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EX-32.2 - EX-32.2 - CERES TACTICAL SYSTEMATIC L.P.d101846dex322.htm
EX-99.6 - EX-99.6 - CERES TACTICAL SYSTEMATIC L.P.d101846dex996.htm
EX-99.4 - EX-99.4 - CERES TACTICAL SYSTEMATIC L.P.d101846dex994.htm
EX-31.1 - EX-31.1 - CERES TACTICAL SYSTEMATIC L.P.d101846dex311.htm
EX-99.2 - EX-99.2 - CERES TACTICAL SYSTEMATIC L.P.d101846dex992.htm
EX-99.7 - EX-99.7 - CERES TACTICAL SYSTEMATIC L.P.d101846dex997.htm
EX-99.5 - EX-99.5 - CERES TACTICAL SYSTEMATIC L.P.d101846dex995.htm
EX-99.1 - EX-99.1 - CERES TACTICAL SYSTEMATIC L.P.d101846dex991.htm
EX-32.1 - EX-32.1 - CERES TACTICAL SYSTEMATIC L.P.d101846dex321.htm
EX-31.2 - EX-31.2 - CERES TACTICAL SYSTEMATIC L.P.d101846dex312.htm
EX-99.3 - EX-99.3 - CERES TACTICAL SYSTEMATIC L.P.d101846dex993.htm
EX-10.3(A) - EX-10.3(A) - CERES TACTICAL SYSTEMATIC L.P.d101846dex103a.htm
EX-10.8(A) - EX-10.8(A) - CERES TACTICAL SYSTEMATIC L.P.d101846dex108a.htm
EX-10.4(B) - EX-10.4(B) - CERES TACTICAL SYSTEMATIC L.P.d101846dex104b.htm
EX-10.9(A) - EX-10.9(A) - CERES TACTICAL SYSTEMATIC L.P.d101846dex109a.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 000-50718

TACTICAL DIVERSIFIED FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York   13-4224248

(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

 

                   Redeemable Units of Limited Partnership Interest             

        Securities registered pursuant to Section 12(g) of the  Act:

                                              (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 an aggregate value of $210,973,714 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, 202,690.7668 Limited Partnership Redeemable Units were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

[None]

 

 

 


PART I

Item 1. Business.

(a) General Development of Business. Tactical Diversified Futures Fund L.P. (the “Partnership”) is a limited partnership organized under the partnership laws of the State of New York on December 3, 2002 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, metals and softs. The commodity interests that are traded by the Partnership directly and through its investments in the Funds (as defined below) are volatile and involve a high degree of market risk. The General Partner (as 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.

A Registration Statement on Form S-1 relating to the public offering of 300,000 redeemable units of limited partnership interest (“Redeemable Units”) became effective March 27, 2003. Between March 27, 2003 (commencement of the offering period) and April 30, 2003, 36,616 Redeemable Units were publicly offered at $1,000 per Redeemable Unit. The proceeds of the initial public offering were held in an escrow account until April 30, 2003, at which time they were turned over to the Partnership for trading.

A second Registration Statement on Form S-1 relating to the public offering of 1,000,000 Redeemable Units (including the 300,000 Redeemable Units that had been previously registered) became effective on December 4, 2003. As of that date, 260,732.3028 Redeemable Units had been sold.

A third Registration Statement on Form S-1 relating to the public offering of 2,000,000 Redeemable Units (including the 1,000,000 Redeemable Units that had been previously registered) became effective on October 7, 2004. As of that date, 807,449.3782 Redeemable Units had been sold.

A fourth Registration Statement on Form S-1 relating to the public offering of 2,000,000 Redeemable Units previously registered became effective on June 30, 2005. As of that date, 1,027,701.7549 Redeemable Units had been sold. The public offering of Redeemable Units terminated on November 30, 2008. The Partnership currently privately and continuously offers 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 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 were made for the Partnership by Graham Capital Management, L.P., (“Graham”), Willowbridge Associates Inc. (“Willowbridge”), Aspect Capital Limited (“Aspect”), Altis Partners (Jersey) Limited (“Altis”), JE Moody & Company LLC (“JE Moody”), Boronia Capital Pty. Ltd. (“Boronia”), and The Cambridge Strategy (Asset Management) Limited (“Cambridge”) (each an “Advisor” and collectively, the “Advisors”), each of which is a registered commodity trading advisor. Krom River Trading AG and Krom River Investment Management (Cayman) Limited (collectively, “Krom River”) was terminated as an advisor to the Partnership as of December 31, 2014. Drury Capital, Inc (“Drury”) and Kaiser Trading Company Pty. Ltd. (“Kaiser”) were terminated as advisors to the Partnership as of June 30, 2014. References herein to “Advisors,” may include, as relevant, Krom River, Drury and Kaiser. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors indirectly through investments in the Funds. The Advisors are not affiliated with one another, the General Partner or MS&Co./CGM and are not responsible for the organization or operation of the Partnership. A description of the trading activities and focus of the Advisors is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

