding at June 30, 2015 and December 31, 2014, respectively)

     3,472,311         4,084,197   

Limited Partner, Class Z (1,314.100 and 2,061.929 Redeemable Units outstanding at June 30, 2015 and December 31, 2014, respectively)

     861,025         1,582,974   
  

 

 

    

 

 

 

Total Partners’ Capital

     114,215,835         186,125,897   
  

 

 

    

 

 

 

Total liabilities and Partners’ Capital

   $ 120,107,378       $ 190,332,186   
  

 

 

    

 

 

 

Net asset value per units:

     

Class A

   $ 606.18       $ 717.60   
  

 

 

    

 

 

 

Class D

   $ 596.63       $ 701.77   
  

 

 

    

 

 

 

Class Z

   $ 655.22       $ 767.72   
  

 

 

    

 

 

 

(1) Defined in Note 1.

The accompanying notes are integral part of these financial statements.

 

3


Table of Contents

Managed Futures Premier BHM L.P.

Statements of Income and Expenses

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Investment income:

        

Interest income allocated from Trading Company

   $      $      $      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

Expenses allocated from Trading Company

  847,678      1,291,746      1,916,013      2,532,456   

Ongoing placement agent fees

  695,863      1,050,838      1,561,448      2,598,384   

Administrative fees

  359,982      543,695      807,172      1,078,525   

Other

  49,604      75,723      106,807      131,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  1,953,127      2,962,002      4,391,440      6,340,892   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

  (1,953,127   (2,962,002   (4,391,440   (6,340,892
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

Net realized gains (losses) on closed contracts allocated from Trading Company

  (8,500,173   15,458,779      (14,163,577   25,052,159   

Net change in unrealized gains (losses) on open contracts allocated from Trading Company

  4,247,451      9,133,419      (6,443,972   10,600,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results allocated from Trading Company

  (4,252,722   24,592,198      (20,607,549   35,652,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (6,205,849 $ 21,630,196    $ (24,998,989 $ 29,311,988   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) allocation from Trading Company

Class A

$ (5,891,203 $ 20,703,826    $ (23,935,088 $ 28,022,917   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

$ (192,216 $ 451,746    $ (611,886 $ 624,088   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

$ (122,430 $ 474,624    $ (452,015 $ 664,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit

Class A

$ 606.18    $ 841.01    $ 606.18    $ 841.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

$ 596.63    $ 817.19    $ 596.63    $ 817.19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

$ 655.22    $ 890.55    $ 655.22    $ 890.55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per Redeemable Unit*

Class A

$ (35.60 $ 77.57    $ (111.42 $ 104.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

$ (33.03 $ 77.62    $ (105.14 $ 107.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

$ (34.95 $ 86.05    $ (112.50 $ 119.68   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

Class A

  210,022.070      267,070.191      226,179.933      270,571.177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

  5,819.883      5,819.883      5,819.883      5,819.883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

  3,500.705      5,530.262      3,881.143      5,589.102   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Represents the change in net asset value per unit during the period.

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

Managed Futures Premier BHM L.P.

Statements of Changes in Partners’ Capital

For the Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

     Class A     Class D      Class Z     Total  
     Amount     Units     Amount     Units      Amount     Units     Amount     Units  

Partners’ Capital at December 31, 2014

   $ 178,254,779        248,403.999      $ 4,084,197        5,819.883       $ 3,786,921        4,932.716      $ 186,125,897        259,156.598   

Subscriptions - Limited Partners

     2,860,304        4,175.008                       46,818        63.303        2,907,122        4,238.311   

Net income (loss)

     (23,935,088            (611,886             (452,015            (24,998,989       

Redemptions - Limited Partners

     (48,686,965     (73,600.067                    (596,075     (811.132     (49,283,040     (74,411.199

Redemptions - General Partner

                                  (535,155     (750.175     (535,155     (750.175
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital at June 30, 2015

   $ 108,493,030        178,978.940      $ 3,472,311        5,819.883       $ 2,250,494        3,434.712      $ 114,215,835        188,233.535   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Class A     Class D      Class Z     Total  
     Amount     Units     Amount     Units      Amount     Units     Amount     Units  

Partners’ Capital at December 31, 2013

   $ 203,521,796        276,167.845      $ 4,131,876        5,819.883       $ 4,418,504        5,731.879      $ 212,072,176        287,719.607   

Subscriptions - Limited Partners

     17,836,939        22,992.461                                     17,836,939        22,992.461   

Net income (loss)

     28,022,917               624,088                664,983               29,311,988          

Redemptions - Limited Partners

     (25,505,594     (32,962.583                    (181,491     (227.446     (25,687,085     (33,190.029
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital at June 30, 2014

   $ 223,876,058        266,197.723      $ 4,755,964        5,819.883       $ 4,901,996        5,504.433      $ 233,534,018        277,522.039   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

1. Organization:

Managed Futures Premier BHM L.P. (the “Partnership”) is a limited partnership organized on August 23, 2010 under the partnership laws of the State of Delaware 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 Partnership commenced trading on November 1, 2010. The commodity interests that are traded by the Partnership through its investment in the Trading Company (as defined below) are volatile and involve a high degree of market risk. The Partnership is authorized to sell an unlimited number of units of limited partnership interest (“Redeemable Units”) on a continuous basis.

Ceres Managed Futures LLC, a Delaware limited liability company, serves as the Partnership’s general partner (the “General Partner” or “Ceres”) and commodity pool operator. Demeter Management LLC (“Demeter”) previously served as the Partnership’s general partner. Demeter was merged into Ceres effective December 1, 2010. Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is wholly-owned indirectly by Morgan Stanley. Prior to June 28, 2013, Citigroup was the indirect minority owner of MSSBH.

On November 1, 2010, the Partnership allocated substantially all of its capital to Morgan Stanley Smith Barney BHM I, LLC (the “Trading Company”), a limited liability company organized under the Delaware Limited Liability Company Law. The Trading Company was formed in order to permit accounts managed by Blenheim Capital Management L.L.C. (“Blenheim” or the “Advisor”) using Blenheim’s Global Markets Strategy-Futures/FX program, a proprietary, discretionary trading program, to invest together in one trading vehicle. The General Partner is also the trading manager of the Trading Company. Individual and pooled accounts currently managed by the General Partner, including the Partnership, are permitted to be members of the Trading Company. The General Partner and the Advisor believe that trading through this Trading Company/feeder structure promotes efficiency and economy in the trading process.

On February 1, 2011, the Redeemable Units offered pursuant to the Partnership’s limited partnership agreement, as amended from time to time (the “Limited Partnership Agreement”), were deemed “Class A Units.” The rights, liabilities, risks, and fees associated with investment in the Class A Units were not changed. In addition, beginning on February 1, 2011, Class D Units were offered. Beginning August 1, 2011, Class Z Units were offered to certain employees of Morgan Stanley Smith Barney LLC and its affiliates (and their family members). Class A, Class D and Class Z will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Units that a limited partner of the Partnership (each a “Limited Partner” or collectively the “Limited Partners”) receives upon a subscription will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer Units to investors at its discretion.

