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EX-32.2 - EX-32.2 - CERES ABINGDON L.P.d101880dex322.htm
EX-31.1 - EX-31.1 - CERES ABINGDON L.P.d101880dex311.htm
EX-32.1 - EX-32.1 - CERES ABINGDON L.P.d101880dex321.htm
EX-31.2 - EX-31.2 - CERES ABINGDON L.P.d101880dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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 0-53210

MANAGED FUTURES PREMIER ABINGDON L.P.

 

(Exact name of registrant as specified in its charter)

 

New York   20-3845005

(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 and Zip Code of principal executive offices)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Redeemable Units of Limited Partnership Interest

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Act.

Yes  ¨    No  þ

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  þ    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  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.  þ

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  þ   Smaller reporting company  ¨
    (Do not check if a 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  þ

Limited Partnership Redeemable Units with aggregate values of $195,678,812 of Class A, $17,484,164 of Class D and $538,221 of Class Z were outstanding and held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of February 29, 2016, there were 151,018.6532 Limited Partnership Redeemable Units of Class A outstanding, 14,179.1386

Limited Partnership Redeemable Units of Class D outstanding and 431.6102 Limited Partnership Redeemable Units of Class Z

outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

[None]


PART I

Item 1. Business.

(a) General Development of Business. Managed Futures Premier Abingdon L.P. (formerly Abingdon Futures Fund L.P.) (the “Partnership”) is a limited partnership organized on November 8, 2005, under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The Partnership commenced trading on February 1, 2007. The commodity interests that are indirectly traded by the Partnership through its investment in CMF Winton Master L.P. (the “Master”) are volatile and involve a high degree of market risk. The General Partner (defined below) may also determine to invest up to all of the Master’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership privately and continuously offers redeemable units in the Partnership (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Subscriptions of additional Redeemable Units and additional general partner contributions and redemptions of Redeemable Units for the years ended December 31, 2015, 2014 and 2013 are reported in the Statements of Changes in Partners’ Capital on page 35 under “Item 8. Financial Statements and Supplementary Data.”

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc. All trading decisions for the Partnership are made by Winton Capital Management Limited (the “Advisor”).

On April 1, 2011, the Partnership began offering “Class A” Redeemable Units, “Class D” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to April 1, 2011 were deemed Class A Redeemable Units. The rights, liabilities, risks, and fees associated with investment in the Class A Redeemable Units did not change. “Class D” Redeemable Units and “Class Z” Redeemable Units were first issued on April 1, 2011 and August 1, 2011, respectively. 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 Redeemable Units that a limited partner receives upon a subscription will generally depend upon the amount invested in the Partnership or the status of the limited partner, although the General Partner may determine to offer any Class of Redeemable Units to investors at its discretion. Class Z Redeemable Units are offered to certain employees of Morgan Stanley and its subsidiaries (and their family members). Class A Redeemable Units, Class D Redeemable Units, and Class Z Redeemable Units are identical, except that Class D Redeemable Units are subject to a monthly ongoing selling agent fee equal to 1/12 of 0.75% (a 0.75% annual rate) of the net assets of Class D as of the end of each month, which differs from the Class A monthly ongoing selling agent fee of 1/12 of 2.00% (a 2.00% annual rate) of the net assets of Class A as of the end of each month. Class Z Redeemable Units are not subject to a monthly ongoing selling agent fee.

On February 1, 2007, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the State of New York, having the same investment objective as the Partnership. The Partnership purchased 9,017.0917 units of the Master with cash equal to $12,945,000. The Master permits accounts managed by the Advisor using the Winton Futures Program (formerly, the Winton Diversified Program, as applied without equities), the Advisor’s proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same as if the Partnership traded directly, and redemption rights are not affected. The General Partner and the Advisor agreed that the Advisor will trade the Partnership’s assets allocated to the Advisor at a level that is up to 1.5 times the amount of assets allocated. During the years ended December 31, 2015 and 2014, the Partnership’s/Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.” or the “Company”), a registered futures commission merchant. During a prior period included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

 

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For the period January 1, 2015 through December 31, 2015, the approximate average market sector distribution for the Partnership was as follows:

 

LOGO

As of December 31, 2015 and 2014, the Partnership owned approximately 38.9% and 29.9% of the Master, respectively. The Partnership intends to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master.

The Master’s trading of exchange-traded futures, forward, swap and option contracts, if applicable, on commodities is done primarily on U.S. commodity exchanges and foreign commodity exchanges. During the years ended December 31, 2015 and 2014, the Master engaged in such trading through commodity brokerage accounts maintained with MS&Co. During a prior period included in this report, the Master also engaged in such trading through commodity brokerage accounts maintained with CGM.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2025; when the net asset value per Redeemable Unit for any Class decreases to less than $400 as of the close of business on any business day; or under other certain circumstances as set forth in the Limited Partnership Agreement of the Partnership as amended and restated from time to time (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the Partnership’s aggregate net assets decline to less than $1,000,000.

 

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The General Partner administers the business and affairs of the Partnership. The Partnership pays the General Partner a monthly General Partner fee (formerly, the administrative fee) in return for its services to the Partnership equal to 1/12 of 1% (1% per year) of month-end Net Assets per Class, for each outstanding Class. Prior to October 1, 2014, the Partnership paid the General Partner a monthly administrative fee equal to 1/24 of 1% (0.5% per year) of month-end Net Assets per Class, for each outstanding Class. Month-end Net Assets per Class, for the purpose of calculating the General Partner fee, are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fee, incentive fee accrual, the General Partner fee and any redemptions or distributions as of the end of such month. This fee may be increased or decreased at the discretion of the General Partner.

The General Partner, on behalf of the Partnership, has entered into a management agreement (the “Management Agreement”) with the Advisor, a registered commodity trading advisor. The Management Agreement provides that the Advisor has sole discretion in determining the investment of the assets of the Partnership allocated to the Advisor by the General Partner. The Partnership is obligated to pay the Advisor a monthly management fee equal to 1/12 of 1.5% (1.5% per year) of month-end Net Assets per Class, for each outstanding Class, allocated to the Advisor. Month-end Net Assets per Class, for each outstanding Class, for the purpose of calculating management fees are Net Assets per Class, for each outstanding Class, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fee, incentive fee accrual, the General Partner fee and any redemptions or distributions as of the end of such month. The Management Agreement may be terminated upon sufficient notice by either party.

In addition, the Partnership is obligated to pay the Advisor an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by the Advisor for the Partnership during each calendar quarter. The Advisor’s incentive fee will be allocated proportionally to each Class based on the net asset value of the respective Class. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers, among other factors, 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.

Prior to and during part of the fourth quarter of 2013, the Partnership was party to a Customer Agreement with CGM (the “CGM Customer Agreement”). During the fourth quarter of 2013, the Partnership entered into a Customer Agreement with MS&Co. (the “MS&Co. Customer Agreement”) and a Selling Agent Agreement with Morgan Stanley Smith Barney LLC doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) (as amended, the “Selling Agreement”). The Partnership has terminated the CGM Customer Agreement.

Under the CGM Customer Agreement, the Partnership paid CGM a monthly brokerage fee equal to (i) 4.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.875% per year of month-end Net Assets for Class D Redeemable Units and (iii) 1.125% per year of month-end Net Assets for Class Z Redeemable Units, in each case in lieu of brokerage fees on a per trade basis. Month-end Net Assets, for the purpose of calculating brokerage fees were Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s brokerage fees, incentive fee accrual, the monthly management fee, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month. The Partnership paid exchange, service, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “CGM clearing fees”) through its investment in the Master. CGM clearing fees were allocated to the Partnership based on its proportionate share of the Master. During the term of the CGM Customer Agreement, all of the Partnership’s assets that were not held in the Master’s accounts at CGM were deposited in the Partnership’s account at CGM. The Partnership’s cash was deposited by CGM in segregated bank accounts to the extent required by Commodity Futures Trading Commission (“CFTC”) regulations. CGM paid the Partnership interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing 30 days from the date on which such weekly rate is determined. The CGM Customer Agreement gave the Partnership the legal right to net unrealized gains and losses on open futures, exchange-cleared swaps and open forward contracts (the Master was also a party to a customer agreement with CGM, which gave the Master the same right). The Partnership has terminated the CGM Customer Agreement.

Under the MS&Co. Customer Agreement and the foreign exchange brokerage account agreement, the Partnership pays trading fees for the clearing and, where applicable, execution of transactions, as well as exchange, clearing, user, give-up, floor brokerage and NFA fees (collectively, the “MS&Co. clearing fees” and together with the CGM clearing fees, the “clearing fees”) through its investment in the Master. MS&Co. clearing fees are allocated to the Partnership based on its proportionate share of the Master. Clearing fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. All of the Partnership’s assets not held in the Master’s accounts at MS&Co. are deposited in the Partnership’s account at MS&Co. The Partnership’s cash is deposited by MS&Co. in segregated bank accounts to the extent required by CFTC regulations. MS&Co. has agreed to pay the Partnership monthly interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. The MS&Co. Customer Agreement may generally be terminated upon notice by either party.

Under the Selling Agreement with Morgan Stanley Wealth Management, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee. Prior to April 1, 2014, the monthly ongoing selling agent fee was paid at a rate equal to (i) 4.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.875% per year of month-end net assets for Class D Redeemable Units and (iii) 1.125% per year of month-end net assets for Class Z Redeemable Units. Effective April 1, 2014, the monthly ongoing selling agent fee was reduced to (i) 2.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.25% per year of month- end Net Assets for Class D Redeemable Units and (iii) 0.5% per year of month-end Net Assets for Class Z Redeemable Units.

 

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Effective October 1, 2014, the monthly ongoing selling agent fee was (i) reduced to 2.0% per year of month-end Net Assets for Class A Redeemable Units, (ii) reduced to 0.75% per year of month-end Net Assets for Class D Redeemable Units and (iii) eliminated for Class Z Redeemable Units.

Morgan Stanley Wealth Management pays a portion of its ongoing selling agent fees to properly registered or exempted financial advisors who have sold Redeemable Units. Month-end Net Assets, for the purpose of calculating ongoing selling agent fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fee, management fee, the incentive fee accrued, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month.

In July 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 furnishes certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The costs of retaining the Administrator are allocated among the pools operated by the General Partner, including the Partnership.

A limited partner in the Master may withdraw all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner in the Master elects to redeem and informs the Master.

(b) Financial Information about Segments. The Partnership’s business consists of only one segment, speculative trading of commodity interests. The Partnership does not engage in sales of goods or services. The Partnership’s net income (loss) from operations for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 is set forth under “Item 6. Selected Financial Data.” The Partnership’s Capital as of December 31, 2015 was $225,699,151.

(c) Narrative Description of Business. See Paragraphs (a) and (b) above.

(i) through (xii) — Not applicable.

(xiii) — The Partnership has no employees.

(d) Financial Information About Geographic Areas. The Partnership does not engage in sales of goods or services or own any long-lived assets, and therefore this item is not applicable.

(e) Available Information. The Partnership does not have an internet address. The Partnership will provide paper copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports free of charge upon request.

(f) Reports to Security Holders. Not applicable.

(g) Enforceability of Civil Liabilities Against Foreign Persons. Not applicable.

(h) Smaller Reporting Companies. Not applicable.

Item 1A. Risk Factors.

As a result of leverage, small changes in the price of the Partnership’s positions may result in major losses.

The trading of commodity interests is speculative, volatile and involves a high degree of leverage. A small change in the market price of a commodity interest contract can produce major losses for the Partnership. Market prices can be influenced by, among other things, changing supply and demand relationships, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events, weather and climate conditions, insects and plant disease, purchases and sales by foreign countries and changing interest rates.

An investor may lose all of its investment.

Due to the speculative nature of trading commodity interests, an investor could lose all of its investment in the Partnership.

 

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The Partnership will pay substantial fees and expenses regardless of profitability, including clearing, ongoing selling agent, and management fees.

Regardless of its trading performance, the Partnership will incur fees and expenses, including trading and transaction, ongoing selling agent fees, General Partner fees and management fees.

An investor’s ability to redeem Redeemable Units is limited.

An investor’s ability to redeem Redeemable Units is limited, and no market exists for the Redeemable Units.

Conflicts of interest exist.

The Partnership is subject to numerous conflicts of interest including those that arise from the facts that:

 

  1. The General Partner and the Partnership’s/Master’s commodity broker are affiliates;

 

  2. The Advisor, the Partnership’s/Master’s commodity broker and their respective principals and affiliates may trade in commodity interests for their own accounts;

 

  3. An investor’s financial advisor will receive ongoing compensation for providing services to the investor’s account with respect to Class A Redeemable Units and Class D Redeemable Units; and

 

  4. The General Partner, on behalf of the Partnership and/or the Master, may purchase money market mutual fund shares from mutual funds affiliated and/or unaffiliated with the General Partner.

Investing in Redeemable Units might not provide the desired diversification of an investor’s overall portfolio.

One of the Partnership’s objectives is to add an element of diversification to a traditional stock and bond portfolio, but any benefit of portfolio diversification is dependent upon the Partnership achieving positive returns and such returns being independent of stock and bond market returns.

Past performance is no assurance of future results.

The Advisor’s trading strategies may not perform as they have performed in the past. The Advisor has from time to time incurred substantial losses in trading on behalf of clients.

An investor’s tax liability may exceed cash distributions.

Investors are taxed on their share of the Partnership’s income, even though the Partnership does not intend to make any distributions.

Regulatory changes could restrict the Partnership’s operations and increase its operational costs.

Regulatory changes could adversely affect the Partnership by restricting its markets or activities, limiting its trading and/or increasing the costs or taxes to which investors are subject. Pursuant to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, the CFTC and the Securities and Exchange Commission (the “SEC”) have promulgated rules to regulate swaps dealers and to mandate additional reporting and disclosure requirements and continue to promulgate rules regarding capital and margin requirements to require that certain swaps be traded on an exchange or a swap execution facility and to require that derivatives (such as those traded by the Partnership) be moved into central clearinghouses. The CFTC and the prudential regulators that oversee swap dealers have adopted rules regarding margin requirements for certain derivatives. In addition, the CFTC and such prudential regulators have proposed or adopted, respectively, rules regarding capital requirements for swap dealers. These rules may negatively impact the manner in which swap contracts are traded and/or settled, increase the costs of such trades, and limit trading by speculators (such as the Partnership) in futures and over-the-counter (“OTC”) markets.