The Partnership will be liquidated upon the first to occur of the following: (1) December 31, 2022; (2) the net asset value per Redeemable Unit decreases to less than $400 per Redeemable Unit as of the close of any business day; or (3) the occurrence of certain other circumstances as set forth in the limited partnership agreement of the Partnership (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 Partnership. The cost of retaining the Administrator will be allocated among the pools operated by the General Partner, including the Partnership.

 

1


Under the Limited Partnership Agreement, the General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. The General Partner has agreed to make capital contributions, if necessary, so that its general partnership interest will be equal to the greater of (1) an amount that will entitle the General Partner to an interest of at least 1% in each material item of Partnership income, gain, loss, deduction or credit and (2) the greater of (i) 1% of the partners’ contributions to the Partnership or (ii) $25,000. Effective October 1, 2014, the Partnership pays the General Partner a monthly administrative fee (“General Partner fee”) (formerly, the administrative fee) in return for its services equal to 1/12th of 1% (1% per year) of month-end Net Assets of the Partnership. Month-end Net Assets, for the purpose of calculating General Partner fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fees, management fees, incentive fee accruals, the General Partner fee and any redemptions or distributions as of the end of such month.

On March 1, 2005, the assets allocated to Aspect for trading were invested in CMF Aspect Master Fund L.P. (“Aspect Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 131,340.8450 units of Aspect Master with cash equal to $122,786,448 and a contribution of open commodity futures and forward contracts with a fair value of $8,554,397. Aspect Master permits accounts managed by Aspect using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Aspect Master. Individual and pooled accounts currently managed by Aspect, including the Partnership, are permitted to be limited partners of Aspect Master. The General Partner and Aspect believe that trading through this structure should promote efficiency and economy in the trading process.

On July 1, 2005, the assets allocated to Willowbridge for trading were invested in CMF Willowbridge Master Fund L.P. (“Willowbridge Master” and formerly CMF Willowbridge Argo Master Fund L.P.), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 95,795.8082 units of Willowbridge Master with cash equal to $85,442,868 and a contribution of open commodity futures and forward contracts with a fair value of $10,352,940. Willowbridge Master permits accounts managed by Willowbridge using its wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Willowbridge have agreed that Willowbridge will trade the assets allocated to Willowbridge at a level up to 3 times the amount of assets allocated. Prior to January 1, 2013, Willowbridge traded the Partnership’s assets pursuant to its Argo Trading System.

On August 1, 2005, the assets allocated to Drury for trading were invested in CMF Drury Capital Master Fund L.P. (“Drury Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 120,720.7387 units of Drury Master with cash equal to $117,943,206 and a contribution of open commodity futures and forward contracts with a fair value of $2,777,533. Drury Master permitted accounts managed by Drury using the Diversified Trend-Following Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Drury Master on June 30, 2014 for cash equal to $11,948,244.

On June 1, 2006, the assets allocated to Graham for trading were invested in CMF Graham Capital Master Fund L.P. (“Graham Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 101,486.0491 units of Graham Master with cash equal to $103,008,482. Graham Master permits accounts managed by Graham using the K4D-15V Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Graham Master. Individual and pooled accounts currently managed by Graham, including the Partnership, are permitted to be limited partners of Graham Master. The General Partner and Graham believe that trading through this structure should promote efficiency and economy in the trading process.

On May 1, 2011, the assets allocated to Krom River for trading were invested in KR Master Fund L.P. (“KR Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in KR Master with cash equal to $65,000,000. KR Master permitted commodity pools managed by Krom River using the Krom River Commodity Program, a proprietary, discretionary system which was traded on both a fundamental and technical basis, to invest together in one trading vehicle. The Partnership fully redeemed its investment in the KR Master on December 31, 2014 for cash equal to $8,902,959.