Morgan Stanley Smith Barney LLC is doing business as Morgan Stanley Wealth Management. This entity previously acted as a non-clearing broker for the Trading Company and currently serves as the selling agent to the Partnership (the “Selling Agent”). The clearing commodity broker for the Trading Company is Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant.

At June 30, 2015, the Partnership owned approximately 81.0% of the Trading Company. At December 31, 2014, the Partnership owned approximately 77.8% of the Trading Company. The Partnership intends to continue to invest substantially all of its assets in the Trading Company. The performance of the Partnership is directly affected by the performance of the Trading Company. The Trading Company’s trading of futures, forward, and option contracts, as applicable, is done primarily on U.S. and foreign commodity exchanges. The Trading Company’s Statements of Financial Condition, including Condensed Schedules of Investments, and Statements of Income and Expenses and Changes in Members’ Capital are included herein.

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

During June 2015, the General Partner determined to invest a portion of the Partnership’s and Trading Company’s excess cash (the Partnership’s and Trading Company’s assets not used for futures interest trading or required margin for such trading) in United States (“U.S.”) Treasury bills and/or other permitted investments. The Trading Company receives interest on U.S. Treasury bills at the relevant coupon rate. There will be no change to the treatment of the excess cash not invested in U.S. Treasury bills or other permitted investments. The General Partner intends to hold the U.S. Treasury bills until maturity, but in the event that the General Partner is required to liquidate U.S. Treasury bills before they mature, to meet redemption requests or otherwise, the Partnership and Trading Company may incur a loss on such U.S. Treasury bills and/or may be subject to additional fees or other costs. The General Partner will endeavor to maintain sufficient cash in the Partnership’s and Trading Company’s accounts in order to avoid early liquidation of U.S. Treasury bills.

 

6


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

2. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at June 30, 2015 and December 31, 2014, and the results of its operations for the three and six months ended June 30, 2015 and 2014. 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 the Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2014. The December 31, 2014 information has been derived from the audited financial statements as of and for the year ended December 31, 2014.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Certain prior period amounts have been reclassified to conform to current period presentation. In the financial highlights, the ongoing selling agent fees and clearing fees allocated from the Trading Company which were previously included in net realized and unrealized gains (losses) per unit and excluded from expenses per unit are now excluded from net realized and unrealized gains (losses) per unit and included in expenses per unit. This information was previously included as a footnote to the financial highlights table.

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.

Partnership’s Investment. The Partnership carries its investment in the Trading Company at fair value based on the net asset value per unit as calculated by the Trading Company.

Trading Company’s Investments. Fair value of exchange-traded futures, options and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are stated at amortized cost which approximates fair value.

All commodity interests of the Trading Company (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 Trading Company’s 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.

Investment Company Status. The Partnership adopted Accounting Standards Update (“ASU”) 2013-08, “Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses.

Income Taxes: Income taxes have not been listed as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. 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 2011 through 2014 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 for each Class is calculated in accordance with investment company guidance. See Note 3. “Financial Highlights.”

Recent Accounting Pronouncement: In May 2015, the Financial Accounting Standards Board issued ASU 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” which relates to disclosures for investments that calculate net asset value per share (potentially fund of fund structures). The ASU requires investments for which the practical expedient is used to measure fair value at Net Asset Value (“NAV”) be removed from the fair value hierarchy. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the ASU removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using the practical expedient. The standard is effective for public business entities for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Partnership has elected to adopt the guidance as of June 30, 2015. The adoption did not have any impact on the Partnership’s fair value measurement disclosures.

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

The Trading Company’s Statements of Financial Condition and Condensed Schedules of Investments as of June 30, 2015 and December 31, 2014, and Statements of Income and Expenses and Changes in Members’ Capital for the three and six months ended June 30, 2015 and 2014, are presented below:

BHM I, LLC

Statements of Financial Condition

 

     (Unaudited)
June 30,

2015
    December 31,
2014
 

Assets:

    

Equity in trading account:

    

Unrestricted cash

   $ 151,293,707      $ 214,203,577   

Restricted cash

     11,720,941        35,822,289   
  

 

 

   

 

 

 

Total cash

     163,014,648        250,025,866   
  

 

 

   

 

 

 

Net unrealized gain (loss) on open contracts

     (16,255,867     (2,436,480
  

 

 

   

 

 

 

Options purchased, (premiums paid $2,227,308 and $5,652,679, respectively)

     1,763,810        4,044,097   
  

 

 

   

 

 

 

Total trading equity

     148,522,591        251,633,483   

Expense reimbursements

     5,856        7,124   
  

 

 

   

 

 

 

Total assets

   $ 148,528,447      $ 251,640,607   
  

 

 

   

 

 

 

Liabilities and Members’ Capital:

    

Liabilities:

    

Options written (premiums received $220,278 and $2,492,318, respectively)

   $ 51,429      $ 6,712,022   

Accrued management fees

     266,897        409,715   

Accrued administrative fees

     1,167        1,759   

Clearing fees due to MS&Co.

            8,165   
  

 

 

   

 

 

 

Total liabilities

     319,493        7,131,661   
  

 

 

   

 

 

 

Members’ Capital:

    

Non-Managing Members

     148,208,954        244,508,946   
  

 

 

   

 

 

 

Total members’ capital

     148,208,954        244,508,946   
  

 

 

   

 

 

 

Total liabilities and members’ capital

   $ 148,528,447      $ 251,640,607   
  

 

 

   

 

 

 

 

 

8


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

BHM I, LLC

Condensed Schedule of Investments

June 30, 2015

(Unaudited)

 

     Fair Value     % of
Members’ Capital
 

Futures and Forward Contracts Purchased

    

Commodity

   $ (16,746,670     (11.30

Equity

     (173,432     (0.11

Foreign currency

     4,108        (1) 
  

 

 

   

 

 

 

Total Futures and Forward Contracts Purchased

     (16,915,994     (11.41
  

 

 

   

 

 

 

Futures and Forward Contracts Sold

    

Commodity

     2,193,587        1.48   

Foreign currency

     28,935        0.02   

Interest rate

     (4,953     (1) 
  

 

 

   

 

 

 

Total Futures and Forward Contracts Sold

     2,217,569        1.50   
  

 

 

   

 

 

 

Unrealized Currency Loss

     (1,557,442     (1.06
  

 

 

   

 

 

 

Net fair value

   $ (16,255,867     (10.97
  

 

 

   

 

 

 

Options Contracts

    

Options purchased on Futures Contracts

   $ 1,763,810        1.19   

Options written on Futures Contracts

   $ (51,429     (0.03

 

 

 

(1)  Amount less than 0.005%.

 

9


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

BHM I, LLC

Condensed Schedule of Investments

December 31, 2014

 

     Fair Value     % of
Members’ Capital
 

Futures and Forward Contracts Purchased

    

Commodity

   $ (11,626,875     (4.76

Equity

     25,442        0.01   

Foreign currency

     253,534        0.10   

Interest rate

     1,594        (1) 
  

 

 

   

 

 

 

Total Futures and Forward Contracts Purchased

     (11,346,305     (4.65
  

 

 

   

 

 

 

Futures and Forward Contracts Sold

    

Commodity

     9,834,673        4.02   

Foreign currency

     953,598        0.39   

Interest rate

     (7,992     (1) 
  

 

 

   

 

 

 

Total Futures and Forward Contracts Sold

     10,780,279        4.41   
  

 

 

   

 

 

 

Unrealized Currency Loss

     (1,870,454     (0.76
  

 

 

   

 

 

 

Net fair value

   $ (2,436,480     (1.00
  

 

 

   

 

 

 

Options Contracts

    

Options purchased on Futures Contracts

   $ 4,044,097        1.65   

Options written on Futures Contracts

   $ (6,712,022     (2.75

 

 

 

(1)  Amount less than 0.005%.