Speculative position and trading limits may reduce profitability.

The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person or a group of persons may hold or control in particular futures and options on futures and swaps that perform a significant price discovery function. Most exchanges also limit the amount of fluctuation in commodity futures contract prices on a single trading day. The Advisor believes that established speculative position and trading limits will not have a materially adverse effect on trading for the Partnership. The trading instructions of the Advisor may have to be modified, and positions held indirectly by the Partnership through its investment in the Master may have to be liquidated in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership by increasing transaction costs to liquidate positions and limiting potential profits on the liquidated positions.

In November 2013, the CFTC proposed new rules that, if adopted in substantially the same form, will impose position limits on certain futures and option contracts and physical commodity swaps that are “economically equivalent” to such contracts. If enacted, these rules could have an adverse effect on the Advisor’s trading for the Partnership.

 

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Item 2. Properties.

The Partnership does not own or lease any properties. The General Partner operates out of facilities provided by Morgan Stanley and/or one of its subsidiaries.

Item 3. Legal Proceedings.

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

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 SEC as required by the Securities Exchange Act of 1934 (the “Exchange Act”), which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2015, 2014, 2013, 2012 and 2011.

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.

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. That settlement was finalized on February 10, 2016.

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 (defined below), 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.

In October 2014, the Illinois Attorney General’s Office (“ILAG”) 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 ILAG approximately $88 million. The Company and ILAG reached an agreement to resolve the matter on February 10, 2016.

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 and NYAG reached an agreement to resolve the matter on February 10, 2016.

 

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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 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 (the “CEA”) and CFTC 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 CEA and CFTC 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 of 1933 (as amended 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 Exchange Act, 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.

On August 6, 2015, the Company consented to and became the subject of an order by the CFTC to resolve allegations that the Company violated CFTC Regulation 22.9(a) by failing to hold sufficient U.S. Dollars in cleared swap segregated accounts in the U.S. to meet all U.S. Dollar obligations to cleared swaps customers. Specifically, the CFTC found that while the Company at all times held sufficient funds in segregation to cover its obligations to its customers, on certain days during 2013 and 2014, it held currencies, such as euros, instead of U.S. dollars, to meet its U.S. dollar obligations. In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with CFTC Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, the Company accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

Civil 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. 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. The defendants’ joint motions for partial summary judgment were denied on November 9, 2015. At December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $46 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 $46 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.

 

7


On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against the Company and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by the Company was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, 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. 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. At December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $59 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 $59 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 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 December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $51 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 $51 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 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. The defendants’ motions to dismiss the amended complaint were granted in part and denied in part on September 30, 2013. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against the Company with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $332 million. At December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $55 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 $55 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.

 

8


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 currently at issue in this action was approximately $644 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 granted in part and denied in part the Company’s motion to dismiss the complaint. The Company perfected its appeal from that decision on June 12, 2015. At December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $269 million, and the certificates had incurred actual losses of approximately $83 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $269 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 May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against the Company and certain affiliates in the Supreme Court of NY. 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 $132 million. The complaint alleges causes of action against the Company for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part the Company’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $116 million. On August 26, 2015, the Company perfected its appeal from the court’s October 29, 2014 decision. At December 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $28 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $28 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 March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against the Company and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged 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 was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. 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.

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 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 in the United States District Court for the Southern District of New York (“SDNY”), styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, 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.

 

9


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, 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.

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, 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.

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 alleged 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 was 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 January 8, 2016, the parties reached an agreement to settle the litigation.

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, and on August 12, 2015, the plaintiff filed a stipulation of discontinuance with prejudice.

 

10


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 SDNY. The complaint alleged 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 in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

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 alleged that the Company and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. 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 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

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.

 

11


Item 4. Mine Safety Disclosures. Not applicable.

 

12


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market Information. The Partnership has issued no stock. There is no public market for the Redeemable Units.

(b) Holders. The number of holders of Redeemable Units as of February 29, 2016, was 1,532 for Class A Redeemable Units, 11 for Class D Redeemable Units and 7 for Class Z Redeemable Units.

(c) Dividends. The Partnership did not declare any distributions in 2015 or 2014. The Partnership does not intend to declare distributions in the foreseeable future.

(d) Securities Authorized for Issuance Under Equity Compensation Plans. None.

(e) Performance Graph. Not Applicable.

(f) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities. For the twelve months ended December 31, 2015, the aggregate subscriptions of the classes were 40,745.6900 Redeemable Units totaling $56,508,630. For the twelve months ended December 31, 2014, the aggregate subscriptions of the Classes were 19,306.2950 Redeemable Units totaling $23,280,332. For the twelve months ended December 31, 2013, the aggregate subscriptions of the classes were 42,906.7040 Redeemable Units totaling $47,084,292.

The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act, and Rule 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors, as described in Regulation D. In determining the applicability of the exemption, the General Partner relied on the face that the Redeemable Units were purchased by accredited investors in a private offering.

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

(g) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

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

 

Period    Class A (a)
Total
Number of
Redeemable
Units
Purchased*
           Class A (b)
Average
Price Paid
per
Redeemable
Unit**
           (c) Total
Number of
Redeemable
Units
Purchased
as Part of
Publicly
Announced
Plans or
Programs
         (d) Maximum
Number (or
Approximate
Dollar Value)
of
Redeemable
Units that
May Yet Be
Purchased
Under the
Plans or
Programs

October 1, 2015—October 31, 2015

     1,298.8230            $ 1,321.57            N/A         N/A

November 1, 2015—November 30, 2015

     891.6020            $ 1,386.85            N/A         N/A

December 1, 2015—December 31, 2015

     6,027.0440            $ 1,351.03            N/A         N/A
       8,217.4690            $ 1,350.26                       

 

* Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

 

** Redemptions of Redeemable Units are effected as of the end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

 

13


Item 6. Selected Financial Data.

Total trading results, total investment income, total expenses, net income (loss) and increase (decrease) in net asset value per Redeemable Unit for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 and net asset value per Redeemable Unit and total assets at December 31, 2015, 2014, 2013, 2012 and 2011 were as follows:

 

     2015     2014     2013     2012     2011  

Total trading results

   $ 8,689,147      $ 48,605,665      $ 30,398,646      $ (7,971,199   $ 18,903,064   

Total investment income

     53,655        27,935        61,332        112,462        49,042   

Total expenses

     (14,181,289     (16,589,843     (13,976,443     (15,389,619     (15,095,840
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,438,487   $ 32,043,757      $ 16,483,535      $ (23,248,356   $ 3,856,266   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit:

          

Class A

   $ (28.25)      $ 219.67      $ 84.55      $ (111.20   $ 22.59   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Class D

   $ (10.37)      $ 221.03      $ 102.79      $ (71.52   $ 28.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

   $ (0.78)      $ 230.66      $ 109.95      $ (63.33   $ 12.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit:

          

Class A

   $ 1,351.03      $ 1,379.28      $ 1,159.61      $ 1,075.06      $ 1,186.26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Class D

   $ 1,270.21      $ 1,280.58      $ 1,059.55      $ 956.76      $ 1,028.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Class Z

   $ 1,289.37      $ 1,290.15      $ 1,059.49      $ 949.54      $ 1,012.87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 234,947,467      $ 208,651,182      $ 211,243,562      $ 211,173,048      $ 240,025,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Partnership, through its investment in the Master, aims to achieve substantial capital appreciation through speculative trading, directly and indirectly, in U.S. and international markets for currencies, interest rates, stock indices, softs, agricultural and energy products and precious and base metals. The Partnership, through its investment in the Master, may employ futures, options on futures, forward and swap contracts in those markets.

The General Partner manages all business of the Partnership and the Master. The General Partner has delegated its responsibility for the investment of the Partnership’s assets to the Advisor. The Partnership has invested these assets in the Master. The General Partner engages a team of approximately 30 professionals whose primary emphasis is on attempting to maintain quality control among the advisors to the funds operated or managed by the General Partner. A full-time staff of due diligence professionals uses proprietary technology and on-site evaluations to identify, select and monitor new and existing futures money managers. The accounting and operations staff provide processing of subscriptions and redemptions and reporting to limited partners and regulatory authorities. The General Partner also engages staff involved in marketing and sales support. In selecting the Advisor for the Partnership/Master, the General Partner considered, among other things, 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.

Responsibilities of the General Partner include:

 

   

due diligence examinations of the Advisor;

 

   

selection, appointment and termination of the Advisor;

 

   

negotiation of the Management Agreement; and

 

   

monitoring the activity of the Advisor.

In addition, the General Partner prepares, or assists the Administrator in preparing, the books and records and provides or assists the Administrator in providing the administrative and compliance services that are required by law or regulation, from time to time, in connection with the operation of the Partnership/Master.

 

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While the Partnership and the Master have the right to seek lower commission rates and fees from other commodity brokers at any time, the General Partner believes that the customer agreements and other arrangements with the commodity broker are fair, reasonable, and competitive.

The Partnership’s assets allocated to the Advisor for trading are not invested in commodity interests directly. The Advisor’s allocation of the Partnership’s assets is currently invested in the Master. The Advisor trades the Master’s, and thereby the Partnership’s, assets in accordance with its Winton Futures Program, a proprietary, systematic trading system.

The investment objective of the Winton Futures Program is to achieve long-term capital appreciation through compound growth by pursuing diversified investment strategies subject to certain investment constraints. These constraints may be imposed by the Advisor or may be required by regulations or rules.

The key investment constraint of the Winton Futures Program as applied to the Partnership through its investment in the Master is that it does not invest in equities (although it may gain indirect exposure to equity markets via investments in equity index futures). It may invest long and short using leverage in non-equity markets that the Advisor believes are sufficiently liquid, and for which there is sufficient data available. The Winton Futures Program is subject to a long-term gross volatility target of 10%.

The Winton Futures Program currently invests in over 100 futures markets, currency forwards and related instruments.

The Advisor generally expects the holding periods for the Winton Futures Program’s portfolio to be long-term with the average holding period across all instruments expected to be 3-8 months.

The Winton Futures Program follows a disciplined investment process that is based on statistical analysis of past data. The initial stage of the process involves collecting, cleaning and organizing large amounts of data. The Winton Futures Program uses a wide variety of data inputs including factors that are intrinsic to markets, such as price, volume and open interest; and those that are external to markets, such as economic statistics, industrial and commodity data and public company financial data. The Advisor conducts statistical research into the data in an attempt to quantify the probability of particular markets rising or falling, conditional on a variety of quantifiable factors. The Advisor’s research is used to develop mathematical models that attempt to forecast market returns, the variability or volatility associated with such returns (often described as “risk”), correlation between markets and transaction costs. These forecasts are used in investment strategies that determine what positions should be held to maximize profit within a certain range of risk. As a result of the Advisor’s research, the Advisor expects that the investments made in accordance with this process will have an improved chance of being successful, which is expected to lead to profits over the long-term.

The Advisor’s investment strategies are operated as an automated, computer-based system. This system is modified over time as the Advisor monitors its operation and undertakes further research. Changes to the system occur as a result of, amongst other things, the discovery of new relationships, changes in market liquidity, the availability of new data or the reinterpretation of existing data.

Most of the Advisor’s investment decisions are made strictly in accordance with the output of the system. However, the Advisor may, in exceptional circumstances, (such as the occurrence of events that fall outside the input parameters of the system), make investment decisions based on other factors and take action to override the output of the system to seek to protect the interests of investors. For example, if there is a market crash or if trading is suspended on a market or exchange, the Advisor may attempt to reduce risk by decreasing leverage or liquidating or hedging positions in certain markets.

 

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The Advisor does not take any responsibility for the accuracy or completeness of the contents of this document, any representations made herein, or the performance of the Partnership/Master. The Advisor disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profits incurred by limited partners or by any third party that may arise from any reliance on this document. The Advisor is neither responsible for, nor involved in, the marketing, distribution or sales of shares or interests in the Partnership and is not responsible for compliance with any marketing or promotion laws, rules or regulations; and no third party other than the Advisor is authorized to make any statement about any of the Advisor’s products or services in connection with any such marketing, distribution or sales. Past performance by any other fund advised by the Advisor is not indicative of any future performance by the Partnership/Master.

(a) Liquidity.

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in sales of goods of services. The Master’s only assets are its equity in its trading accounts, consisting of cash and cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts and investment in U.S. Treasury bills, if applicable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2015.

 

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To minimize the risk relating to low margin deposits, the Master follows certain trading policies, including:

 

(i) The Master invests its assets only in commodity interests that the Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisor believes will permit it to enter and exit trades without noticeably moving the market.

 

(ii) The Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Master’s net assets allocated to the Advisor.

 

(iii) The Master may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged.

 

(iv) The Master does not employ the trading technique commonly known as “pyramiding,” in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities.

 

(v) The Master does not utilize borrowings other than short-term borrowings if the Master takes delivery of any cash commodities.

 

(vi) The Advisor may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Master. “Spreads” and “straddles” describe commodity futures trading strategies involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets.

 

(vii) The Master will not permit the churning of its commodity trading account. The term “churning” refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, indicating the desire to generate commission income.

From January 1, 2015 through December 31, 2015, the Partnership’s average margin to equity ratio (i.e., the percentage of assets on deposit required for margin) was approximately 15.3%. The foregoing margin to equity ratio takes into account cash held in the Partnership’s name, as well as the allocable value of the positions and cash held on behalf of the Partnership in the name of the Master.

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

Market risk is the potential for changes in the value of the financial instruments traded by the Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s and the Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s and the Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership and the Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership and the Master had credit risk and concentration risk, as MS&Co. and/or CGM or their affiliates were the sole counterparties or brokers with respect to the Partnership’s and the Master’s assets. Credit risk with respect to exchange-traded instruments was reduced to the extent that, through MS&Co. and/or CGM, the Partnership’s and the Master’s counterparty was an exchange or clearing organization. The Partnership and the Master continue to be subject to such risks with respect to MS&Co.