On May 1, 2011, the assets allocated to Altis for trading were invested in CMF Altis Partners Master Fund L.P. (“Altis Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 21,851.9469 units of Altis Master with cash equal to $70,000,000. Altis Master permits commodity pools managed now and in the future by Altis using the Global Futures Portfolio Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Altis Master. Individual and pooled accounts currently managed by Altis, including the Partnership, are permitted to be limited partners of Altis Master. The General Partner and Altis believe that trading through this structure should promote efficiency and economy in the trading process.

On January 1, 2013, the assets allocated to Boronia for trading were invested in Morgan Stanley Smith Barney Boronia I, LLC (“Boronia I, LLC” or “Boronia Trading Company”), a limited liability company organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Boronia I, LLC with cash equal to $36,000,000. Boronia I, LLC permits accounts managed by Boronia using the Boronia Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the manager of Boronia I, LLC. Individual and pooled accounts currently managed by Boronia, including the Partnership, are permitted to be members of Boronia I, LLC. The General Partner and Boronia believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Boronia agreed that Boronia will trade the Partnership’s assets allocated to Boronia at a level up to 1.5 times the amount of assets allocated.

 

2


On January 1, 2013, the assets allocated to Kaiser for trading were invested in Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC” or “Kaiser Trading Company” and together with Boronia Trading Company, the “Trading Companies”), a limited liability company organized under the laws of the State of Delaware. The Partnership purchased an interest in Kaiser Trading Company with cash equal to $30,000,000. Kaiser Trading Company permitted accounts managed by Kaiser using the Global Diversified trading program, a proprietary, systematic trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Kaiser Trading Company on June 30, 2014 for cash equal to $29,367,227.

On August 1, 2013, the assets allocated to JE Moody for trading were invested in JEM Master Fund L.P. (“JEM Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 11,968.0895 units of JEM Master with cash equal to $15,820,000. JEM Master permits accounts managed by JE Moody using the JEM Commodity Relative Value Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of JEM Master. Individual and pooled accounts currently managed by JE Moody, including the Partnership, are permitted to be limited partners of JEM Master. The General Partner and JE Moody believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and JE Moody agreed that JE Moody will trade the Partnership’s assets allocated to JE Moody at a level that is up to 3 times the amount of assets allocated.

On December 1, 2015, the assets allocated to Cambridge for trading were invested in Cambridge Master Fund L.P. (“Cambridge Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Cambridge Master with cash equal to $17,000,000. Cambridge Master permits accounts managed by Cambridge using the Asian Markets Alpha Programme and the Emerging markets Alpha Programme, each a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Cambridge Master. Individual and pooled accounts currently managed by Cambridge, including the Partnership, are permitted to be limited partners of Cambridge Master. The General Partner and Cambridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Cambridge agreed that Cambridge will trade the Partnership’s assets allocated to Cambridge at a level that is up to 1.5 times the amount of assets allocated. The amount of leverage may be increased or decreased in the future. However, in no event will the amount of leverage be greater than 2 times the amount of assets allocated.

The General Partner is not aware of any material changes to the trading programs discussed above during the year ended December 31, 2015.

Aspect Master’s, Willowbridge Master’s, Graham Master’s, Altis Master’s, JEM Master’s, Boronia I, LLC’s, and Cambridge Master’s (collectively, the “Funds”) trading of futures, forward 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 Funds engaged in such trading through commodity brokerage accounts maintained with MS&Co. During a prior period included in this report, certain of the Funds and the Partnership engaged in such trading through commodity brokerage accounts maintained with CGM. References herein to “Funds” may also include as relevant, references to Drury Master, KR Master and Kaiser I, LLC.

Generally, a limited partner/member in the Funds withdraws all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, a limited partner may request a withdrawal as of the end of any day if such request is received by the General Partner at least three days in advance of the proposed withdrawal day.

Management fees, General Partner and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Boronia which are charged at the Boronia Trading Company level and Kaiser (prior to its termination on June 30, 2014) which were charged at the Kaiser Trading Company level. All clearing fees are borne by the Funds and allocated to the Funds’ limited partners, including the Partnership. Professional fees and other expenses are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level. All other fees are charged at the Partnership level.