 

10


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

BHM I, LLC

Statements of Income and Expenses

(Unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2015     2014     2015    

2014

 

Investment income:

        

Interest income

   $      $      $      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Management fees

     891,123        1,441,889        2,034,576        2,790,328   

Brokerage, clearing and transaction fees

     160,665        276,113        386,605        521,229   

Administrative fees

     3,683        5,825        8,518        12,206   

Incentive fees

            74,352               97,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,055,471        1,798,179        2,429,699        3,421,263   

Expense reimbursements

     (15,142     (37,407     (41,006     (73,476
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     1,040,329        1,760,772        2,388,693        3,347,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (1,040,329     (1,760,772     (2,388,693     (3,347,787

Trading results:

        

Trading profit (loss):

        

Net realized

     (10,515,357     20,408,747        (17,771,253     33,923,134   

Net change in unrealized

     5,416,469        12,146,018        (8,285,750     14,247,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

     (5,098,888     32,554,765        (26,057,003     48,170,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,139,217   $ 30,793,993      $ (28,445,696   $ 44,822,514   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

BHM I, LLC

Changes in Members’ Capital

(Unaudited)

 

     Managing
Member
     Non-Managing
Members
        Total      

Members’ Capital, December 31, 2014

   $       $ 244,508,946      $ 244,508,946   

Net Income/(loss)

             (28,445,696     (28,445,696

Capital Withdrawals

             (67,854,296     (67,854,269
  

 

 

    

 

 

   

 

 

 

Members’ Capital, June 30, 2015

   $       $ 148,208,954      $ 148,208,954   
  

 

 

    

 

 

   

 

 

 

Members’ Capital, December 31, 2013

   $       $ 313,607,842      $ 313,607,842   

Capital Contributions

             1,441,327        1,441,327   

Net Income

             44,822,514        44,822,514   

Capital Withdrawals

             (52,215,520     (52,215,520
  

 

 

    

 

 

   

 

 

 

Members’ Capital, June 30, 2014

   $       $ 307,656,163      $ 307,656,163   
  

 

 

    

 

 

   

 

 

 

 

12


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

3. Financial Highlights:

Financial highlights for each Class as a whole for the three and six months ended June 30, 2015 and 2014, were as follows:

 

Financial Highlights:    Three Months Ended
June 30, 2015
    Three Months Ended
June 30, 2014
 
     Class A     Class D     Class Z     Class A     Class D     Class Z  

Net realized and unrealized gains (losses)

   $ (26.58   $ (26.18   $ (28.76   $ 83.70      $ 83.55      $ 92.50   

Net investment loss

     (9.02     (6.85     (6.19     (6.13     (5.93     (6.45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     (35.60     (33.03     (34.95     77.57        77.62        86.05   

Net asset value per Unit, beginning of period

     641.78        629.66        690.17        763.44        739.57        804.50   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Unit, end of period

   $ 606.18      $ 596.63      $ 655.22      $ 841.01      $ 817.19      $ 890.55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Financial Highlights:    Six Months Ended
June 30, 2015
    Six Months Ended
June 30, 2014
 
     Class A     Class D     Class Z     Class A     Class D     Class Z  

Net realized and unrealized gains (losses)

   $ (92.64   $ (90.90   $ (99.64   $ 115.99      $ 118.77      $ 132.22   

Net investment loss

     (18.78     (14.24     (12.86     (11.93     (11.54     (12.54
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     (111.42     (105.14     (112.50     104.06        107.23        119.68   

Net asset value per Unit, beginning of period

     717.60        701.77        767.72        736.95        709.96        770.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Unit, end of period

   $ 606.18      $ 596.63      $ 655.22      $ 841.01      $ 817.19      $ 890.55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

 

     Three Months Ended
June 30, 2015
    Three Months Ended
June 30, 2014
 
     Class A     Class D     Class Z     Class A     Class D     Class Z  

Ratios to average net assets:(1)

            

Net investment income (loss)(2)

     (5.8 )%      (4.3 )%      (3.5 )%      (5.5 )%      (4.2 )%      (3.4 )% 

Operating expenses

     5.8     4.3     3.5     5.5     4.2     3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5.8     4.3     3.5     5.5     4.2     3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

            

Total return before incentive fees

     (5.5 )%      (5.2 )%      (5.1 )%      10.2     10.5     10.7

Incentive fees

                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (5.5 )%      (5.2 )%      (5.1 )%      10.2     10.5     10.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended
June 30, 2015
    Six Months Ended
June 30, 2014
 
     Class A     Class D     Class Z     Class A     Class D     Class Z  

Ratios to average net assets:(1)

            

Net investment income (loss)(2)

     (5.8 )%      (4.4 )%      (3.6 )%      (6.0 )%      (4.2 )%      (3.4 )% 

Operating expenses

     5.8     4.4     3.6     6.0     4.2     3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5.8     4.4     3.6     6.0     4.2     3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

            

Total return before incentive fees

     (15.5 )%      (15.0 )%      (14.7 )%      14.1     15.1     15.5

Incentive fees

                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (15.5 )%      (15.0 )%      (14.7 )%      14.1     15.1     15.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Annualized (other than incentive fees).

 

(2)  Interest income less operating expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets of the Partnership and includes the income and expenses allocated from the Trading Company.

 

14


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

Financial Highlights of the Trading Company:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30, 
 
     2015     2014     2015     2014  

Ratios to average Members’ Capital: (2)

        

Net investment loss(1)

     (2.28 )%      (2.37 )%      (2.35 )%      (2.26 )% 

Expenses before incentive fees

     2.28     2.35     2.35     2.23

Expenses after incentive fees

     2.28     2.37     2.35     2.26

Total return before incentive fees

     (4.03 )%      11.04     (13.20 )%      16.28

Total return after incentive fees

     (4.03 )%      11.02     (13.20 )%      16.24

 

 

 

(1) The calculation is based on non-managing Members’ allocated income and expenses and average non-managing Members’ Capital.

 

(2)  Annualized except for incentive fees.

 

15


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

4. 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 Trading Company’s trading activities is shown on the Statements of Income and Expenses.

The Partnership and Trading Company, in the normal course of business, enter into various contracts with MS&Co. acting as their commodity broker. The brokerage agreement with MS&Co. gives the Partnership and the Trading Company, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Trading Company nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on its Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” have been met.

The following tables summarize the gross and net amounts relating to assets and liabilities of the Trading Company’s derivatives and their offsetting subject to master netting agreements or similar agreements as of June 30, 2015 and December 31, 2014, respectively.