The General Partner monitors and attempts to control the Partnership’s and the Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership and the Master may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under New York law.

 

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(See also “Item 8. Financial Statements and Supplementary Data” for further information on financial instrument risk included in the notes to financial statements.)

Other than the risks inherent in commodity futures, forwards, options and swaps trading, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the General Partner may cause the Partnership to cease trading operations under certain circumstances, including a decrease in net asset value per Redeemable Unit of any Class to less than $400 as of the close of business on any business day. In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the aggregate net assets of the Partnership decline to less than $1,000,000.

(b) Capital Resources.

(i) The Partnership has made no material commitments for capital expenditures.

(ii) The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be predicted. Market movements in commodities are dependent upon fundamental and technical factors which the Advisor may or may not be able to identify, such as changing supply and demand relationships, weather, government agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. Partnership expenses consist of, among other things, clearing, ongoing selling agent, management and General Partner fees. The level of these expenses is dependent upon trading performance and the level of net assets maintained. In addition, the amount of interest income payable by the Partnership’s commodity broker is dependent upon interest rates over which neither the Partnership nor the commodity broker has control.

No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value as of the last day of any month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions. Redemptions are generally funded out of the Partnership’s cash holdings and/or redemptions from the Master. For the year ended December 31, 2015, 19,628.7880 Redeemable Units were redeemed of Class A totaling $26,736,281. For the year ended December 31, 2014, 43,633.4960 Redeemable Units were redeemed out of Class A totaling $51,494,981, 5,033.7730 Redeemable Units of Class D were redeemed totaling $5,311,637, 144.8280 Redeemable Units of Class Z were redeemed totaling $152,169 and 616.0930 General Partner Redeemable Units of Class Z were redeemed totaling $701,492. For the year ended December 31, 2013, 58,457.0180 Redeemable Units of Class A were redeemed totaling $65,360,235, 185.5080 Redeemable Units of Class Z were redeemed totaling $192,255 and 200.0000 General Partner Redeemable Units of Class Z were redeemed totaling $200,824.

For the year ended December 31, 2015, there were additional subscriptions of 37,257.7740 Redeemable Units of Class A totaling $51,738,630, 3,449.7730 Redeemable Units of Class D totaling $4,720,000, 38.1430 Redeemable Units of Class Z totaling $50,000 and 216.9500 General Partner Redeemable Units of Class Z totaling $300,000. For the year ended December 31, 2014, there were additional subscriptions of 16,861.5740 Redeemable Units of Class A totaling $20,181,812 and 2,444.7210 Redeemable Units of Class D totaling $3,098,520. For the year ended December 31, 2013, there were additional subscriptions of 39,818.8570 Redeemable Units of Class A totaling $43,972,521, subscriptions of 3,030.7590 Redeemable Units of Class D totaling $3,051,148 and subscriptions of 57.0880 Redeemable Units of Class Z totaling $60,623.

(c) Results of Operations.

For the year ended December 31, 2015, the net asset value per Redeemable Unit for Class A decreased 2.1% from $1,379.28 to $1,351.03. For the year ended December 31, 2015, the net asset value per Redeemable Unit for Class D decreased 0.8% from $1,280.58 to $1,270.21. For the year ended December 31, 2015, the net asset value per Redeemable Unit for Class Z decreased 0.1% from $1,290.15 to $1,289.37. For the year ended December 31, 2014, the net asset value per Redeemable Unit for Class A increased 18.9% from $1,159.61 to $1,379.28. For the year ended December 31, 2014, the net asset value per Redeemable Unit for Class D increased 20.9% from $1,059.55 to $1,280.58. For the year ended December 31, 2014, the net asset value per Redeemable Unit for Class Z increased 21.8% from $1,059.49 to $1,290.15. For the year ended December 31, 2013, the net asset value per Redeemable Unit for Class A increased 7.9% from $1,075.06 to $1,159.61. For the year ended December 31, 2013, the net asset value per Redeemable Unit for Class D increased 10.7% from $956.76 to $1,059.55. For the year ended December 31, 2013, the net asset value per Redeemable Unit for Class Z increased 11.6% from $949.54 to $1,059.49.

The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses of $8,689,147 for the year ended December 31, 2015. Gains were primarily attributable to the Master’s trading of energy, U.S. and non-U.S. interest rates, livestock, metals and softs, and were partially offset by losses in currencies, grains and indices. The net trading gain (or loss)realized from the Partnership’s investment in the Master is disclosed on page 34 under “Item 8. Financial Statements and Supplementary Data.

 

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The most significant losses were incurred within the global stock index markets during August from long positions in U.S., European, and Asian equity index futures as prices fell sharply amid concern a slowdown in Chinese economic growth would adversely affect the global economy. Additional losses in this sector were experienced during June from long positions in European, U.S., and Asian equity index futures as prices declined as concerns over Greece’s efforts to avoid a default weighed on global financial markets. Within the currency sector, losses were recorded during August from short positions in the euro and Japanese yen versus the U.S. dollar as the value of the U.S. dollar declined as fears over a hard landing in China and its impact on global growth outlook pushed back expectations for a U.S. Federal Reserve rate hike at the September FOMC meeting. Additional losses in this sector were recorded during April from short positions in the euro versus the U.S. dollar after the relative value of the dollar slumped following the release of lower-than-expected first quarter Gross Domestic Product totals in the U.S. Losses in the currency sector were also incurred during December from short positions in the euro and Swiss franc versus the U.S. dollar as the relative values of these European currencies reversed higher early in the month after the scale of the European Central Bank’s stimulus measures disappointed investors. The Partnership’s trading losses for the year were offset by trading gains achieved within the energy markets during November and December from short positions in crude oil and it related products as prices weakened as the OPEC nations added to a growing global supply glut by failing to agree on production cuts. Gains within the energies were also experienced during July and September from short positions in crude oil and its related products as prices dropped as record production in the U.S. and Middle East boosted global supplies. Within the global interest rate markets, gains were recorded during January from long positions in European fixed income futures as prices advanced on increased speculation that slow growth in Eurozone economies would spur the European Central Bank to increase its quantitative easing measures. Additional gains were experienced during January from long positions in U.S. Treasury note and Treasury bond futures as prices climbed higher over investor concern that record crude oil inventories could dampen inflation projections in the U.S. Gains were also recorded in this sector during September from long positions in European and U.S. fixed income futures. Within the metals markets, gains were achieved primarily during July from short positions in gold and silver futures as prices fell as a strengthening U.S. dollar curbed demand for precious metals as a store of value. Additional gains in this sector were recorded during July from short positions in copper futures as prices declined amid investor concern of slowing demand from China. Within the agricultural complex, gains were achieved during November from short positions in corn and wheat futures as prices weakened following the release of U.S. government forecasts which predicted that global grain inventories will reach record levels in 2016. Gains within the agricultural complex were also recorded during September from short positions in cattle futures as prices moved lower on signs of weaker-than-expected beef demand amid increased supplies.

The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses of $48,605,665 for the year ended December 31, 2014. Gains were primarily attributable to the Master’s trading of currencies, energy, U.S. and non- U.S. interest rates and livestock, and were partially offset by losses in grains, indices, metals and softs.

The most significant gains were achieved within the global interest rate sector during August from long positions in European fixed income futures as prices advanced over investor speculation that the European Central Bank would continue stimulus measures after reports showed euro-area manufacturing expanded less than previously estimated during July. Additional gains during August were experienced from long positions in U.S. fixed income futures. During October and November, gains were recorded from long positions in European fixed income futures as prices rose as concern over the European economy spurred demand for the relative safety of government debt. Additional gains were achieved during May from long positions in U.S. Treasury bond and Treasury note futures as prices increased amid easing investor concern the U.S. Federal Reserve would raise borrowing costs. Within the energy markets, gains were achieved during September from short positions in crude oil and its related products as prices moved lower on news that fuel inventory levels in the U.S. were higher than previous estimates predicted. Gains were experienced during October, November, and December from short positions in crude oil and its related products as prices moved lower as U.S. oil production advanced and after the OPEC nations failed to cut output in response to the global supply glut. Additional gains were recorded during January from long positions in natural gas futures as prices advanced after a U.S. government report showed a record drop in U.S. inventories. Within the currency sector, gains were experienced during November from short positions in the Japanese yen versus the U.S. dollar as the relative value of the yen declined after economic indicators showed Japan’s economy was growing at a slower pace than previously forecast. Additional gains were recorded during February from long positions in the British pound versus the U.S. dollar as the relative value of the pound increased after Bank of England policy makers expressed little concern that the strength of the currency would harm the British economy. During September, gains were achieved from short positions in the euro versus the U.S. dollar as the value of the dollar strengthened amid signs that the U.S. economy was outpacing its peers. The Partnership’s gains for the year were partially offset by losses incurred within the agricultural sector during June and July from long positions in corn and soybean futures as prices declined as mild weather throughout much of the Midwest reinforced analysts’ predictions that U.S. grain harvests would reach near record levels in 2014. Within the global stock index sector, losses were recorded during January from long positions in U.S., European, and Asian equity index futures as prices declined as economic growth momentum in China weakened and the U.S. Federal Reserve announced measures to further taper its quantitative easing program. Additional losses were experienced during October from long positions in European equity index futures as prices declined amid concern that the region’s central bank will face obstacles in its measures to revive the region’s economy. Within the metals markets, losses were incurred during June from short positions in gold and silver futures as precious metals prices rallied as increased turmoil in the Ukraine and Iraq caused investors to seek the relative safety of the precious metals. During February, losses were incurred from short positions in silver and gold futures as prices moved higher as increased geo-political tensions and discouraging U.S. economic data spurred investor demand.

 

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Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master was earned at a rate equal to the 4-week U.S. Treasury bill discount rate. All interest earned on U.S. Treasury bills and/or money market mutual fund securities will be retained by the Partnership. Interest income allocated from the Master for the three and twelve months ended December 31, 2015 increased by $32,410 and $25,720, respectively, as compared to the corresponding periods in 2014. The increase in interest income is primarily due to higher U.S. Treasury bill rates and higher average daily equity during the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s account and upon interest rates over which neither the Partnership nor MS&Co. has control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three months ended December 31, 2015 increased by $140,945, as compared to the corresponding period in 2014. The increase in ongoing selling agent fees is due to higher average net assets during the three months ended December 31, 2015, as compared to the corresponding period in 2014. Ongoing selling agent fees for the twelve months ended December 31, 2015 decreased $957,269, as compared to the corresponding period in 2014. The decrease is due to reduced ongoing selling agent fee rates for each Class effective October 1, 2014.

Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Management fees for the three and twelve months ended December 31, 2015 increased by $122,410 and $562,480, respectively, as compared to the corresponding periods in 2014. The increase in management fees is due to higher average net assets during the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014.

General Partner fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, additions and redemptions. General Partner fees for the three and twelve months ended December 31, 2015 increased by $81,608 and $1,069,088, respectively, as compared to the corresponding periods in 2014. The increase in General Partner fees is due to an increase in the General Partner fee rate effective October 1, 2014 and higher average net assets during the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014.

Incentive fees paid by the Partnership are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the management agreement. Trading performance for the three and twelve months ended December 31, 2015 resulted in incentive fees of $0 and $3,535,100, respectively. Trading performance for the three and twelve months ended December 31, 2014 resulted in incentive fees of $5,973,502 and $6,899,734, respectively. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new profits for the Partnership.

The Partnership pays professional fees, which generally include legal and accounting expenses, certain offering costs and filing, reporting and data processing fees. Professional fees for the years ended December 31, 2015 and 2014 were $464,422 and $213,420, respectively.

 

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The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses of $30,398,646 for the year ended December 31, 2013. Gains were primarily attributable to the Master’s trading of currencies, grains, indices, livestock, metals and softs, and were partially offset by losses in energy and U.S. and non-U.S. interest rates.

The most significant gains were achieved within the equity index markets as equity prices rose throughout a majority of the year. During January, profits were recorded from long positions in U.S., European, and Asian equity index futures as prices moved higher after German business confidence improved, economic reports in the U.S. and China beat estimates, and a weaker yen boosted Japan’s exports. During April, gains were achieved from long positions in Asian equity index futures as prices rallied during the month as the Bank of Japan reinforced its commitment to reach aggressive inflation and currency devaluation targets. Additional gains in the global stock index sector were recorded during the last four months of the year from long positions in U.S. and European equity index futures as prices reached record levels in the U.S. on investor reaction to the U.S. Federal Reserve Bank continuing its quantitative easing measures unabated. Within the metals markets, gains were recorded from March through June, and again from September through December. The most significant gains in this sector recorded during June from short positions in gold and silver futures as prices slumped amid speculation that the U.S. Federal Reserve may scale back its debt-purchasing program, eroding the appeal of the metals as a store of value. Additional gains in metals were recorded from short positions in copper futures. Additional gains were achieved in April from short positions in gold futures as prices declined as positive economic news in the U.S. reduced demand for the precious metal. The Partnership also recorded gains during September from short positions in gold and silver futures, as prices declined early in the month over renewed investor concern that the U.S. Federal Reserve would curtail its quantitative easing program, eroding demand for the precious metals. Within the agricultural sector, gains were recorded during August from long positions in soybean futures as prices increased as persistent, dry weather in the U.S. Midwest threatened crop yields. Within the currency markets, gains were recorded during January, March, April, and from September through December. The most meaningful gains in this sector were recorded during January from a short Japanese yen position versus the U.S. dollar as the Japanese yen reached the weakest level versus the dollar since June 2010 amid speculation that Japanese Prime Minister Shinzo Abe would select a central-bank chief who will expand monetary easing, accelerating the currency’s decline. During December, additional gains within the currency sector were achieved from short positions in the Japanese yen versus the U.S. dollar as the value of the yen fell amid speculation that the Bank of Japan would continue unprecedented stimulus measures, while the U.S. Federal Reserve began to pare quantitative easing amid the U.S. economic recovery. A portion of the Partnership’s gains during the year was offset by losses incurred within the global interest rate markets, primarily during May, from long positions in U.S. and European fixed income futures as prices moved lower following a positive U.S. employment report and a rise in German sentiment. Additional losses in the sector were incurred during January from long positions in European and U.S. fixed income futures as prices fell amid positive economic reports and after European Central Bank President Mario Draghi said that the euro-area economy should gradually recover during 2013. Within the energy markets, losses were recorded during May through October, as energy prices remained volatile throughout much of the middle of 2013. The most notable losses in the energy complex were recorded during July from short positions in crude oil and heating oil futures as prices rallied after reports indicated that the U.S. economy was strengthening.