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

 

LOGO

At December 31, 2015, the Partnership owned approximately 13.7% of Willowbridge Master, 55.3% of Aspect Master, 72.7% of Graham Master, 59.7% of Altis Master, 61.0% of JEM Master, 48.8% of Boronia I, LLC and 28.3% of Cambridge Master. At December 31, 2014, the Partnership owned approximately 19.7% of Willowbridge Master, 57.4% of Aspect Master, 73.5% of Graham Master, 73.4% of KR Master (prior to its redemption on December 31, 2014), 67.4% of Altis Master, 70.6% of JEM Master and 50.5% of Boronia I, LLC. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to the investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.

 

3


Pursuant to the terms of the management agreement with each Advisor (each a “Management Agreement”), the Partnership is obligated to pay each Advisor (except Boronia and Kaiser) a monthly management fee. The Partnership paid Drury and will pay Graham a monthly management fee equal to 1/12th of 1.75% (1.75% per year) of month-end Net Assets allocated to the respective Advisor. Prior to April 1, 2014, the Partnership paid Graham a monthly management fee of 1/6 of 1% (2% per year) of month-end Net Assets allocated to the Graham. The Partnership will pay JE Moody a monthly management fee equal to 1/12 of 1.5% (5% per year) of month-end Net Assets allocated to the JE Moody. The Partnership will pay Aspect and Willowbridge a monthly management fee equal to 1/12th of 1.5% (1.5% per year) of month-end Net Assets allocated to the Advisors. The Partnership will pay Altis a monthly management fee equal to 1/12th of 1.25% (1.25% per year) of month-end Net Assets allocated to Altis. Prior to August 1, 2015, the Partnership paid Altis a monthly management fee equal to 1/12th of 1.5% (1.5% per year) of month-end Net Assets allocated to Altis. From October 2013 to December 31, 2014 the Partnership paid Krom River a monthly management fee equal to 1/12th of 1% (1% per year), of month-end Net Assets allocated to the Krom River. Prior to October 1, 2013, Krom River received a monthly management fee equal to 2% per year. Boronia Trading Company will pay Boronia a monthly management fee of 1.5% per year of the aggregate net assets of the first day of each month. Prior to January 1, 2015, Boronia Trading Company paid Boronia a monthly management fee of 1/12 of 1.875% (1.875% annual rate) of Boronia Trading Company’s net assets of the Boronia Trading Company as of the first day of each month. During prior periods included in this report, Kaiser Trading Company paid Kaiser a monthly management fee of 2% per year of the aggregate net assets of Kaiser Trading Company as of the first day of each month. The Partnership will pay Boronia and Kaiser indirectly, the Partnership’s pro rata portion of the management fee of the Boronia Trading Company and Kaiser Trading Company, respectively. Month-end Net Assets, for the purpose of calculating General Partner fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fees and any redemptions or distributions as of the end of such month. Each Management Agreement may be terminated upon notice by either party.

In addition, the Partnership is obligated to pay Altis, Aspect, Graham, JE Moody and Willowbridge an incentive fee, payable quarterly, equal to 20% and Cambridge an incentive fee, payable quarterly, equal to 15% of the New Trading Profits, as defined in each Management Agreement, earned by each Advisor for the Partnership during each calendar quarter. Boronia will receive an incentive fee equal to 20% of the New Trading Profits earned by Boronia I, LLC. To the extent an Advisor incurs a loss for the Partnership, 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. The incentive fee paid by Boronia I, LLC is allocated to the Partnership based on its proportionate ownership interest of Boronia I, LLC.

The Management Agreements generally continue in effect until June 30 of each year and are renewable by the General Partner for additional one-year periods upon 30 days’ prior notice to an Advisor. Each Management Agreement may be terminated upon notice by either party.