Offsetting of Derivative Assets and Liabilities as of June 30, 2015:

 

     Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statements of
Financial

Condition
    Net Amounts
Presented in the
Statements of

Financial Condition
    Gross amounts not offset in the
Statements of Financial Condition
 
           Financial
Instruments
    Cash Collateral
Pledged/Received(2)
     Net Amount  

Assets

             

Futures

   $ 2,753,978      $ (2,753,978   $      $      $       $   

Forwards

     3,859,473        (3,859,473                             

Options purchased

     1,763,810               1,763,810        (51,429             1,712,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

   $ 8,377,261      $ (6,613,451   $ 1,763,810      $ (51,429   $       $ 1,712,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

             

Futures

   $ (8,725,378   $ 2,753,978      $ (5,971,400 )(1)    $      $       $ (5,971,400

Forwards

     (12,586,498     3,859,473        (8,727,025 )(1)                     (8,727,025

Options written

     (51,429            (51,429     51,429                  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities

   $ (21,363,305   $ 6,613,451      $ (14,749,854   $ 51,429      $       $ (14,698,425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Unrealized currency loss

                (1,557,442 )(1) 
             

 

 

 

Net fair value

              $ 14,543,486 (2) 
             

 

 

 

 

16


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

Offsetting of Derivative Assets and Liabilities as of December 31, 2014:

 

     Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statements of
Financial

Condition
    Net Amounts
Presented in the
Statements of

Financial Condition
    Gross amounts not offset in the
Statements of Financial Condition
 
         Financial
Instruments
    Cash Collateral
Pledged/Received(2)
     Net Amount  

Assets

             

Futures

   $ 10,297,509      $ (4,758,861   $ 5,538,648 (1)    $      $       $ 5,538,648   

Forwards

     8,141,243        (8,141,234                             

Options purchased

     4,044,097               4,044,097        (4,044,097               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

   $ 22,482,849      $ (12,900,104   $ 9,582,745      $ (4,044,097           $ 5,538,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

             

Futures

   $ (4,758,861   $ 4,758,861      $      $      $       $   

Forwards

     (14,245,917     8,141,243        (6,104,674 )(1)                     (6,104,674

Options written

     (6,712,022            (6,712,022     4,044,097                (2,667,925
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities

   $ (25,716,800   $ 12,900,104      $ (12,816,696   $ 4,044,097      $       $ (8,772,599
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Unrealized currency loss

                (1,870,454 )(1) 
             

 

 

 

Net fair value

              $ (5,104,405 )(2) 
             

 

 

 

 

(1)  Included as a component of “Net unrealized gain on open contracts” or “Net unrealized loss on open contracts” on the Statements of Financial Condition.

 

(2) In the event of default by the Partnership, MS&Co., the sole counterparty to the Partnership’s derivative contracts, has the right to offset the Partnership’s obligation with the cash held by the Partnership, thereby minimizing the counterparty’s risk of loss. There is no collateral posted by MS&Co. and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown on the Statements of Financial Condition.

The effect of trading activities on the Statements of Financial Condition as of June 30, 2015, and December 31, 2014:

June 30, 2015

 

Futures and Forward Contracts

   Long
Unrealized
Gain
     Long
Unrealized
Loss
    Short
Unrealized
Gain
     Short
Unrealized
Loss
    Net
Unrealized
Gain/(Loss)
    Average
number of
contracts
outstanding
for
six months
(absolute
quantity)
 

Commodity

   $ 2,357,406       $ (19,104,076   $ 4,124,804       $ (1,931,217   $ (14,553,083     10,581   

Equity

     16,429         (189,861                    (173,432     190   

Foreign currency

     4,803         (695     109,790         (80,855     33,043        454   

Interest rates

                    219         (5,172     (4,953     346   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total

   $ 2,378,638       $ 19,294,632      $ 4,234,813       $ (2,017,244     (14,698,425  
  

 

 

    

 

 

   

 

 

    

 

 

     

Unrealized currency loss

               (1,557,442  
            

 

 

   

Total net unrealized loss on open contracts

             $ (16,255,867  
            

 

 

   

 

           Average number of
contracts outstanding
for the six months
(absolute quantity)
 

Option Contracts at Fair Value

    

Options purchased

   $ 1,763,810        2,328   

Options written

   $ (51,429     670   

 

17


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

December 31, 2014

 

Futures and Forward Contracts

  Long Unrealized
Gain
    Long Unrealized
Loss
    Short
Unrealized
Gain
    Short Unrealized
Loss
    Net
Unrealized
Gain/(Loss)
    Average number of
contracts
outstanding for the
year (absolute
quantity)
 

Commodity

  $ 7,096,479      $ (18,723,354   $ 10,015,651      $ (180,978   $ (1,792,202     20,439   

Equity

    27,202        (1,760                   25,442        977   

Foreign currency

    253,534               1,040,697        (87,099     1,207,132        684   

Interest rates

    1,594               3,595        (11,587     (6,398     777   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total

  $ 7,378,809      $ (18,725,114   $ 11,059,943      $ (279,664     (566,026  
 

 

 

   

 

 

   

 

 

   

 

 

     

Unrealized currency loss

            (1,870,454  
         

 

 

   

Total net unrealized gain/loss on open contracts

          $ (2,436,480  
         

 

 

   

 

Option Contracts at Fair Value

         Average number
of contracts
outstanding for
the year
(absolute quantity)
 

Options purchased

   $ 4,044,097        4,956   

Options written

   $ (6,712,022     1,740   

The following tables indicate the trading gains and losses, by market sector, on derivative instruments for the three and six months ended June 30, 2015 and 2014.

 

Sector

  For the
Three Months
Ended
June 30, 2015
    For the
Six Months
Ended
June 30, 2015
    For the
Three Months
Ended 

June 30, 2014
    For the 
Six Months
Ended 

June 30, 2014
 

Commodity

  $ (5,325,203   $ (30,618,236   $ 34,264,439      $ 52,246,838   

Equity

    (118,483     502,886        973,608        1,791,462   

Foreign currency

    (582,867     3,505,950        (2,155,973     (5,285,437

Interest rates

    (65,573     239,385        (833,839     (957,891

Unrealized currency loss

    993,238        313,012        306,530        375,329   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    (5,098,888 )****      (26,057,003 )****    $ 32,554,765 ****    $ 48,170,301 **** 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

**** This amount is in “Total trading results” on the Trading Company’s Statements of Income and Expenses.

 

18


Table of Contents

Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

5. Fair Value Measurements:

Trading Company’s/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.