 

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In the General Partner’s opinion, the Advisor continues to employ its trading methods in a consistent and disciplined manner and its results are consistent with the objectives of the Partnership and expectations for the Advisor’s program. The General Partner continues to monitor the Advisor’s performance on a daily, weekly, monthly and annual basis to ensure that these objectives are met.

Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership expects to increase capital through operations.

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

(d) Off-Balance Sheet Arrangements. None.

(e) Contractual Obligations. None.

(f) Operational Risk.

The Partnership, through its investment in the Master, is directly exposed to market risk and credit risk, which arise in the normal course of its business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace.

Such risks include:

Operational/Settlement Risk — the risk of financial and opportunity loss and legal liability attributable to operational problems, such as inaccurate pricing of transactions, untimely trade execution, clearance and/or settlement, or the inability to process large volumes of transactions. The Partnership/Master are subject to increased risks with respect to their trading activities in emerging market securities, where clearance, settlement, and custodial risks are often greater than in more established markets.

Technological Risk — the risk of loss attributable to technological limitations or hardware failure that constrain the Partnership’s/Master’s ability to gather, process, and communicate information efficiently and securely, without interruption, to customers, and in the markets where the Partnership/Master participates. Additionally, the General Partner’s computer systems may be vulnerable to unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events that could have a security impact on such systems. If one or more of such events occur, this potentially could jeopardize a limited partner’s personal, confidential, proprietary or other information processed and stored in, and transmitted through, the General Partner’s computer systems, and adversely affect the Partnership’s business, financial condition or results of operations.

Legal/Documentation Risk — the risk of loss attributable to deficiencies in the documentation of transactions (such as trade confirmations) and customer relationships (such as master netting agreements) or errors that result in non-compliance with applicable legal and regulatory requirements.

Financial Control Risk — the risk of loss attributable to limitations in financial systems and controls. Strong financial systems and controls ensure that assets are safeguarded, that transactions are executed in accordance with the General Partner’s authorization, and that financial information utilized by the General Partner and communicated to external parties, including the Partnership’s Redeemable Unit holders, creditors and regulators, is free of material errors.

 

22


(g) Critical Accounting Policies.

Partnership’s Investment. The Partnership carries its investment in the Master at fair value based on the Master’s net asset value per Unit, as a practical expedient, as calculated by the Master.

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

The fair value of exchange-traded futures, option 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 input 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 valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

The Master considers prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker quotes or pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the years ended December 31, 2015 and 2014, the Master did not hold any derivative instruments 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. For the years ended December 31, 2015 and 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

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

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Forward foreign currency contracts are valued daily, and the Master’s net equity therein, representing unrealized gain or loss on the contracts, as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Master’s Statements of Financial Condition. Net realized gains (losses) and net change in 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 Master’s Statements of Income and Expenses.

 

23


London Metals Exchange Forward Contracts. Metal contracts traded on the LME represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master on each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and net change in unrealized gains (losses) on metal contracts are included in the Master’s Statements of Income and Expenses.

The Master does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Master’s Statements of Income and Expenses.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Introduction

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

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

Market movements result in frequent changes in the fair market value of the Master’s open positions and, consequently, in its earnings and cash flow. The Master’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Master’s open positions and the liquidity of the markets in which it trades.

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

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

Materiality as used in this section, “Qualitative and Quantitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Master’s market sensitive instruments.

 

24


Quantifying the Partnership’s/Master’s Trading Value at Risk

The following quantitative disclosures regarding the Master’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 and Section 21E of the Exchange Act). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor except for statements of historical fact (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period).

The Master’s risk exposure in the various market sectors traded by the Advisor is quantified below in terms of Value at Risk. Due to the Master’s mark-to-market accounting, any loss in the fair value of the Master’s open positions is directly reflected in the Partnership’s earnings (realized or unrealized allocated from the Master).

Exchange margin requirements have been used by the Master 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 intervals. 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.

In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Master) the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers’ margins have been used.

The fair value of the Master’s futures and forward positions does not have any optionality component. However, the Advisor may trade commodity options. Where this instrument is a futures contract, the futures margin has been used, and where this instrument is a physical commodity, the futures-equivalent margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Master in almost all cases fluctuate to a lesser extent than those of the underlying instruments.

In quantifying the Master’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been added to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Master’s positions are rarely, if ever, 100% positively correlated have not been reflected.

 

25


The Master’s Trading Value at Risk in Different Market Sectors

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Master’s open positions by market category as of December 31, 2015 and 2014, and the highest, lowest and average value at any point during the years. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. As of December 31, 2015, the Master’s total capitalization was $603,041,370 and the Partnership owned approximately 38.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2015 was as follows:

December 31, 2015

 

            % of Total     High      Low      Average  

Market Sector

   Value at Risk      Capitalization     Value at Risk      Value at Risk      Value at Risk*  

Currencies

   $ 40,462,391         6.71   $ 48,614,615       $ 15,576,197       $ 35,944,393   

Energy

     9,717,129         1.61        9,931,478         4,409,409         7,710,733   

Grains

     4,243,794         0.71        4,675,587         908,552         2,777,114   

Indices

     20,463,380         3.39        38,149,455         6,133,415         23,684,667   

Interest Rates U.S.

     4,509,892         0.75        12,570,085         4,509,892         9,528,608   

Interest Rates Non-U.S.

     9,044,627         1.50        14,830,759         4,180,208         10,971,313   

Livestock

     822,690         0.14        1,001,330         363,495         696,799   

Metals

     8,647,874         1.43        11,766,815         5,052,082         8,300,999   

Softs

     1,350,801         0.22        2,208,250         954,635         1,773,316   
  

 

 

    

 

 

         

Total

   $ 99,262,578         16.46 %         
  

 

 

    

 

 

         

 

* Annual average month-end Value at Risk.

As of December 31, 2014, the Master’s total capitalization was $697,801,812 and the Partnership owned approximately 29.9% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2014 was as follows:

December 31, 2014

 

            % of Total     High      Low      Average  

Market Sector

   Value at Risk      Capitalization     Value at Risk      Value at Risk      Value at Risk*  

Currencies

   $ 32,224,643         4.62   $ 46,206,758       $ 32,224,643       $ 39,296,361   

Energy

     5,549,664         0.80        8,807,820         2,522,147         4,712,524   

Grains

     2,079,743         0.30        6,803,017         1,490,355         4,170,978   

Indices

     20,399,383         2.92        38,072,737         8,890,588         29,808,840   

Interest Rates U.S.

     6,850,223         0.98        13,373,014         3,884,773         9,651,736   

Interest Rates Non-U.S.

     11,751,881         1.69        16,055,733         6,963,948         13,910,466   

Livestock

     514,635         0.07        1,046,318         379,670         749,689   

Metals

     6,484,422         0.93        10,460,750         4,878,593         7,358,093   

Softs

     1,407,923         0.20        2,499,906         1,135,915         1,784,789   
  

 

 

    

 

 

         

Total

   $ 87,262,517         12.51        
  

 

 

    

 

 

         

 

* Annual average month-end Value at Risk.

 

26


Material Limitations on Value at Risk as an Assessment of Market Risk

The face value of the market sector instruments held by the Master is typically many times the applicable margin requirement (margin requirements generally range between 1% and 15% of contract face value, although an exchange may increase margin requirements on short notice), as well as many times the capitalization of the Master. The magnitude of the Master’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Master to incur severe losses over a short period of time. The foregoing Value at Risk tables — as well as the past performance of the Master — give no indication of this “risk of ruin.”

Non-Trading Risk

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

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding the Master’s market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Master 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 Master’s primary market risk exposures, as well as the strategies used and to be used by the General Partner and the Advisor for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Master’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 management strategies of the Master. There can be no assurance that the Master’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short or long term. Investors must be prepared to lose all or substantially all of their investment in the Partnership.

The following were the primary trading risk exposures of the Master as of December 31, 2015, by market sector.

Interest Rates. Interest rate movements directly affect the price of the futures positions held by the Master and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Master’s profitability. The Master’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-8 countries. However, the Master also takes futures positions on the government debt of smaller nations — e.g., Australia.

Currencies. The Master’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Master’s currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the dollar-based Partnership in expressing Value at Risk in a functional currency other than U.S. dollars.

Stock Indices. The Master’s primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Master are limited to futures on broadly based indices. As of December 31, 2015, the Master’s primary exposures were in the CME stock indices. The General Partner anticipates little, if any, trading in non-G-8 stock indices. The Master is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices. (Static markets would not cause major market changes but would make it difficult for the Master to avoid being “whipsawed” into numerous small losses.)

Metals. The Master’s primary metal market exposure is to fluctuations in the price of gold, aluminum, silver and copper.

Energy. The Master’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East. Oil prices can be volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.

Grains. The Master’s primary commodities exposure is subject to agricultural price movements, which are often directly affected by severe unexpected weather conditions.

Softs. The Master’s primary commodities exposure is subject to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Cocoa, coffee, and sugar accounted for the bulk of the Master’s commodity exposure.

 

27


Qualitative Disclosures Regarding Non-Trading Risk Exposure

The following were the only non-trading risk exposures of the Master as of December 31, 2015.

Foreign Currency Balances. The Master’s primary foreign currency balances are in Hong Kong dollars, Euro and Japanese Yen. The Advisor regularly converts foreign currency balances to U.S. dollars in an attempt to control the Master’s non-trading risk.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The General Partner monitors and attempts to control the Partnership’s (through its investment in the Master) 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 Master may be subject.

The General Partner monitors the Master’s performance and the concentration of its open positions, and consults with the Advisor concerning the Master’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 Master. 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 Master’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.

 

28


Item 8. Financial Statements and Supplementary Data.

Managed Futures Premier Abingdon L.P.

The following financial statements and related items of the Partnership are filed under this Item 8: Oath or Affirmation, Management’s Report on Internal Control over Financial Reporting, Report of Independent Registered Public Accounting Firm, for the years ended December 31, 2015, 2014 and 2013; Statements of Financial Condition at December 31, 2015 and 2014; Statements of Income and Expenses for the years ended December 31, 2015, 2014 and 2013; Statements of Changes in Partners’ Capital for the years ended December 31, 2015, 2014 and 2013; and Notes to Financial Statements.

 

29


To the Limited Partners of

Managed Futures Premier Abingdon L.P.

To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.

 

LOGO

 

By:  

Patrick T. Egan

President and Director

Ceres Managed Futures LLC

General Partner,

Managed Futures Premier Abingdon L.P.

Ceres Managed Futures LLC

522 Fifth Avenue

New York, NY 10036

(855) 672-4468

 

30


Management’s Report on Internal Control Over Financial Reporting

The management of Managed Futures Premier Abingdon L.P. (the “Partnership”), Ceres Managed Futures LLC, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Partnership’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and

(iii) 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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Managed Futures Premier Abingdon L.P. has assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management concluded that the Partnership maintained effective internal control over financial reporting as of December 31, 2015 based on the criteria referred to above.

 

 

LOGO

   

 

LOGO

Patrick T. Egan

President and Director

Ceres Managed Futures LLC

General Partner,

Managed Futures Premier Abingdon L.P.

   

Steven Ross

Chief Financial Officer and Director

Ceres Managed Futures LLC

General Partner,

Managed Futures Premier Abingdon L.P.

 

31


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of

Managed Futures Premier Abingdon L.P.:

We have audited the accompanying statements of financial condition of Managed Futures Premier Abingdon L.P. (the “Partnership”) as of December 31, 2015 and 2014, and the related statements of income and expenses and changes in partners’ capital for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of Managed Futures Premier Abingdon L.P. as of December 31, 2015 and 2014, and the results of its operations and changes in its partners’ capital for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

New York, New York

March 24, 2016

 

32


Managed Futures Premier Abingdon L.P.

Statements of Financial Condition

December 31, 2015 and 2014

 

     December 31,
2015
     December 31,
2014
 

Assets:

     

Investment in Master, at fair value (Note 1)

   $ 234,617,857       $ 208,372,534   

Cash (Note 3c)

     329,610         278,648   
  

 

 

    

 

 

 

Total assets

   $ 234,947,467       $ 208,651,182   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital

     

Liabilities:

     

Accrued expenses:

     

Ongoing selling agent fees (Note 3c)

   $ 367,700       $ 318,934   

Management fees (Note 3b)

     292,913         252,736   

General Partner fees (Note 3a)

     195,275         168,491   

Incentive fees (Note 3b)

             5,973,502   

Professional fees

     249,711         169,938   

Redemptions payable to Limited Partners (Note 6)

     8,142,717         702,292   
  

 

 

    

 

 

 

Total liabilities

     9,248,316         7,585,893   
  

 

 

    

 

 

 

Partners’ Capital: (Notes 1 and 6)

     

General Partner, Class A, 0.0000 Redeemable Units outstanding at December 31, 2015 and 2014

               

General Partner, Class D, 0.0000 Redeemable Units outstanding at December 31, 2015 and 2014

               

General Partner, Class Z, 1,909.7640 and 1,692.8140 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     2,462,400         2,183,984   

Limited Partners, Class A, 151,491.9322 and 133,862.9462 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     204,669,817         184,633,894   

Limited Partners, Class D, 14,179.1386 and 10,729.3656 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     18,010,427         13,739,779   

Limited Partners, Class Z, 431.6102 and 393.4672 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     556,507         507,632   
  

 

 

    

 

 

 

Total partners’ capital

     225,699,151         201,065,289   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 234,947,467       $ 208,651,182   
  

 

 

    

 

 

 

Class A, net asset value per Redeemable Unit

   $ 1,351.03       $ 1,379.28   
  

 

 

    

 

 

 

Class D, net asset value per Redeemable Unit

   $ 1,270.21       $ 1,280.58   
  

 

 

    

 

 

 

Class Z, net asset value per Redeemable Unit

   $ 1,289.37       $ 1,290.15   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

 

33


Managed Futures Premier Abingdon L.P.