Prior to and during part of the third quarter of 2013, the Partnership was party to a Customer Agreement with CGM (the “CGM Customer Agreement”). During the third quarter of 2013, the Partnership entered into a Customer Agreement with MS&Co. (the “MS&Co. Customer Agreement”) and during the fourth quarter of 2013, the Partnership entered into a Selling Agent Agreement with Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) (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 1/12th of 5.5% (5.5% per year) of month-end Net Assets, 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 accruals, the monthly management fees and other expenses and any redemptions or distributions as of the end of such month. The Partnership paid for exchange, service, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively the “CGM clearing fees”) directly and through its investment in the Funds cleared through CGM. CGM clearing fees were allocated to the Partnership based on its proportionate share of each Fund. During the term of the CGM Customer Agreement, all of the Partnership’s assets that were not held in the Funds’ accounts at CGM (or with respect to the Trading Companies, at MS&Co.) 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 a Fund’s except for the Trading Companies’) 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, the Partnership will pay 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 Funds. MS&Co. clearing fees are allocated to the Partnership based on its proportionate share of each Fund. 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 Funds’ 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 interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s, except for the Trading Companies) brokerage account at the rate equal to the monthly average of the 4-Week U.S. Treasury bill discount rate. MS&Co. has agreed to pay the Trading Companies on 100% of the average daily equity maintained in cash in each Trading Company’s respective brokerage account at the rate equal to the monthly average of the 4-Week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of these interest credits, daily funds do not include monies due to the Trading Companies on or with respect to futures, forward, or option contracts that have not been received. 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 ongoing selling agent fee was paid at a rate equal to 5.5% per year of month-end Net Assets. Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 5.5% to an annual rate of 3%. On October 1, 2014, the monthly ongoing selling agent fee was further reduced from an annual rate of 3% to an annual rate of 2%. Morgan Stanley Wealth Management will pay a portion of its ongoing selling agent fees to properly registered or exempted selling agents and to 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 fees, incentive fee accruals, the monthly management fees, General Partner fees and other expenses and any redemptions or distributions as of the end of such month.

 

4


Aspect Master, Willowbridge Master, Graham Master and Cambridge Master have entered, and Drury Master had entered into a foreign exchange brokerage agreement with MS&Co. Under the foreign exchange brokerage agreement, the Partnership pays trading fees for the clearing and where applicable, execution of foreign exchange transactions, as well as applicable exchange, clearing, user, give-up, floor brokerage and NFA fees (collectively, the “foreign exchange clearing fees”) through its investment in Aspect Master, Drury Master, Willowbridge Master, Graham Master and Cambridge Master.

Clearing fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed.

  (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 $206,869,254.

(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 the sale 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.

The Partnership will pay substantial fees and expenses regardless of profitability.

Regardless of its trading performance, the Partnership will incur fees and expenses, including clearing, General Partner, ongoing selling agent and management fees. Substantial incentive fees may be paid to one or more of the Advisors even if the Partnership experiences a net loss for the full year.

An investor’s ability to redeem or transfer 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/Funds’ commodity brokers are affiliates;

 

  2.

Each of the Advisors, the Partnership’s/Funds’ commodity brokers and their respective principals and affiliates may trade in commodity interests for their own accounts; and

 

  3.

An investor’s financial advisor will receive ongoing compensation for providing services to the investor’s account.

 

  4.

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

 

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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 Advisors’ trading strategies may not perform as they have performed in the past. The Advisors have 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.

The General Partner may allocate the Partnership’s assets to undisclosed advisors.

The General Partner at any time may select and allocate the Partnership’s assets to undisclosed advisors. Investors may not be advised of such changes in advance. Investors must rely on the ability of the General Partner to select commodity trading advisors and allocate assets among them.

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

Regulatory costs or 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 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, to mandate additional reporting and disclosure requirements 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 rules regarding capital requirements for swap dealers adopted rules regarding margin requirements for certain derivatives. In addition, the CFTC and such prudential regulators have proposed or adopted, respectively. 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. commodity 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, 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 Advisors believe that established speculative position and trading limits will not materially adversely affect trading for the Partnership. The trading instructions of an advisor may have to be modified, and positions held by the Partnership 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 an Advisor’s trading for the Fund.

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 “Securities 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.

 

6


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.

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 (the “Securities Act”), agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

 

7


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.

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.

 

8


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.

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.

 

9


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.

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.

 

10


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.

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.

Item 4. Mine Safety Disclosures. Not Applicable.

 

11


PART II

Item 5.   Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchase 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 6,354.