The Trading Company 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 who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended June 30, 2015, and December 31, 2014, the Trading Company did not hold any derivative instruments for which market quotations were not readily available and which were priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the six months ended June 30, 2015 and twelve months ended December 31, 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

 

June 30, 2015

 
Level 1
   
Level 2
    Level 3   Total  

Assets

       

Futures

  $ 2,753,978      $      n/a   $ 2,753,978   

Forwards

    3,852,084        7,389      n/a     3,859,473   

Options Purchased

    1,763,810             n/a     1,763,810   
 

 

 

   

 

 

     

 

 

 

Total Assets

  $ 8,369,872      $ 7,389      n/a   $ 8,377,261   
 

 

 

   

 

 

     

 

 

 

Liabilities

       

Futures

  $ 8,725,378      $      n/a   $ 8,725,378   

Forwards

    12,586,498             n/a     12,586,498   

Options Written

    51,429             n/a     51,429   
 

 

 

   

 

 

     

 

 

 

Total Liabilities

  $ 21,363,305      $      n/a   $ 21,363,305   
 

 

 

   

 

 

     

 

 

 

Unrealized currency loss

          (1,557,442
       

 

 

 

*Net fair value

  $ (12,993,433   $ 7,389      n/a   $ (14,543,486
 

 

 

   

 

 

     

 

 

 

 

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Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

December 31, 2014

  Level 1     Level 2     Level 3     Total  
Assets        

Futures

  $ 10,297,509      $        n/a      $ 10,297,509   

Forwards

    7,586,000        555,243        n/a        8,141,243   

Options purchased

    4,044,097               n/a        4,044,097   
 

 

 

   

 

 

     

 

 

 

Total assets

  $ 21,927,606      $ 555,243        n/a      $ 22,482,849   
 

 

 

   

 

 

     

 

 

 
Liabilities        

Futures

  $ 4,758,861      $        n/a      $ 4,758,861   

Forwards

    14,254,917               n/a        14,245,917   

Options written

    6,712,022               n/a        6,712,022   
 

 

 

   

 

 

     

 

 

 

Total liabilities

  $ 25,716,800      $        n/a      $ 25,716,800   
 

 

 

   

 

 

     

 

 

 

Unrealized currency loss

          (1,870,454
       

 

 

 

*Net fair value

  $ (3,789,194   $ 555,243        n/a      $ (5,104,405
 

 

 

   

 

 

     

 

 

 

 

 

* This amount comprises of the “Net unrealized gain/loss on open contracts”, “Options purchased” and “Options written” on the Statements of Financial Condition.

 

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Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

6. Financial Instrument Risks:

In the normal course of business, the Partnership, through its investment in the Trading Company, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include certain forwards and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be 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. 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 0.0% to 3.6% of the Trading Company’s contracts are traded OTC.

The Trading Company 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 Trading Company 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 Trading Company. When the contract is closed, the Trading Company 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.

Forward foreign currency contracts are those contracts where the Trading Company agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Forward foreign currency contracts are valued daily, and the Trading Company’ 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 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 Trading Company does not isolate the 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 total trading results in the Statements of Income and Expenses.

The risk to the Limited Partners that have purchased Units in the Partnership 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 Delaware law.

Market risk is the potential for changes in the value of the financial instruments traded by the Trading Company 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 Trading Company 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/Trading Company’s risk of loss in the event of a counterparty default is typically limited to the asset amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Trading Company’s risk of loss is reduced through the use of legally enforceable Trading Company netting agreements with counterparties that permit the Partnership/Trading Company to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Trading Company has credit risk and concentration risk, as MS&Co., or an MS&Co. affiliate, is the sole counterparty or broker with respect to the Partnership’s/Trading Company’s assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MS&Co., the Partnership’s/Trading Company’s counterparty is an exchange or clearing organization.

        The Trading Company may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific futures interest on the underlying asset at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the fair value of the futures interest, on the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount. Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition. The difference between the fair value of the option and the premiums received/premiums paid is treated as an unrealized gain or loss.

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

The General Partner/managing member monitors and attempts to control the Partnership’s/Trading Company’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/Trading Company may be subject. These monitoring systems generally allow the General Partner/managing member 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 Trading Company’s business, these instruments may not be held to maturity.

 

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Managed Futures Premier BHM L.P.

Notes to Financial Statements

June 30, 2015

(Unaudited)

 

7. 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 other subsequent events requiring adjustments of or disclosure in the financial statements.

On or about July 31, 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a Master Services Agreement, the Administrator will furnish certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator will maintain certain books and records of the Partnership. The costs of retaining the Administrator will be allocated among the pools operated by the General Partner, including the Partnership. The General Partner does not expect that such additional expense will have a material impact on the Partnership’s break even point.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Trading Company. The Trading Company does not engage in the sale of goods or services. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Trading Company. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the second quarter of 2015.

There are no known trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

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

For the six months ended June 30, 2015, the Partnership’s capital decreased 38.6% from $186,125,897 to $114,215,835. This decrease was attributable to the redemptions of 750.175 General Partner Units totaling $535,155 and redemptions of 74,411.199 Limited Partners Units totaling $49,283,040, coupled with a net loss of $24,998,989, which was partially offset by the subscriptions of 4,238.311 Units totaling $2,907,122. Future redemptions could impact the amount of funds available for investment in the Trading Company in subsequent periods.

The Trading Company’s capital consists of the capital contributions of the members as increased or decreased by realized and/or unrealized gains or losses on commodity futures trading and by expenses, interest income, redemptions of Units and distributions of profits, if any.

For the six months ended June 30, 2015, the Trading Company’s capital decreased 39.4% from $244,508,946 to $148,208,954. This decrease was attributable to the withdrawals of $67,854,296, coupled with a net loss of $28,445,696. Future withdrawals could impact the amount of funds available for investment in commodity contracts positions in subsequent periods.

There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangement at the present time.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The General Partner 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 2. “Basis of Presentation and Summary of Significant Accounting Policies”, of the Financial Statements.

The Trading Company 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 Members’ Capital.

 

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Results of Operations

During the Partnership’s second quarter of 2015, the net asset value per Unit for Class A decreased 5.5% from $641.78 to $606.18, as compared to an increase of 10.2% in the second quarter of 2014. During the Partnership’s second quarter of 2015, the net asset value per Unit for Class D decreased 5.2% from $629.66 to $596.63, as compared an increase of 10.5% in the second quarter of 2014. During the Partnership’s second quarter of 2015, the net asset value per Unit for Class Z decreased 5.1% from $690.17 to $655.22, as compared to an increase of 10.7% in the second quarter of 2014. The Partnership, through its investment in the Trading Company, experienced a net trading loss in the second quarter of 2015 of $4,252,722. Losses were primarily attributable to the Trading Company’s trading in metals, energy, currency, global stock index, and global interest rates and were partially offset by gains in the agricultural markets. The Partnership, through its investment in the Trading Company, experienced a net trading gain in the second quarter of 2014 of $24,592,198. Gains were primarily attributable to the Trading Company’s trading in commodities and equities and were partially offset by losses in currencies and interest rates.

The most significant losses were experienced within the metals markets during June from long positions in palladium futures as prices fell sharply amid concerns about weak automobile demand from the U.S. and China during a time of plentiful output from South African mines. Additional metals losses during June were incurred from long positions in tin, nickel, and platinum futures. Losses in the metals sector were also experienced during May from long positions in nickel and tin futures as industrial metals moved lower on concern that demand will slow in China and the U.S. Within the energy markets, losses were recorded during May from short positions in WTI crude oil futures as prices rallied on news that the number of U.S. drilling rigs continued to decline during April. Additional losses in the energy sector were experienced during June from long positions in Brent crude oil futures as prices declined as the OPEC nations increased production in an effort to maintain market share against higher cost producers. Within the currency sector, losses were incurred during April from short positions in the euro versus the U.S. dollar as the value of the euro advanced following the release of stronger-than-expected European economic data. Within the global stock index markets, losses were recorded during June from long positions in European equity index futures as prices slumped as concerns over Greece’s latest effort to avoid a default weighed on global financial markets. Within the global interest rate sector, losses were experienced during June from long positions in U.S. fixed income futures as prices retreated amid growing uncertainty over the timing of the Federal Reserve Bank’s decision to potentially increase interest rates. A portion of the Partnership’s losses for the quarter was offset by gains achieved within the agricultural markets during April and May from long positions in cocoa futures as prices rallied from a weakening U.S. dollar and on reports of a fungus outbreak on cocoa farms in West Africa. Additional gains were achieved during May from short positions in soybean futures as prices fell on the prospect of strong crop yields in South America. During June, gains were recorded from long positions in corn futures as prices surged after heavy rainfall in the U.S. Midwest raised the potential for crop damage.