Statements of Income and Expenses

for the years ended December 31, 2015, 2014 and 2013

 

     2015     2014     2013  

Income:

      

Interest income allocated from Master (Note 3c)

   $ 53,655      $ 27,935      $ 61,332   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Expenses allocated from Master

     318,238        287,459        297,491   

Ongoing selling agent fees (Note 3c)

     4,237,214        5,194,483        9,145,329   

Management fees (Note 3b)

     3,375,788        2,813,308        3,174,889   

General Partner fees (Note 3a)

     2,250,527        1,181,439        1,058,297   

Incentive fees (Note 3b)

     3,535,100        6,899,734          

Professional fees

     464,422        213,420        300,437   
  

 

 

   

 

 

   

 

 

 

Total expenses

     14,181,289        16,589,843        13,976,443   
  

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (14,127,634     (16,561,908     (13,915,111
  

 

 

   

 

 

   

 

 

 

Trading results:

      

Net gains (loss) on investment in Master:

      

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

     17,755,035        50,485,166        23,810,242   

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

     (9,065,888     (1,879,501     6,588,404   
  

 

 

   

 

 

   

 

 

 

Total trading results

     8,689,147        48,605,665        30,398,646   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,438,487   $ 32,043,757      $ 16,483,535   
  

 

 

   

 

 

   

 

 

 

Net income (loss) allocation by Class:

      

Class A

   $ (4,966,426   $ 29,673,748      $ 14,932,283   
  

 

 

   

 

 

   

 

 

 

Class D

   $ (449,352   $ 1,841,302      $ 1,217,600   
  

 

 

   

 

 

   

 

 

 

Class Z

   $ (22,709   $ 528,707      $ 333,652   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per Redeemable Unit (Note 7)*

      

Class A

   $ (28.25   $ 219.67      $ 84.55   
  

 

 

   

 

 

   

 

 

 

Class D

   $ (10.37   $ 221.03      $ 102.79   
  

 

 

   

 

 

   

 

 

 

Class Z

   $ (0.78   $ 230.66      $ 109.95   
  

 

 

   

 

 

   

 

 

 

Weighted average Redeemable Units outstanding

      

Class A

     148,065.7209        143,246.6293        176,759.7197   
  

 

 

   

 

 

   

 

 

 

Class D

     13,330.4439        9,334.2889        11,909.7548   
  

 

 

   

 

 

   

 

 

 

Class Z

     2,271.2438        2,543.2260        3,152.3475   
  

 

 

   

 

 

   

 

 

 

 

* Represents the change in net asset value per Redeemable Unit.

See accompanying notes to financial statements.

 

34


Managed Futures Premier Abingdon L.P.

Statements of Changes in Partners’ Capital

for the years ended December 31, 2015, 2014 and 2013

 

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

Partners’ Capital, December 31, 2012

  $ 192,728,746        179,273.0292      $ 9,842,846        10,287.6586      $ 3,015,374        3,175.6222      $ 205,586,966        192,736.3100   

Subscriptions—Limited Partners

    43,972,521        39,818.8570        3,051,148        3,030.7590        60,623        57.0880        47,084,292        42,906.7040   

Net income (loss)

    14,932,283               1,217,600               333,652               16,483,535          

Redemptions—General Partner

                                (200,824     (200.0000     (200,824     (200.0000

Redemptions—Limited Partners

    (65,360,235     (58,457.0180                   (192,255     (185.5080     (65,552,490     (58,642.5260
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2013

    186,273,315        160,634.8682        14,111,594        13,318.4176        3,016,570        2,847.2022        203,401,479        176,800.4880   

Subscriptions—Limited Partners

    20,181,812        16,861.5740        3,098,520        2,444.7210                      23,280,332        19,306.2950   

Net income (loss)

    29,673,748               1,841,302               528,707               32,043,757          

Redemptions—General Partner

                                (701,492     (616.0930     (701,492     (616.0930

Redemptions—Limited Partners

    (51,494,981     (43,633.4960     (5,311,637     (5,033.7730     (152,169     (144.8280     (56,958,787     (48,812.0970
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2014

    184,633,894        133,862.9462        13,739,779        10,729.3656        2,691,616        2,086.2812        201,065,289        146,678.5930   

Subscriptions—General Partner

                                300,000        216.9500        300,000        216.9500   

Subscriptions—Limited Partners

    51,738,630        37,257.7740        4,720,000        3,449.7730        50,000        38.1430        56,508,630        40,745.6900   

Net income (loss)

    (4,966,426            (449,352            (22,709            (5,438,487       

Redemptions—Limited Partners

    (26,736,281     (19,628.7880                                 (26,736,281     (19,628.7880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2015

  $ 204,669,817        151,491.9322      $ 18,010,427        14,179.1386      $ 3,018,907        2,341.3742      $ 225,699,151        168,012.4450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit:

 

2013:

  Class A    $ 1,159.61   
    

 

 

 
  Class D    $ 1,059.55   
    

 

 

 
  Class Z    $ 1,059.49   
    

 

 

 

2014:

  Class A    $ 1,379.28   
    

 

 

 
  Class D    $ 1,280.58   
    

 

 

 
  Class Z    $ 1,290.15   
    

 

 

 

2015:

  Class A    $ 1,351.03   
    

 

 

 
  Class D    $ 1,270.21   
    

 

 

 
  Class Z    $ 1,289.37   
    

 

 

 

See accompanying notes to financial statements.

 

35


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

1. Partnership Organization:

Managed Futures Premier Abingdon L.P. (the “Partnership”) is a limited partnership organized on November 8, 2005, under the partnership laws of the State of New York, to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The Partnership commenced trading on February 1, 2007. The commodity interests that are indirectly traded by the Partnership through its investment in CMF Winton Master L.P. (the “Master”) are volatile and involve a high degree of market risk. The General Partner (defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership privately and continuously offers redeemable units in the Partnership (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc. All trading decisions for the Partnership are made by Winton Capital Management Limited (the “Advisor”).

During the years ended December 31, 2015 and 2014, the Partnership’s and the Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During a prior period included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

On February 1, 2007, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the state of New York, having the same investment objective as the Partnership. The Partnership purchased 9,017.0917 Redeemable Units of the Master with cash equal to $12,945,000. The Master permits accounts managed by the Advisor using the Winton Futures Program (formerly, the Winton Diversified Program, as applied without equities), the Advisor’s proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same as if the Partnership traded directly, and redemption rights are not affected. The General Partner and the Advisor agreed that the Advisor will trade the Partnership’s assets allocated to the Advisor at a level that is up to 1.5 times the amount of assets allocated.

A limited partner in the Master may withdraw all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner in the Master elects to redeem and informs the Master.

 

36


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

On April 1, 2011, the Partnership began offering “Class A” Redeemable Units, “Class D” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to April 1, 2011 were deemed Class A Redeemable Units. The rights, liabilities, risks, and fees associated with investment in the Class A Redeemable Units did not change. “Class D” Redeemable Units and “Class Z” Redeemable Units were first issued on April 1, 2011 and August 1, 2011, respectively. 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 Redeemable Units that a limited partner receives upon a subscription will generally depend upon the amount invested in the Partnership or the status of the limited partner, although the General Partner may determine to offer any Class of Redeemable Units to investors at its discretion. Class Z Redeemable Units are offered to certain employees of Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) and its affiliates (and their family members). Class A Redeemable Units, Class D Redeemable Units, and Class Z Redeemable Units are identical, except that Class D Redeemable Units are subject to a monthly ongoing selling agent fee equal to 1/12th of 0.75% (a 0.75% annual rate) of the net assets of Class D as of the end of each month, which differs from the Class A monthly ongoing selling agent fee of 1/12th of 2.00% (a 2.00% annual rate) of the net assets of Class A as of the end of each month. Class Z Redeemable Units are not subject to a monthly ongoing selling agent fee.

The financial statements of the Master, including the Condensed Schedules of Investments, are contained elsewhere in this report and should be read together with the Partnership’s financial statements.

As of December 31, 2015 and 2014, the Partnership owned approximately 38.9% and 29.9% of the Master, respectively. The Partnership intends to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master.

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each, except that no limited partner is liable for obligations of the Partnership in excess of their capital contributions and profits, if any, net of distributions or redemptions and losses, if any.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2025; when the net asset value per Redeemable Unit for any class decreases to less than $400 as of the close of business on any business day; or under certain circumstances as set forth in the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the Partnership’s aggregate net assets decline to less than $1,000,000.

In July 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 furnishes certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains 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.

2.     Basis of Presentation and Summary of Significant Accounting Policies:

 

  a. Use of Estimates.     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, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

 

  b. Statement of Cash Flows.     The Partnership is not required to provide a Statement of Cash Flows.

 

37


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

  c. Partnership’s Investment.     The Partnership carries its investment in the Master at fair value based on the Master’s net asset value per Unit, as a practical expedient, as calculated by the Master.

Master’s Investments. All commodity interests of the Master, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described in Note 5, “Fair Value Measurements” in the attached Master’s financial statements) 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 and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Master’s Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Master’s Statements of Income and Expenses.

 

  d. 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 2012 through 2015 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.

 

  e. Investment Company Status.     Effective January 1, 2014, 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.

 

  f. Net Income (Loss) per Redeemable Unit.     Net income (loss) per Redeemable Unit for each Class is calculated in accordance with investment company guidance. See Note 7, “Financial Highlights.”

 

  g. Recent Accounting Pronouncements.     In May 2015, the Financial Accounting Standards Board (“FASB”) 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.

 

38


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

In January 2016, FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments for all entities that hold financial assets or owe financial liabilities. One of the amendments in this update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet or a description of changes in the methods and significant assumptions. Additionally, the update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. Investment companies are specifically exempted from ASU 2016-01’s equity investment accounting provisions and will continue to follow the industry specific guidance for investment accounting under Topic 946. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, and interim periods therein. For other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The General Partner is currently evaluating the impact this guidance will have on the Partnership’s financial statements and related disclosures.

 

  h. Reclassification.     Certain prior year amounts have been reclassified to conform to current year presentation. Amounts reported as professional fees in the Statements of Financial Condition and Statements of Income and Expenses were previously reported separately as professional fees and other expenses. In the financial highlights, ongoing selling agent fees and clearing fees allocated from Master, which were previously included in net realized and unrealized gains (losses) per Redeemable Unit and excluded from expenses per Redeemable Unit, are now excluded from net realized and unrealized gains (losses) per Redeemable Unit and included in net investment loss per Redeemable Unit. Interest income per Redeemable Unit and expenses per Redeemable Unit previously presented separately are now combined into net investment loss per Redeemable Unit.

 

  i. 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 determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.

3.     Agreements:

 

  a. Limited Partnership Agreement:

The General Partner administers the business and affairs of the Partnership. The Partnership pays the General Partner a monthly General Partner fee (formerly, the administrative fee) in return for its services to the Partnership equal to 1/12 of 1% (1% per year) of month-end Net Assets per Class, for each outstanding Class. Prior to October 1, 2014, the Partnership paid the General Partner a monthly administrative fee equal to 1/24 of 1% (0.5% per year) of month-end Net Assets per Class, for each outstanding Class. Month-end Net Assets per Class, for the purpose of calculating the General Partner fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fee, incentive fee accrual, the General Partner fee and any redemptions or distributions as of the end of such month. This fee may be increased or decreased at the discretion of the General Partner.

 

  b. Management Agreement:

The General Partner, on behalf of the Partnership, has entered into a management agreement (the “Management Agreement”) with the Advisor, a registered commodity trading advisor. The Management Agreement provides that the Advisor has sole discretion in determining the investment of the assets of the Partnership allocated to the Advisor by the General Partner. The Partnership is obligated to pay the Advisor a monthly management fee equal to 1/12 of 1.5% (1.5% per year) of month-end Net Assets per Class, for each outstanding Class, allocated to

 

39


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

the Advisor. Month-end Net Assets per Class, for each outstanding Class, for the purpose of calculating management fees are Net Assets per Class, for each outstanding Class, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s management fee, incentive fee accrual, the General Partner fee and any redemptions or distributions as of the end of such month. The Management Agreement may be terminated upon notice by either party.

In addition, the Partnership is obligated to pay the Advisor an incentive fee, payable quarterly, equal to 20% of the new trading profits, as defined in the Management Agreement, earned by the Advisor for the Partnership during each calendar quarter. The Advisor’s incentive fee will be allocated proportionally to each Class based on the net asset value of the respective Class. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Advisor, the General Partner considers, among other factors, 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.

 

  c. Customer Agreement/Selling Agent Agreement:

Prior to and during part of the fourth quarter of 2013, the Partnership was party to a Customer Agreement with CGM (the “CGM Customer Agreement”). During the fourth quarter of 2013, the Partnership entered into a Customer Agreement with MS&Co. (the “MS&Co. Customer Agreement”) and a Selling Agent Agreement with Morgan Stanley Wealth Management (the “Selling Agreement”). The Partnership terminated the CGM Customer Agreement.

Under the CGM Customer Agreement, the Partnership paid CGM a monthly brokerage fee equal to (i) 4.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.875% per year of month-end Net Assets for Class D Redeemable Units and (iii) 1.125% per year of month-end Net Assets for Class Z Redeemable Units, in each case in lieu of brokerage fees on a per trade basis. Month-end Net Assets, for the purpose of calculating brokerage fees, were Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s brokerage fees, incentive fee accrual, the monthly management fee, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month. The Partnership paid exchange, service, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “CGM clearing fees”) through its investment in the Master. CGM clearing fees were allocated to the Partnership based on its proportionate share of the Master. During the term of the CGM Customer Agreement, all of the Partnership’s assets that were not held in the Master’s accounts at CGM were deposited in the Partnership’s account at CGM. The Partnership’s cash was deposited by CGM in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. CGM paid the Partnership interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing 30 days from the date on which such weekly rate is determined.