During the six months ended June 30, 2015, the net asset value per Unit for Class A decreased 15.5% from $717.60 to $606.18, as compared to an increase of 14.1% in the same period of 2014. During the six months ended June 30, 2015, the net asset value per Unit for Class D decreased 15.0% from $701.77 to $596.63, as compared an increase of 15.1% in the same period of 2014. During the six months ended June 30, 2015, the net asset value per Unit for Class Z decreased 14.7% from $767.72 to $655.22, as compared to an increase of 15.5% in the same period of 2014. The Partnership, through its investment in the Trading Company experienced a net trading loss in the six months ended June 30, 2015 of $20,607,549. Losses were primarily attributable to the Trading Company’s trading in metals and were partially offset by gains in the agricultural, currency, global stock index, energy, and global interest rate markets. The Partnership, through its investment in the Trading Company experienced a net trading gain in the six months ended June 30, 2014 of $35,652,880. Gains were primarily attributable to the Trading Company’s trading in commodities and equities and were partially offset by losses in currencies and interest rates.

 

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The most significant losses were incurred during March and June from long positions in palladium futures as prices fell dramatically on weakening demand from China, increasing supplies, and a strengthening U.S. dollar eroding demand for precious metals. Additional losses during March were experienced from long positions in nickel and tin futures as prices declined amid concern of slowing industrial demand from China. Additional losses were experienced during May from long positions in nickel and tin futures as prices moved lower on concern that demand will slow in China and the U.S. During January, further losses were incurred within the metals sector from short positions in gold futures as prices advanced, capping the biggest monthly gain in three years, after U.S. government data showed the economy expanded at a slower pace than forecast in the previous quarter. The Partnership’s trading losses for the first six months of the year were partially offset by trading gains within the agricultural sector during February from long positions in cocoa futures as prices advanced amid speculation of reduced supply following periods of drought and disease in the Ivory Coast and Ghana, the world’s top cocoa growing regions. Additional gains were recorded during April from long positions in cocoa futures as prices rallied from a weakening U.S. dollar and on reports of a fungus outbreak on cocoa farms in West Africa. Within the currency markets, gains were achieved during March from short positions in the Brazilian real versus the U.S. dollar as the relative value of the real dropped on concern a stalled Brazilian economy and fiscal weakness in Brazil would lead to a sovereign debt downgrade. Gains were recorded within the global stock index sector during February and March from long positions in European equity index futures as prices rose after the European Central Bank introduced added quantitative easing measures. Within the energy markets, gains were experienced during January and March from short position in crude oil futures as prices fell amid a growing global supply glut. Additional gains were achieved during February from short positions in U.S. fixed income futures as prices moved lower after a stronger-than-expected U.S. employment report boosted speculation the U.S. Federal Reserve may raise interest rates earlier than previously anticipated.

 

25


Table of Contents

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership (and the Trading Company) depends on the Advisor’s ability to forecast price changes in energy and energy-related commodities. Such price changes 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 the Advisor correctly makes such forecasts, the Partnership (and the Trading Company) expects to increase capital through operations.

For excess cash which is not invested by the General Partner in U.S. Treasury bills and/or other permitted investments, MS&Co. credits the Trading Company on 100% of the average daily equity maintained in cash in the Trading Company’s account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount less 0.15% during such month. There was no interest income earned allocated from the Trading Company for the three months ended June 30, 2015 and 2014. The amount of interest income earned by the Partnership depends on the average daily equity in the Trading Company over which neither the Partnership/Trading Company nor MS&Co. has control.

Ongoing selling agent fees are calculated on a monthly basis as a percentage of the net assets (as defined in the Limited Partnership Agreement) of the Partnership as of the beginning of each month. The ongoing selling agent fees rate for the three and six months ended June 30, 2015 decreased $354,975 and $1,036,936, as compared to the corresponding period in 2014. The decrease in ongoing selling agent fees is due to lower average net assets during the three and six months ended June 30, 2015, as compared to the corresponding periods in 2014.

The Partnership pays the ongoing administrative, operating, offering and organizational expenses of the Partnership and the Trading Company as such expenses are incurred, not to exceed 0.25% annually of the net assets of the Partnership. Administrative fees for the three and six months ended June 30, 2015 decreased $183,713 and $271,353, respectively, as compared to the corresponding periods in 2014.

Management and incentive fees are borne by the Trading Company.

In allocating substantially all of the assets of the Partnership to the Trading Company, 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 and allocate assets to additional advisors at any time.

Off-Balance Sheet Arrangements and Contractual Obligations

The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.

 

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Trading Company. The Trading Company is a speculative commodity pool. The market sensitive instruments held by the Trading Company are acquired for speculative trading purposes, and all or substantially all of the Partnership’s capital is subject to the risk of trading loss, through its investment in the Trading Company. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Trading Company’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 value of the Trading Company’s open positions and, consequently, in its earnings and cash balances. The Trading Company’s and 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 value of financial instruments and contracts, the diversification results among the Trading Company’s open positions and the liquidity of the markets in which it trades.

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

Quantifying the Trading Company Trading Value at Risk

The following quantitative disclosures regarding the Trading Company’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purpose of the safe harbor, except for the statements of historical fact.

The Trading Company accounts for open positions on the basis of mark to market accounting principles. Any loss in the market value of the Trading Company’s open positions is directly reflected in the Trading Company’s earnings and cash balance.

The Trading Company Value at Risk computation is based on the risk representation of the underlying benchmark for each instrument or contract and does not distinguish between exchange and non-exchange dealer-based instruments. It’s also not based on exchange and/or dealer-based maintenance margin requirements. Value at Risk models, including the models used by Morgan Stanley and Ceres, are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the Value at Risk model is used to quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Advisor in its daily risk management activities. Please further note that Value at Risk as described above may not be comparable to similarly-titled measures used by other entities.

Limitations on Value at Risk as an Assessment of Market Risk

Value at Risk models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of Value at Risk market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, Value at Risk risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:

 

    past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;

 

    changes in portfolio value caused by market movements may differ from those of the Value at Risk model;

 

    Value at Risk results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;

 

    Value at Risk using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and

 

    the historical market risk factor data used for Value at Risk estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

 

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In addition, the Value at Risk tables below, as well as the past performance of the Partnership and the Trading Company, give no indication of the Partnership’s potential “risk of ruin.”