Under the MS&Co. Customer Agreement and the foreign exchange brokerage account agreement (described in Note 4, “Trading Activities”), the Partnership pays trading fees for the clearing and, where applicable, execution of transactions, as well as exchange, clearing, user, give-up, floor brokerage and NFA fees (collectively, the “MS&Co. clearing fees” and together with the CGM clearing fees, the “clearing fees”) through its investment in the Master. MS&Co. clearing fees are allocated to the Partnership based on its proportionate

 

40


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

share of the Master. Clearing fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. All of the Partnership’s assets not held in the Master’s accounts at MS&Co. are deposited in the Partnership’s account at MS&Co. The Partnership’s cash is deposited by MS&Co. in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. MS&Co. has agreed to pay the Partnership interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. The MS&Co. Customer Agreement may generally be terminated upon notice by either party.

Under the Selling Agreement with Morgan Stanley Wealth Management, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee. Prior to April 1, 2014, the monthly ongoing selling agent fee was paid at a rate equal to (i) 4.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.875% per year of month-end net assets for Class D Redeemable Units and (iii) 1.125% per year of month-end net assets for Class Z Redeemable Units.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced to (i) 2.5% per year of month-end Net Assets for Class A Redeemable Units, (ii) 1.25% per year of month- end Net Assets for Class D Redeemable Units and (iii) 0.5% per year of month-end Net Assets for Class Z Redeemable Units.

Effective October 1, 2014, the monthly ongoing selling agent fee was (i) reduced to 2.0% per year of month-end Net Assets for Class A Redeemable Units, (ii) reduced to 0.75% per year of month-end Net Assets for Class D Redeemable Units and (iii) eliminated for Class Z Redeemable Units.

Morgan Stanley Wealth Management pays a portion of its ongoing selling agent fees to properly registered or exempted financial advisors who have sold Redeemable Units. Month-end Net Assets, for the purpose of calculating ongoing selling agent fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fee, management fee, the incentive fee accrued, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month.

 

41


Managed Futures Premier Abingdon L.P.

Notes to Financial Statements

 

4.     Trading Activities:

The Partnership was formed for the purpose of trading commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Master’s trading activities are shown in the Statements of Income and Expenses.

During the second quarter of 2013, the Master entered into a foreign exchange brokerage account agreement with MS&Co. The Master commenced foreign exchange trading through an account at MS&Co. on or about May 1, 2013. During the third quarter of 2013, the Master also entered into a futures brokerage account agreement with MS&Co. The Master commenced futures trading through an account at MS&Co. on or about July 22, 2013.

The MS&Co. Customer Agreement with the Partnership and the Master gives, and the CGM Customer Agreement with the Partnership and the Customer Agreement between CGM and the Master each gave, the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures, exchange-cleared swaps and open forward contracts. The Partnership and the Master net, for financial reporting purposes, the unrealized gains and losses on open futures exchange-cleared swaps and open forward contracts in the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

Brokerage fees previously paid to CGM were calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and were affected by trading performance, subscriptions and redemptions. Trading and transaction fees are based on the number of trades executed by the Advisor and the Partnership’s percentage ownership of the Master.

For disclosures regarding the Master’s trading activities, see Note 4, “Trading Activities,” in the attached Master’s financial statements.

5.     Fair Value Measurements:

See Notes 2 and 5 of the Master’s financial statements for the determination of the fair value of the Master’s investments and related disclosures, including the fair value hierarchy, pursuant to ASC 820, “Fair Value Measurement.

6.     Subscriptions, Distributions and Redemptions:

Subscriptions are accepted monthly from investors who become limited partners on the first day of the month after their subscription is processed. Distributions of profits, if any, will be made at the sole discretion of the General Partner and at such times as the General Partner may decide. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value per Redeemable Unit as of the last day of any month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions.

 

42


7.     Financial Highlights:

Financial highlights for the limited partner classes as a whole for the years ended December 31, 2015, 2014 and 2013 were as follows:

 

     2015     2014     2013  
     Class A     Class D     Class Z     Class A     Class D     Class Z     Class A     Class D     Class Z  

Net realized and unrealized gains (losses)

   $ 61.63      $ 57.25      $ 57.73      $ 330.86      $ 305.97      $ 307.51      $ 159.90      $ 144.32      $ 143.76   

Net investment loss

     (89.88     (67.62     (58.51     (111.19     (84.94     (76.85     (75.35     (41.53     (33.81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the year

     (28.25     (10.37     (0.78     219.67        221.03        230.66        84.55        102.79        109.95   

Net asset value per Redeemable Unit, beginning of year

     1,379.28        1,280.58        1,290.15        1,159.61        1,059.55        1,059.49        1,075.06        956.76        949.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of year

   $ 1,351.03      $ 1,270.21      $ 1,289.37      $ 1,379.28      $ 1,280.58      $ 1,290.15      $ 1,159.61      $ 1,059.55      $ 1,059.49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2015     2014     2013  
     Class A     Class D     Class Z     Class A     Class D     Class Z     Class A     Class D     Class Z  

Ratios to Average Net Assets:

                  

Net investment loss*

     (6.6 )%      (5.0 )%      (4.4 )%      (9.1 )%      (7.2 )%      (7.2 )%      (7.0 )%      (4.2 )%      (3.1 )% 

Operating expenses

     5.0     3.7     2.9     5.4     3.7     3.3     7.0     4.2     3.1

Incentive fees

     1.6     1.4     1.5     3.8     3.6     3.9            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6.6     5.1     4.4     9.2     7.3     7.2     7.0     4.2     3.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

                  

Total return before incentive fees

     (0.5 )%      0.6     1.4     22.7     24.5     25.7     7.9     10.7     11.6

Incentive fees

     (1.6 )%      (1.4 )%      (1.5 )%      (3.8 )%      (3.6 )%      (3.9 )%             
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (2.1 )%      (0.8 )%      (0.1 )%      18.9     20.9     21.8     7.9     10.7     11.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*    Interest income allocated from Master less total expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the limited partner class for the Classes using the limited partners’ share of income, expenses and average net assets of the Partnership and includes the income and expenses allocated from the Master.

8.     Financial Instrument Risks:

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

 

43


Market risk is the potential for changes in the value of the financial instruments traded by the Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

See Note 8, “Financial Instrument Risks” of the attached Master’s financial statements for risks relating to financial instruments and derivatives that are traded by the Master.

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 and the Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s and the Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership and the Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership and the Master had credit risk and concentration risk, as MS&Co. and/or CGM or their affiliates were the sole counterparties or brokers with respect to the Partnership’s and the Master’s assets. Credit risk with respect to exchange-traded instruments was reduced to the extent that, through MS&Co. and/or CGM, the Partnership’s and the Master’s counterparty was an exchange or clearing organization. The Partnership and the Master continue to be subject to such risks with respect to MS&Co.

The General Partner monitors and attempts to control the Partnership’s and the Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership and the Master may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under New York law.

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

 

44


Selected unaudited quarterly financial data for the Partnership for the years ended December 31, 2015 and 2014 are summarized below:

 

     For the period from
October 1, 2015 to
December 31, 2015
    For the period from
July 1, 2015 to
September 30, 2015
    For the period from
April 1, 2015 to
June 30, 2015
    For the period from
January 1, 2015 to
March 31, 2015
 

Total trading results

   $ 2,279,658      $ 8,191,347      $ (22,075,298   $ 20,293,440   

Total investment income

     37,689        8,603        3,443        3,920   

Total expenses

     (2,712,371     (2,682,164     (2,633,717     (6,153,037
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (395,024   $ 5,517,786      $ (24,705,572   $ 14,144,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class A

   $ (1.77   $ 33.01      $ (151.08   $ 91.59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class D

   $ 2.32      $ 34.80      $ (136.86   $ 89.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class Z

   $ 4.76      $ 37.60      $ (135.80   $ 92.66   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the period from
October 1, 2014 to
December 31, 2014
    For the period from
July 1, 2014 to
September 30, 2014
    For the period from
April 1, 2014 to
June 30, 2014
    For the period from
January 1, 2014 to
March 31, 2014
 

Total trading results

   $ 32,133,791      $ 3,316,685      $ 13,649,700      $ (494,511

Total investment income

     5,279        4,568        5,996        12,092   

Total expenses

     (8,239,784     (2,329,161     (2,812,053     (3,208,845
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 23,899,286      $ 992,092      $ 10,843,643      $ (3,691,264
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class A

   $ 165.08      $ 6.61      $ 69.13      $ (21.15
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class D

   $ 156.79      $ 9.61      $ 67.07      $ (12.44
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit of Class Z

   $ 160.09      $ 11.76      $ 69.29      $ (10.48
  

 

 

   

 

 

   

 

 

   

 

 

 

 

45


To the Limited Partners of

CMF Winton Master L.P.

To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.

 

  LOGO
By:  

Patrick T. Egan

 

President and Director

Ceres Managed Futures LLC

  General Partner,
  CMF Winton Master L.P.
Ceres Managed Futures LLC
522 Fifth Avenue
New York, NY 10036
855-672-4468
 

 

46


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of

CMF Winton Master L.P.:

We have audited the accompanying statements of financial condition of CMF Winton Master L.P. (the “Partnership”), including the condensed schedules of investments, as of December 31, 2015 and 2014, and the related statements of income and expenses and changes in partners’ capital for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of CMF Winton Master L.P. as of December 31, 2015 and 2014, and the results of its operations and changes in its partners’ capital for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

New York, New York

March 24, 2016

 

47


CMF Winton Master L.P.

Statements of Financial Condition

December 31, 2015 and 2014

 

     December 31,
2015
     December 31,
2014
 

Assets:

     

Equity in trading account:

     

Investment in U.S. Treasury bills, at fair value (amortized cost $472,872,074 and $0 at December 31, 2015 and 2014, respectively)

   $ 472,950,344       $ —     

Cash (Note 3c)

     25,746,373         583,586,984   

Cash margin (Note 3c)

     99,262,577         87,262,518   

Net unrealized appreciation on open futures contracts

     5,389,377         32,298,121   
  

 

 

    

 

 

 

Total assets

   $ 603,348,671       $ 703,147,623   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Net unrealized depreciation on open forward contracts

   $ 269,234       $ 5,286,899   

Accrued expenses:

     

Professional fees

     38,067         38,281   

Clearing fees due to MS&Co. (Note 3c)

     —           20,631   
  

 

 

    

 

 

 

Total liabilities

     307,301         5,345,811   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 0.0000 Redeemable Units outstanding at December 31, 2015 and 2014

     —           —     

Limited Partners, 161,976.6460 and 195,446.6928 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     603,041,370         697,801,812   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 603,348,671       $ 703,147,623   
  

 

 

    

 

 

 

Net asset value per Redeemable Unit

   $ 3,723.01       $ 3,570.29   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

48


CMF Winton Master L.P.

Condensed Schedule of Investments

December 31, 2015

 

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

Futures Contracts Purchased

       

Currencies

     510       $ 30,126        0.01

Energy

     75         (7,647     (0.00 )* 

Grains

     95         (17,551     (0.00 )* 

Indices

     2,628         1,099,760        0.18   

Interest Rates U.S.

     614         (610,774     (0.10

Interest Rates Non-U.S.

     19,410         (3,062,521     (0.51

Livestock

     3         160        0.00

Softs

     311         64,286        0.01   
     

 

 

   

 

 

 

Total futures contracts purchased

        (2,504,161     (0.41
     

 

 

   

 

 

 

Futures Contracts Sold

       

Currencies

     4,548         3,922,263        0.65   

Energy

     2,317         1,273,340        0.21   

Grains

     2,492         2,035,524        0.34   

Indices

     1,710         (453,830     (0.08

Interest Rates U.S.

     122         (3,016     (0.00 )* 

Interest Rates Non-U.S.

     556         (29,705     (0.00 )* 

Livestock

     394         (660,400     (0.11

Metals

     1,441         2,011,420        0.33   

Softs

     544         (202,058     (0.03
     

 

 

   

 

 

 

Total futures contracts sold

        7,893,538        1.31   
     

 

 

   

 

 

 

Net unrealized appreciation on open futures contracts

      $ 5,389,377        0.90
     

 

 

   

 

 

 

Unrealized Appreciation on Open Forward Contracts

       

Currencies

   $ 285,098,551       $ 3,394,312        0.56

Metals

     492         1,854,557        0.31   
     

 

 

   

 

 

 

Total unrealized appreciation on open forward contracts

        5,248,869        0.87   
     

 

 

   

 

 

 

Unrealized Depreciation on Open Forward Contracts

       

Currencies

   $ 245,182,550         (4,880,125     (0.81

Metals

     353         (637,978     (0.11
     

 

 

   

 

 

 

Total unrealized depreciation on open forward contracts

        (5,518,103     (0.92
     

 

 

   

 

 

 

Net unrealized depreciation on open forward contracts

      $ (269,234     (0.05 )% 
     

 

 

   

 

 

 

U.S. Government Securities

 

Face Amount

  

Maturity Date

  

Description

   Fair Value      % of  Partners’
Capital
 

$128,000,000

   1/21/2016    U.S. Treasury bills, 0.19% (Amortized cost of $127,981,084)    $ 127,991,600         21.23

$345,000,000

   2/11/2016    U.S. Treasury bills, 0.125% (Amortized cost of $344,890,990)      344,958,744         57.20   
        

 

 

    

 

 

 

Total U.S. Government Securities

         $ 472,950,344         78.43
        

 

 

    

 

 

 

Net fair value

         $ 478,070,487         79.28
        

 

 

    

 

 

 

 

* Due to rounding.

See accompanying notes to financial statements.

 

49


CMF Winton Master L.P.

Condensed Schedule of Investments

December 31, 2014

 

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

Futures Contracts Purchased

       

Currencies

     48       $ 89,449        0.01

Energy

     345         (3,240,330     (0.46

Grains

     1,142         (547,033     (0.08

Indices

     4,399         7,141,455        1.02   

Interest Rates U.S.

     11,509         (1,203,705     (0.17

Interest Rates Non-U.S.

     15,522         10,815,045        1.55   

Livestock

     147         (414,305     (0.06

Metals

     1         (1,320     (0.00 )* 

Softs

     231         72,885        0.01   
     

 

 

   

 

 

 

Total futures contracts purchased

        12,712,141        1.82   
     

 

 

   

 

 

 

Futures Contracts Sold

       

Currencies

     5,042         7,261,530        1.04   

Energy

     913         10,503,341        1.51   

Grains

     207         (178,058     (0.03

Indices

     208         (875,800     (0.13

Interest Rates Non-U.S.

     203         (42,225     (0.01

Livestock

     235         593,170        0.09   

Metals

     730         681,990        0.10   

Softs

     802         1,642,032        0.24   
     

 

 

   

 

 

 

Total futures contracts sold

        19,585,980        2.81   
     

 

 

   

 

 

 

Net unrealized appreciation on open futures contracts

      $ 32,298,121        4.63
     

 

 

   

 

 

 

Unrealized Appreciation on Open Forward Contracts

       

Currencies

   $ 214,890,277       $ 2,852,834        0.41

Metals

     669         2,265,003        0.32   
     

 

 

   

 

 

 

Total unrealized appreciation on open forward contracts

        5,117,837        0.73   
     

 

 

   

 

 

 

Unrealized Depreciation on Open Forward Contracts

       

Currencies

   $ 293,627,256         (7,383,994     (1.06

Metals

     892         (3,020,742     (0.43
     

 

 

   

 

 

 

Total unrealized depreciation on open forward contracts

        (10,404,736     (1.49
     

 

 

   

 

 

 

Net unrealized depreciation on open forward contracts

      $ (5,286,899     (0.76 )% 
     

 

 

   

 

 

 

Net fair value

      $ 27,011,222        3.87
     

 

 

   

 

 

 

 

* Due to rounding.

See accompanying notes to financial statements.

 

50


CMF Winton Master L.P.

Statements of Income and Expenses

for the years ended

December 31, 2015, 2014 and 2013

 

     2015     2014     2013  

Investment Income:

      

Interest income

   $ 152,157      $ 111,655      $ 248,684   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Clearing fees (Note 3c)

     807,144        852,175        898,837   

P.rofessional fees

     105,457        125,301        122,213   
  

 

 

   

 

 

   

 

 

 

Total expenses

     912,601        977,476        1,021,050   
  

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (760,444     (865,821     (772,366
  

 

 

   

 

 

   

 

 

 

Trading Results:

      

Net gains (losses) on trading of commodity interests:

      

Net realized gains (losses) on closed contracts

     51,728,772        171,648,092        81,943,704   

Net change in unrealized gains (losses) on open contracts

     (21,891,079     (6,714,039     24,133,563   
  

 

 

   

 

 

   

 

 

 

Total trading results

     29,837,693        164,934,053        106,077,267   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 29,077,249      $ 164,068,232      $ 105,304,901   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per Redeemable Unit (Note 7)*

   $ 153.12      $ 814.99      $ 365.82   
  

 

 

   

 

 

   

 

 

 

Weighted average Redeemable Units outstanding

     179,016.7911        220,902.6826        292,249.3714   
  

 

 

   

 

 

   

 

 

 

 

* Represents the change in net asset value per Redeemable Unit before distribution of interest income to feeder funds.

See accompanying notes to financial statements.

 

51


CMF Winton Master L.P.

Statements of Changes in Partners’ Capital

for the years ended

December 31, 2015, 2014 and 2013

 

     Partners’
Capital
 

Partners’ Capital, December 31, 2012

   $ 759,910,513   

Net income (loss)

     105,304,901   

Subscriptions of 28,577.2321 Redeemable Units

     71,774,198   

Redemptions of 92,063.6642 Redeemable Units

     (235,791,496

Distribution of interest income to feeder funds

     (248,684
  

 

 

 

Partners’ Capital, December 31, 2013

     700,949,432   

Net income (loss)

     164,068,232   

Subscriptions of 15,448.4607 Redeemable Units

     45,189,157   

Redemptions of 74,354.9421 Redeemable Units

     (212,293,354

Distribution of interest income to feeder funds

     (111,655
  

 

 

 

Partners’ Capital, December 31, 2014

     697,801,812   

Net income (loss)

     29,077,249   

Subscriptions of 21,244.7232 Redeemable Units

     78,552,619   

Redemptions of 54,714.7700 Redeemable Units

     (202,323,573

Distribution of interest income to feeder funds

     (66,737
  

 

 

 

Partners’ Capital, December 31, 2015

   $ 603,041,370   
  

 

 

 

Net asset value per Redeemable Unit:

 

2013:

   $ 2,755.81   
  

 

 

 

2014:

   $ 3,570.29   
  

 

 

 

2015:

   $ 3,723.01   
  

 

 

 

See accompanying notes to financial statements.

 

52


CMF Winton Master L.P.

Notes to Financial Statements

1. Partnership Organization:

CMF Winton Master L.P. (the “Master”) is a limited partnership organized under the partnership laws of the State of New York to engage in the speculative trading of a diversified portfolio of commodity interests including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The commodity interests that are traded by the Master are volatile and involve a high degree of market risk. The General Partner (defined below) may also determine to invest up to all of the Master’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Master may sell an unlimited number of redeemable units of limited partnership interest (“Redeemable Units”). The Redeemable Units of the Master are used solely for accounting purposes and do not represent units issued legally.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Master. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc. All trading decisions for the Master are made by the Advisor (defined below).

On November 1, 2004 (commencement of trading operations), CMF Winton Feeder I L.P. (“Winton Feeder”) allocated substantially all of its capital, and Diversified Multi-Advisor Futures Fund L.P. (“Diversified”) and Orion Futures Fund L.P. (“Orion”) allocated a portion of their capital to the Master. Winton Feeder purchased 2,000.0000 Redeemable Units with cash equal to $2,000,000. On September 30, 2014, Winton Feeder redeemed its investment in the Master. This amounted to 372.6816 Redeemable Units with cash equal to $1,124,465. Orion purchased 35,389.8399 Redeemable Units with cash equal to $33,594,083 and a contribution of open commodity futures and forward contracts with a fair value of $1,795,757. Diversified purchased 15,054.1946 Redeemable Units with cash equal to $14,251,586 and a contribution of open commodity futures and forward contracts with a fair value of $802,609. On December 31, 2013, Diversified redeemed its investment in the Master. This amounted to 1,474.7838 Redeemable Units with cash equal to $4,064,224. On December 1, 2004, Tactical Diversified Futures Fund L.P. (“Tactical Diversified”) allocated a portion of its capital to the Master and purchased 52,981.2908 Redeemable Units with cash equal to $57,471,493. On August 31, 2011, Tactical Diversified redeemed its investment in the Master. This amounted to 12,054.4847 Redeemable Units with cash equal to $29,538,004. On July 1, 2005, Institutional Futures Portfolio L.P. (“Institutional Portfolio”) allocated a portion of its capital to the Master and purchased 5,741.8230 Redeemable Units with cash equal to $7,000,000. On February 1, 2007, Managed Futures Premier Abingdon L.P. (formerly, Abingdon Futures Fund L.P.) (“Abingdon”) allocated a portion of its capital to the Master and purchased 9,017.0917 Redeemable Units with cash equal to $12,945,000. On March 1, 2007, Global Futures Fund Ltd. (“Global Futures”) allocated a portion of its capital to the Master and purchased 1,875.7046 Redeemable Units with cash equal to $2,500,000. On April 1, 2009, Orion Futures Fund (Cayman) Ltd. (“Orion Cayman”) allocated a portion of its capital to the Master and purchased 319.5126 Redeemable Units with cash equal to $640,000. On June 30, 2013, Orion Cayman redeemed its investment in the Master. This amounted to 424.4000 Redeemable Units with cash equal to $1,067,417. On June 1, 2013, Morgan Stanley Managed Futures Custom Solutions Fund LP – Series A (“Custom Solutions”) allocated a portion of its capital to the Master and purchased 383.1755 Redeemable Units with cash equal to $1,000,000. The Master permits commodity pools managed by Winton Capital Management Limited (the “Advisor”) using the Winton Futures Program (formerly, the Winton Diversified Program, as applied without equities), the Advisor’s proprietary, systematic trading program, to invest together in one trading vehicle.

 

53


CMF Winton Master L.P.

Notes to Financial Statements

 

During the years ended December 31, 2015 and 2014, the Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During a prior period included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

The Master’s investors consist of Orion, Institutional Portfolio, Abingdon, Global Futures and Custom Solutions (each a “Feeder,” collectively, the “Funds”). Orion, Institutional Portfolio, Abingdon, Global Futures and Custom Solutions each owned approximately 58.4%, 1.1%, 38.9%, 0.9% and 0.7% of the Master at December 31, 2015, respectively. Orion, Institutional Portfolio, Abingdon, Global Futures and Custom Solutions each owned approximately 67.3%, 1.3%, 29.9%, 0.9% and 0.6% of the Master at December 31, 2014, respectively.

The Master will be liquidated upon the first to occur of the following: December 31, 2024: or under certain other circumstances as defined in the limited partnership agreement of the Master (the “Limited Partnership Agreement”).

In July 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 furnishes certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Master.

2.     Basis of Presentation and Summary of Significant Accounting Policies:

 

  a. Use of Estimates.    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, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

 

  b. Statement of Cash Flows.    The Master is not required to provide a Statement of Cash Flows.

 

  c. Master’s Investments.    All commodity interests of the Master, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described in Note 5, “Fair Value Measurements”) 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 and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses.

Master’s Cash. The Master’s cash includes cash denominated in foreign currencies of $15,762,494 and $10,918,951 as of December 31, 2015 and 2014, respectively. The cost of foreign currencies was $15,855,406 as of December 31, 2015, and based on the General Partner’s assessment, the cost of foreign currencies was not materially different from the fair value as of December 31, 2014.

 

  d. Income and Expenses Recognition.    All of the income and expenses and realized and unrealized gains and losses on trading of commodity interests are determined on each valuation day and allocated pro-rata among the Funds at the time of such determination.

 

54


CMF Winton Master L.P.

Notes to Financial Statements

 

  e. Income Taxes.    Income taxes have not been listed as each partner is individually liable for the taxes, if any, on its share of the Master’s income and expenses. The General Partner has concluded that no provision for income tax is required in the Master’s financial statements. The Master files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2012 through 2015 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.

 

  f. Investment Company Status.    Effective January 1, 2014, the Master 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 Master has been deemed to be an investment company since inception. Accordingly, the Master 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.

 

  g. Net Income (Loss) per Redeemable Unit.    Net income (loss) per Redeemable Unit is calculated in accordance with investment company guidance. See Note 7, “Financial Highlights.”

 

  h. Fair Value of Financial Instruments.    The carrying value of the Master’s assets and liabilities presented in the Statements of Financial Condition that qualify as financial instruments under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, “Financial Instruments”, approximates the fair value due to the short term nature of such balances.

 

  i. Recent Accounting Pronouncement.    In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments for all entities that hold financial assets or owe financial liabilities. One of the amendments in this update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet or a description of changes in the methods and significant assumptions. Additionally, the update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. Investment companies are specifically exempted from ASU 2016-01’s equity investment accounting provisions and will continue to follow the industry specific guidance for investment accounting under Topic 946. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, and interim periods therein. For other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The General Partner is currently evaluating the impact this guidance will have on the Master’s financial statements and related disclosures.

 

  j. Reclassification.    Certain prior period amounts have been reclassified to conform to current period presentation. In the financial highlights, clearing fees which were previously included in net realized and unrealized gains (losses) per Redeemable Unit and excluded from expenses per Redeemable Unit are now excluded from net realized and unrealized gains (losses) per Redeemable Unit and included in net investment loss per Redeemable Unit. Interest income per Redeemable Unit and expenses per Redeemable Unit previously presented separately are now combined into net investment loss per Redeemable Unit.

 

55


CMF Winton Master L.P.

Notes to Financial Statements

 

  k. 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 determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.

3.     Agreements:

 

  a. Limited Partnership Agreement:

The General Partner administers the business and affairs of the Master, including selecting one or more advisors to make trading decisions for the Master.

 

  b. Management Agreement:

The General Partner, on behalf of the Master, has entered into a management agreement (the “Management Agreement”) with the Advisor, a registered commodity trading advisor. The Advisor is not affiliated with the General Partner or MS&Co./CGM and is not responsible for the organization or operation of the Master. The Management Agreement provides that the Advisor has sole discretion in determining the investment of the assets of the Master. All management fees in connection with the Management Agreement are borne by the Funds. The Management Agreement may be terminated upon notice by either party.

 

  c. Customer Agreement:

During the second quarter of 2013, the Master entered into a foreign exchange brokerage account agreement with MS&Co. Prior to and during part of the third quarter of 2013, the Master was party to a Customer Agreement with CGM (the “CGM Customer Agreement”). During the third quarter of 2013, the Master entered into a Customer Agreement with MS&Co. (the “MS&Co. Customer Agreement”). The Master has terminated the CGM Customer Agreement.

Under the CGM Customer Agreement, CGM provided services to the Master, including, among other things, the execution and clearing of transactions for the Master’s account in accordance with orders placed by the Advisor. All exchange, service, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “CGM clearing fees”) were borne by the Master and allocated to the Funds. All other fees, including CGM’s direct brokerage fees, were borne by the Funds. During the term of the CGM Customer Agreement, all of the Master’s assets were deposited in the Master’s account at CGM. The Master’s cash was deposited by CGM in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations.