The Value at Risk tables provided present the results of the Partnership’s Value at Risk for each of the Trading Company’s market risk exposures and on an aggregate basis at June 30, 2015 and December 31, 2014.

Value at Risk is not necessarily representative of the Trading Company’s historic risk, nor should it be used to predict the Partnership or the Trading Company’s future financial performance or their ability to manage or monitor risk. There can be no assurance that the Trading Company’s actual losses on a particular day will not exceed the Value at Risk amounts indicated above or that such losses will not occur more than once in 100 trading days.

“Value at Risk” is a measure of the maximum amount which the Trading Company could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Trading Company’s speculative trading and the recurrence in the markets traded by the Trading Company of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Trading Company’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 Trading Company’s losses in any market sector will be limited to Value at Risk or by the Trading Company’s attempts to manage its market risk.

Margin requirements have been used by the Trading Company as the measure of its Value at 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.

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Form 10-K filed with the SEC for the year ended December 31, 2014.

As of June 30, 2015, the Trading Company’s total capitalization was $148,208,954, and the Partnership owned approximately 81.0% of the Trading Company. The Partnership invests substantially all of its assets in the Trading Company. The Trading Company’s Value at Risk as of June 30, 2015 was as follows:

June 30, 2015

 

                  Three months ended June 30, 2015  

Market Sector

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

Commodity

   $ 10,112,137         6.82   $ 34,942,623       $ 10,112,137       $ 19,007,463   

Equity

     731,813         0.50     1,232,882         123,342         685,313   

Currency

     885,221         0.60     1,086,613         194,711         575,705   

Interest Rate

     17,325         0.01     1,043,270         15,813         333,237   
  

 

 

    

 

 

         

Total

   $ 11,746,496         7.93 %         
  

 

 

    

 

 

         

 

 

 

* Average of month-end Values at Risk.

 

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As of December 31, 2014, the Trading Company’s total capitalization was $244,508,946 and the Partnership owned approximately 77.8% of the Trading Company. The Partnership invests substantially all of its assets in the Trading Company. The Trading Company’s Value at Risk as of December 31, 2014 was as follows:

 

       December 31, 2014     Twelve Months ended December 31, 2014  

Market Sector

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

at Risk*
 

Commodity

   $ 39,364,629         16.10   $ 43,693,621       $ 18,663,484       $ 33,562,241   

Currency

     1,168,311         0.48     6,633,967         122,650         2,185,027   

Equity

     83,769         0.03     4,581,127         0         2,144,179   

Interest Rate

     35,888         0.02     4,170,826         10,139         850,656   
  

 

 

    

 

 

         

TOTAL

   $ 40,652,597         16.63 %         
  

 

 

    

 

 

         

 

 

 

* Annual Average of month-end Values at Risk.

Non-Trading Risk

The Trading Company has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding the Partnership’s market risk exposures — except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of these could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.

Investors must be prepared to lose all or substantially all of their investment in the Partnership.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The General Partner monitors and attempts to control the Partnership’s, through its investment in the Trading Company, 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 Trading Company may be subject.

The General Partner monitors the Trading Company’s performance and the concentration of open positions, and consults with the Advisor concerning the Trading Company’s overall risk profile. If the General Partner felt it necessary to do so, the General Partner could require the Advisor to close out positions as well as enter positions traded on behalf of the Trading Company. However, any such intervention would be a highly unusual event. The General Partner primarily relies on the Advisor’s own risk control policies while maintaining a general supervisory overview of the Trading Company’s market risk exposures.

The Advisor applies its own risk management policies to its trading. The Advisor often follows diversification guidelines, margin limits and stop loss points to exit a position. The Advisor’s research of risk management often suggests ongoing modifications to its trading programs.

As part of the General Partner’s risk management, the General Partner periodically meets with the Advisor to discuss its risk management and to look for any material changes to the Advisor’s portfolio balance and trading techniques. The Advisor is required to notify the General Partner of any material changes to its programs.

 

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Item 4.  Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the 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 (principal executive officer) and CFO (principal financial officer) 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, 2015 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, 2015 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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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, 2014, as updated by the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

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.” or the “Company”).

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the U.S. Securities and Exchange Commission (“SEC”) as required by the Securities Exchange Act of 1934, 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, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2014, 2013, 2012, 2011 and 2010.

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 the National Futures Association.

 

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Regulatory and Governmental Matters. 

The Company has received subpoenas and requests for information from certain federal and state regulatory and governmental entities, including among others various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force, such as the United States Department of Justice, Civil Division and several state Attorney General’s Offices, concerning the origination, financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages and related matters such as residential mortgage backed securities (“RMBS”), collateralized debt obligations (“CDOs”), structured investment vehicles (“SIVs”) and credit default swaps backed by or referencing mortgage pass-through certificates. These matters, some of which are in advanced stages, include, but are not limited to, investigations related to the Company’s due diligence on the loans that it purchased for securitization, the Company’s communications with ratings agencies, the Company’s disclosures to investors, and the Company’s handling of servicing and foreclosure related issues.

On February 25, 2015, the Company reached an agreement in principle with the United States Department of Justice, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against the Company. While the Company and the Civil Division have reached an agreement in principle to resolve this matter, there can be no assurance that the Company and the Civil Division will agree on the final documentation of the settlement.

In May 2014, the California Attorney General’s Office (“CAAG”), which is one of the members of the RMBS Working Group, indicated that it has made certain preliminary conclusions that the Company made knowing and material misrepresentations regarding RMBS and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System. The CAAG has further indicated that it believes the Company’s conduct violated California law and that it may seek treble damages, penalties and injunctive relief. The Company does not agree with these conclusions and has presented defenses to them to the CAAG.

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against the Company and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleges that the Company and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System (“VRS”). The complaint alleges VRS suffered total losses of approximately $384 million on these securities, but does not specify the amount of alleged losses attributable to RMBS sponsored or underwritten by the Company. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks, among other things, treble damages and civil penalties. On January 20, 2015, the defendants filed a demurrer to the complaint and a plea in bar seeking dismissal of the complaint.

In October 2014, the Illinois Attorney General’s Office (“IL AG”) sent a letter to the Company alleging that the Company knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that the Company pay the IL AG approximately $88 million. The Company does not agree with these allegations and has presented defenses to them to the IL AG.

 

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On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intends to file a lawsuit related to approximately 30 subprime securitizations sponsored by the Company. NYAG indicated that the lawsuit would allege that the Company misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. The Company does not agree with NYAG’s allegations and has presented defenses to them to NYAG.

On June 5, 2012, the Company consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by The Commodity Futures Trading Commission (“CFTC”) to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures transactions unless there is an Exchange for Related Position (“EFRP”). Specifically, the CFTC found that from April 2008 through October 2009, the Company violated Section 4c(a) of the Commodity Exchange Act and Commission Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (“CME”) and Chicago Board of Trade (“CBOT”) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position. In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Act and Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, the Company accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. The Company entered into corresponding and related settlements with the CME and CBOT in which the CME found that the Company violated CME Rules 432.Q and 538 and fined the Company $750,000 and CBOT found that the Company violated CBOT Rules 432.Q and 538 and fined the Company $1,000,000.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime RMBS 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, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against the Company in connection with trading by one of the Company’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that the Company violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. CFE alleged that the Company violated CFE Rules 608, 609 and 620. Both matters are ongoing.

On June 18, 2015, the Company entered into a settlement with the SEC and paid a fine of $500,000 as part of the MCDC Initiative to resolve allegations that the Company failed to form a reasonable basis through adequate due diligence for believing the truthfulness of the assertions by issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule 15c2-12 in connection with offerings in which the Company acted as senior or sole underwriter.

 

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Other Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against the Company 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 the Company 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 the Company’s individual motion to dismiss the amended complaint. On March 7, 2013, the court granted defendants’ motion to strike plaintiff’s demand for a jury trial. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $49 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $49 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company 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 the Company 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 the Company 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 federal securities law claims 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. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against the Company in the Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. action. On February 18, 2015, the court entered an order setting a number of claims for trial throughout 2016. Claims against the Company have not yet been set for trial. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $63 million, and the certificates had incurred actual losses of approximately $1 million. Based on currently available information, the Company believes it could incur a loss for this action up to the difference between the $63 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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.

 

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On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company 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. A corrected amended complaint was filed on April 8, 2011. The corrected amended 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 and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by the Company at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. After that dismissal, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $78 million. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $53 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $53 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company 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 the Company 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. On October 16, 2012, plaintiffs filed an amended complaint. The amended 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 the Company is approximately $1.073 billion. The amended complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On January 2, 2015, the court denied defendants’ renewed motion to dismiss the amended complaint. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this

 

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action was approximately $590 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $590 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against the Company 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 29, 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 the Company or sold to plaintiff by the Company 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 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 were granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. Plaintiff has voluntarily dismissed its claims against the Company with respect to two of the securitizations at issue, such that the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company is approximately $358 million. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $57 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $57 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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 May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Company, 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 the Company to plaintiff was approximately $694 million. The complaint alleges causes of action against the Company 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 the defendants’ motion to dismiss. On August 4, 2014, claims regarding two certificates were dismissed by stipulation. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $644 million. On September 12, 2014, the Company filed a notice of appeal from the denial of the motion to dismiss. On January 12, 2015, the Company filed an amended answer to the complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $283 million, and the certificates had incurred actual losses of approximately $80 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between

 

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the $283 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses.

On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against the Company and certain affiliates in the United States District Court for the Southern District of New York. The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff 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 the Company to plaintiffs was approximately $417 million. The complaint alleges causes of action against the Company for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, 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 and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On November 17, 2014, the plaintiff filed an amended complaint. On December 15, 2014, defendants answered the amended complaint. At June 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $200 million, and the certificates had incurred actual losses of $28 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $200 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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.

Settled Civil Litigation

On August 25, 2008, the Company and two ratings agencies were named as defendants in a purported class action related to securities issued by a structured investment vehicle called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case was styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. The complaint alleged, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime residential mortgage backed securities held by the Cheyne SIV. The plaintiffs asserted allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. On April 24, 2013, the parties reached an agreement to settle the case, and on April 26, 2013, the court dismissed the action with prejudice. The settlement does not cover certain claims that were previously dismissed.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against the Company and/or its affiliates and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints asserted claims on behalf of certain clients of plaintiff’s affiliates and allege that defendants made untrue statements and material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates

 

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allegedly issued by the Company and/or its affiliates or sold to plaintiff’s affiliates’ clients by the Company and/or its affiliates in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On October 25, 2010, the Company, certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action related to securities issued by the SPV in Singapore, commonly referred to as “Pinnacle Notes.” The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and was pending in the SDNY. On January 31, 2014, the plaintiffs filed a second amended complaint, which asserted 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 to settle the litigation, which received final court approval on July 2, 2015.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against the Company in the 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 the defendants made untrue statements and material omissions in the sale to the plaintiffs 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 the plaintiffs by the Company was approximately $104 million. The complaint raised 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 the 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 the Company appealed on April 11, 2013. On May 3, 2013, the Company filed its answer to the amended complaint. On January 16, 2015, the parties reached an agreement to settle the litigation.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against the Company 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 the Company was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

On September 2, 2011, the Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including the Company and certain affiliates. A complaint against the Company and certain affiliates and other defendants was filed in the Supreme Court of NY, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass-through certificates with an original unpaid balance of approximately $11 billion. The complaint raised claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On February 7, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

 

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On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against the Company and certain affiliates in the Supreme Court of NY, NY County styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleges that the defendants made untrue statements and material omissions in the sale to the 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 the Company was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B, filed two complaints against the Company 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 the Company 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 plaintiff by the Company in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against the Company 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 the Company to plaintiff was approximately $141 million. On July 28, 2015, the parties reached an agreement to settle the litigation.

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.

 

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Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on the Form 10-K for the fiscal year ended December 31, 2014 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

For the three months ended June 30, 2015, there were subscriptions of 1,879.268 Units of Class A totaling $1,237,375 and 14.113 Units of Class Z totaling $10,000. The Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act, and Section 506 of Regulation D promulgated thereunder. The Units were purchased by accredited investors as described in Regulation D.

Proceeds from the sale of Units are used in the trading of commodity interests including futures contracts, swaps, options and forward contracts.

The following chart sets forth the purchases of Units for each Class by the Partnership.

 

Period  

Class A

(a) Total

Number

of Units

Purchased*

   

Class A

(b) Average

Price Paid per

Unit**

   

Class Z

(a) Total

Number

of Units

Purchased*

   

Class Z

(b) Average

Price Paid per

Unit**

   

(c) Total
Number

of Units

Purchased

as Part

of Publicly

Announced

Plans or

Programs

 

(d) Maximum

Number (or
Approximate

Dollar Value)
of Units that

May Yet Be

Purchased

Under the

Plans or

Programs

April 1, 2015 -
April 30, 2015

    16,931.620      $ 670.55        11.701      $ 722.26      N/A   N/A

May 1, 2015 -
May 31, 2015

    24,597.364      $ 656.72             $ 708.57      N/A   N/A

June 1, 2015 -
June 30, 2015

    9,641.846      $ 606.18        71.501      $ 655.22      N/A   N/A
      51,170.830      $ 651.77        83.202      $ 664.65      N/A   N/A

 

 

* Generally, Limited Partners are permitted to redeem their Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner may compel redemption but to date the General Partner has not exercised this right. Purchases of 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 Units are effected as of the last day of each month at the net asset value per Unit as of that day.

Item 3. Defaults Upon Senior Securities — None.

Item 4. Mine Safety Disclosures. Not Applicable.

 

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Item 6.     Exhibits

Exhibits:

31.1 Rule 13a-14(a)/15d-14(a) Certification (Certification of President).

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

32.1 Section 1350 Certification (Certification of President).

32.2 Section 1350 Certification (Certification of Chief Financial Officer).

 

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

Notes to Exhibits List

 

* Submitted electronically herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Managed Futures Premier BHM L.P.
By:  

Ceres Managed Futures LLC

(General Partner)

 

By:   /s/ Patrick T. Egan
  Patrick T. Egan
  President and Director

Date: August 12, 2015

 

By:   /s/ Steven Ross
  Steven Ross
 

Chief Financial Officer

(Principal Accounting Officer)

Date: August 12, 2015

 

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