Under the MS&Co. Customer Agreement and the foreign exchange brokerage account agreement, the Master pays MS&Co. trading fees for the clearing and, where applicable, the execution of transactions. Further, all trading, exchange, clearing, user, give-up, floor brokerage and NFA fees (collectively, the “MS&Co. clearing fees” and together with the CGM clearing fees, the “clearing fees”) are borne by the Master and allocated to the Funds. All other fees are borne by the Funds. All of the Master’s assets are deposited in the Master’s account at MS&Co. The Master’s cash is deposited by MS&Co. in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. At December 31, 2015 and 2014, the amount of cash held by the Master for margin requirements was $99,262,577 and $87,262,518, respectively. The MS&Co. Customer Agreement may generally be terminated upon notice by either party.

 

56


CMF Winton Master L.P.

Notes to Financial Statements

 

4.     Trading Activities:

The Master was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity interests. The results of the Master’s trading activities are shown in the Statements of Income and Expenses.

The MS&Co. Customer Agreement with the Master gives the Master the legal right to net unrealized gains and losses on open futures and forward contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in the Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” have been met.

All of the commodity interests owned by the Master are held for trading purposes. The monthly average number of futures contracts traded during the years ended December 31, 2015 and 2014 were 47,772 and 50,169, respectively. The monthly average number of metals forward contracts traded during the years ended December 31, 2015 and 2014 were 1,040 and 1,126, respectively. The monthly average notional values of currency forward contracts held during the years ended December 31, 2015 and 2014 were $625,854,119 and $634,466,265, respectively.

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

 

           Gross Amounts     Amounts     Gross Amounts Not Offset in the         
           Offset in the     Presented in the     Statements of Financial Condition         
           Statements of     Statements of            Cash Collateral         
     Gross Amounts     Financial     Financial     Financial      Received/      Net  

December 31, 2015

   Recognized     Condition     Condition     Instruments      Pledged*      Amount  

Assets

              

Futures

   $ 17,800,660      $ (12,411,283   $ 5,389,377      $ —         $ —         $ 5,389,377   

Forwards

     5,248,869        (5,248,869     —          —           —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 23,049,529      $ (17,660,152   $ 5,389,377      $ —         $ —         $ 5,389,377   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities

              

Futures

   $ (12,411,283   $ 12,411,283      $ —        $ —         $ —         $ —     

Forwards

     (5,518,103     5,248,869        (269,234     —           —           (269,234
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

   $ (17,929,386   $ 17,660,152      $ (269,234   $ —         $ —         $ (269,234
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net fair value

               $ 5,120,143
              

 

 

 
           Gross Amounts     Amounts     Gross Amounts Not Offset in the         
           Offset in the     Presented in the     Statements of Financial Condition         
           Statements of     Statements of            Cash Collateral         
     Gross Amounts     Financial     Financial     Financial      Received/      Net  

December 31, 2014

   Recognized     Condition     Condition     Instruments      Pledged*      Amount  

Assets

              

Futures

   $ 43,561,809      $ (11,263,688   $ 32,298,121      $ —         $ —         $ 32,298,121   

Forwards

     5,117,837        (5,117,837     —          —           —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 48,679,646      $ (16,381,525   $ 32,298,121      $ —         $ —         $ 32,298,121   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Liabilities

              

Futures

   $ (11,263,688   $ 11,263,688      $ —        $ —         $ —         $ —     

Forwards

     (10,404,736     5,117,837        (5,286,899     —           —           (5,286,899
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

   $ (21,668,424   $ 16,381,525      $ (5,286,899   $ —         $ —         $ (5,286,899
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net fair value

               $ 27,011,222
              

 

 

 

 

* In the event of default by the Master, MS&Co., the Master’s commodity futures broker and the sole counterparty to the Master’s off-exchange-traded contracts, as applicable, has the right to offset the Master’s obligation with the Master’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. There is no collateral posted by MS&Co. and as such, in the event of default by MS&Co., the Master is exposed to the amount shown in the Statements of Financial Condition. In the case of exchange-traded contracts, the Master’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee fund may be available in the event of a default.

 

57


CMF Winton Master L.P.

Notes to Financial Statements

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of December 31, 2015 and 2014, respectively.

 

     December 31,  
     2015  

Assets

  

Futures Contracts

  

Currencies

   $ 4,375,005   

Energy

     3,059,034   

Grains

     2,067,358   

Indices

     2,758,533   

Interest Rates U.S.

     7,546   

Interest Rates Non-U.S.

     3,038,265   

Livestock

     31,455   

Metals

     2,228,435   

Softs

     235,029   
  

 

 

 

Total unrealized appreciation on open futures contracts

     17,800,660   
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

     (422,616

Energy

     (1,793,341

Grains

     (49,385

Indices

     (2,112,603

Interest Rates U.S.

     (621,336

Interest Rates Non-U.S.

     (6,130,491

Livestock

     (691,695

Metals

     (217,015

Softs

     (372,801
  

 

 

 

Total unrealized depreciation on open futures contracts

     (12,411,283
  

 

 

 

Net unrealized appreciation on open futures contracts

   $ 5,389,377
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 3,394,312   

Metals

     1,854,557   
  

 

 

 

Total unrealized appreciation on open forward contracts

     5,248,869   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (4,880,125

Metals

     (637,978
  

 

 

 

Total unrealized depreciation on open forward contracts

     (5,518,103
  

 

 

 

Net unrealized depreciation on open forward contracts

   $ (269,234 )** 
  

 

 

 

 

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

 

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

 

58


CMF Winton Master L.P.

Notes to Financial Statements

 

     December 31,  
     2014  

Assets

  

Futures Contracts

  

Currencies

   $ 7,910,345   

Energy

     10,516,685   

Grains

     204,223   

Indices

     9,120,453   

Interest Rates U.S.

     1,652,217   

Interest Rates Non-U.S.

     10,825,920   

Livestock

     599,795   

Metals

     922,115   

Softs

     1,810,056   
  

 

 

 

Total unrealized appreciation on open futures contracts

     43,561,809   
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

     (559,366

Energy

     (3,253,674

Grains

     (929,314

Indices

     (2,854,798

Interest Rates U.S.

     (2,855,922

Interest Rates Non-U.S.

     (53,100

Livestock

     (420,930

Metals

     (241,445

Softs

     (95,139
  

 

 

 

Total unrealized depreciation on open futures contracts

     (11,263,688
  

 

 

 

Net unrealized appreciation on open futures contracts

   $ 32,298,121
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 2,852,834   

Metals

     2,265,003   
  

 

 

 

Total unrealized appreciation on open forward contracts

     5,117,837   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (7,383,994

Metals

     (3,020,742
  

 

 

 

Total unrealized depreciation on open forward contracts

     (10,404,736
  

 

 

 

Net unrealized depreciation on open forward contracts

   $ (5,286,899 )** 
  

 

 

 

 

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

 

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

 

59


CMF Winton Master L.P.

Notes to Financial Statements

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the years ended December 31, 2015, 2014 and 2013.

 

      2015     2014     2013  

Sector

      

Currencies

   $ (7,215,757   $ 22,002,118      $ 22,641,168   

Energy

     31,038,579        48,086,222        (19,506,921

Grains

     (3,427,761     (16,897,203     12,720,641   

Indices

     (22,507,686     (4,416,908     118,746,353   

Interest Rates U.S.

     3,171,758        21,903,430        (27,294,562

Interest Rates Non-U.S.

     15,738,906        90,216,048        (29,539,424

Livestock

     2,295,247        8,264,282        1,728,125   

Metals

     6,882,258        (2,002,323     22,484,013   

Softs

     3,862,149        (2,221,613     4,097,874   
  

 

 

   

 

 

   

 

 

 

Total

   $ 29,837,693 ***    $ 164,934,053 ***    $ 106,077,267 *** 
  

 

 

   

 

 

   

 

 

 

 

*** This amount is in “Total trading results” in the Statements of Income and Expenses.

5.     Fair Value Measurements:

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

The fair value of exchange-traded futures, option 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 input 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 valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

The Master considers prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker quotes or pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the years ended December 31, 2015 and 2014, the Master did not hold any derivative instruments 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. For the years ended December 31, 2015 and 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

60


CMF Winton Master L.P.

Notes to Financial Statements

 

December 31, 2015

   Total      Level 1      Level 2      Level 3  

Assets

           

U.S. Treasury bills

   $ 472,950,344       $ —         $ 472,950,344       $ —     

Futures

     17,800,660         17,800,660         —           —     

Forwards

     5,248,869         1,854,557         3,394,312       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 495,999,873       $ 19,655,217       $ 476,344,656       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

   $ 12,411,283       $ 12,411,283       $ —         $ —     

Forwards

     5,518,103         637,978         4,880,125         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 17,929,386       $ 13,049,261       $ 4,880,125       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 478,070,487       $ 6,605,956       $ 471,464,531       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   Total      Level 1      Level 2      Level 3  

Assets

           

Futures

   $ 43,561,809       $ 43,561,809       $ —         $ —     

Forwards

     5,117,837         2,265,003         2,852,834         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 48,679,646       $ 45,826,812       $ 2,852,834       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

   $ 11,263,688       $ 11,263,688       $ —         $ —     

Forwards

     10,404,736         3,020,742         7,383,994         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 21,668,424       $ 14,284,430       $ 7,383,994       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $ 27,011,222       $ 31,542,382       $ (4,531,160    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

6.     Subscriptions, Distributions and Redemptions:

Subscriptions are accepted monthly from investors and they become limited partners on the first day of the month after their subscriptions are processed. A limited partner may withdraw all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request for redemption has been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner elects to redeem and informs the Master.

 

61


CMF Winton Master L.P.

Notes to Financial Statements

 

7.     Financial Highlights:

Financial highlights for the limited partner class as a whole for the years ended December 31, 2015, 2014 and 2013 were as follows:

 

     2015     2014     2013  

Net realized and unrealized gains (losses)

   $ 157.43      $ 819.10      $ 368.55   

Net investment loss

     (4.31     (4.11     (2.73
  

 

 

   

 

 

   

 

 

 

Increase (decrease) for the year

     153.12        814.99        365.82   

Distribution of interest income to feeder funds

     (0.40     (0.51     (0.87

Net asset value per Redeemable Unit, beginning of year

     3,570.29        2,755.81        2,390.86   
  

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of year

   $ 3,723.01      $ 3,570.29      $ 2,755.81   
  

 

 

   

 

 

   

 

 

 

Ratios to average net assets:

      

Net investment loss*

     (0.1 )%      (0.1 )%      (0.1 )% 
  

 

 

   

 

 

   

 

 

 

Operating expenses

     0.1     0.2     0.1
  

 

 

   

 

 

   

 

 

 

Total return

     4.3     29.6     15.3
  

 

 

   

 

 

   

 

 

 

 

* Interest income less total expenses.

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

 

62


CMF Winton Master L.P.

Notes to Financial Statements

 

8. Financial Instrument Risks:

In the normal course of business, the Master is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot be accurately predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. 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 3.9% to 31.8% of the Master’s contracts are traded OTC.

Futures Contracts. The Master trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and its 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 net change in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses.

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Forward foreign currency contracts are valued daily, and the Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and net change in 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.

 

63


London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and its value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and net change in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses.

The Master does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Statements of Income and Expenses.

Market risk is the potential for changes in the value of the financial instruments traded by the Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Master is exposed to 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 Master’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Master had credit risk and concentration risk during the reporting period and prior periods, as MS&Co. and/or CGM or their affiliates were the sole counterparties or brokers with respect to the Master’s assets. Credit risk with respect to exchange- traded instruments is reduced to the extent that, through MS&Co. and/or CGM, the Master’s counterparty is an exchange or clearing organization. The Master continues to be subject to such risks with respect to MS&Co.

The General Partner monitors and attempts to control the Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Master may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

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

 

64


Selected unaudited quarterly financial data for the Master for the years ended December 31, 2015 and 2014 are summarized below:

 

     For the period from
October 1, 2015 to
December 31, 2015
    For the period from
July 1, 2015 to
September 30, 2015
    For the period from
April 1, 2015 to
June 30, 2015
    For the period from
January 1, 2015 to
March 31, 2015
 

Total trading results

   $ 5,996,908      $ 24,499,530      $ (63,902,539   $ 63,243,794   

Total interest income

     101,593        24,539        11,695        14,330   

Total expenses

     (198,718     (236,379     (246,477     (231,027
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 5,899,783      $ 24,287,690      $ (64,137,321   $ 63,027,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per unit

   $ 39.29      $ 132.89      $ (360.86   $ 341.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     For the period from
October 1, 2014 to
December 31, 2014
    For the period from
July 1, 2014 to
September 30, 2014
    For the period from
April 1, 2014 to
June 30, 2014
    For the period from
January 1, 2014 to
March 31, 2014
 

Total trading results

   $ 107,995,824      $ 11,255,160      $ 47,088,566      $ (1,405,497

Total interest income

     20,823        18,438        24,401        47,993   

Total expenses

     (263,308     (238,396     (227,391     (248,381
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 107,753,339      $ 11,035,202      $ 46,885,576      $ (1,605,885
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per unit

   $ 553.17      $ 54.95      $ 211.58      $ (4.71
  

 

 

   

 

 

   

 

 

   

 

 

 

 

65


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. 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 and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 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.

The report included in “Item 8. Financial Statements and Supplementary Data.” includes the General Partner’s report on internal control over financial reporting (“Management’s Report”).

There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended December 31, 2015 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

Item 9B. Other Information.

Effective February 1, 2016, Steven Ross was appointed as a director of the General Partner and Frank Smith resigned as a director of the General Partner.

Effective February 24, 2016, Edmond Moriarty and Kevin Klingert resigned as directors of the General Partner.

 

66


PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The Partnership has no directors or executive officers and its affairs are managed by its General Partner. Investment decisions are made by the Advisor.

The directors and executive officers of the General Partner are Patrick T. Egan (President and Chairman of the Board of Directors of the General Partner), Steven Ross (Chief Financial Officer and Director), M. Paul Martin (Director) and Feta Zabeli (Director). Each director holds office until the earlier of his or her death, resignation or removal. Vacancies on the board of directors may be filled by either (i) the majority vote of the remaining directors or (ii) MSSB Holdings, as the sole member of the General Partner. The officers of the General Partner are designated by the General Partner’s board of directors. Each officer will hold office until his or her successor is designated and qualified