 

  (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. The public offering of Redeemable Units terminated on November 30, 2008. For the twelve months ended December 31, 2015, there were additional subscriptions of 1,201.8070 Redeemable Units totaling $1,259,286. For the twelve months ended December 31, 2014, there were additional subscriptions of 2,795.8450 Redeemable Units totaling $2,457,437. For the twelve months ended December 31, 2013, there were additional subscriptions of 10,974.3070 Redeemable Units totaling $10,139,653.

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

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

(a) Total Number of  
Redeemable Units  

Purchased*  

   (b) Average Price Paid
    per Redeemable Unit**    
   (c) Total Number of  
Redeemable Units  
Purchased as Part of  
Publicly Announced  Plans  
or Programs  
   (f) 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

   3,475.3860      $                             973.20      N/A      N/A

November 1, 2015 - November 30, 2015

   3,828.0730      $                         1,012.59      N/A      N/A

December 1, 2015 - December 31, 2015

   3,096.0820      $                             981.45      N/A      N/A
     10,399.5410      $                             990.16            

 

  *

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 affected 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.

 

12


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

     $ 9,695,899           $ 44,862,557           $ 25,507,734           $ (34,447,602)          $ (2,215,398)    

Total investment income

      30,065            36,299            112,023            286,872            203,814     

Total expenses

      (16,165,341)           (23,149,097)           (37,929,758)           (46,932,366)           (59,021,775)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     $ (6,439,377)          $ 21,749,759           $ (12,310,001)          $ (81,093,096)          $ (61,033,359)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Increase (decrease) in net asset value per Redeemable Unit

     $ (28.64)          $ 109.81           $ (27.13)          $ (141.39)          $ (96.48)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net asset value per Redeemable Unit

     $ 981.45           $ 1,010.09           $ 900.28           $ 927.41           $ 1,068.80     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 210,973,446           $ 260,301,062           $ 381,939,591           $ 505,985,168           $ 679,248,128     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Overview

The Partnership, directly and through its investment in the Funds, aims to achieve substantial capital appreciation and permit investors to diversify a traditionally structured stock and bond portfolio. The Partnership attempts to accomplish its objectives through speculative trading in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals directly, or through investments in the Funds. The Funds may employ futures, swaps, options on futures, and forward contracts in those markets.

The General Partner manages all business of the Partnership/Funds. The General Partner has delegated its responsibility for the investment of the Partnership’s assets to the Advisors. 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 use state-of-the-art technology and on-site evaluations to monitor new and existing futures money managers. The accounting and operations staff provides processing of subscriptions and redemptions and reporting to limited partners and regulatory authorities. The General Partner also includes staff involved in marketing and sales support. In selecting the Advisors for the Partnership, the General Partner considered past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisors at any time and may allocate assets to additional advisors at any time.

Responsibilities of the General Partner include:

 

   

due diligence examinations of the Advisors;

 

   

selection, appointment and termination of the Advisors;

 

   

negotiation of the management agreements; and

 

   

monitoring the activity of the Advisors.

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/Funds.

While the Partnership and the Funds have the right to seek lower commission rates 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.

 

13


The programs traded by each Advisor on behalf of the Partnership as of December 31, 2015 were: Graham — K4D-15V Program (“K4D”), Aspect — Diversified Program, Willowbridge — w/Praxis Futures Trading Approach (“Praxis”), Altis — Global Futures Portfolio Program, JE Moody — JEM Commodity Relative Value Program, Boronia — Boronia Diversified Program and Cambridge — Asian Markets Alpha Programme and Emerging Markets Alpha Programme. As of December 31, 2015 and September 30, 2015, the Partnership’s assets were allocated among the Advisors in the following approximate percentages:

 

Advisor

  

            December 31, 2015             

  

            September 30, 2015             

Graham Capital Management, L.P.

   19%   $        38,259,250    18%   $        38,772,888

Aspect Capital Limited

   18%   $        37,781,441    16%   $        33,794,949

Willowbridge Associates Inc.

   23%   $        47,673,480    29%   $        64,027,190

Altis Partners (Jersey) Limited

   11%   $        23,375,828    11%   $        24,817,350

J E Moody & Company LLC.

   3%   $          6,759,469    3%   $          5,919,876

Boronia Capital Pty. Ltd.

   18%   $        36,166,787    23%   $        48,902,785

Cambridge Master Fund L.P.

   8%   $        16,852,999    0%   $                     -    

No assurance is given that an Advisor’s trading program will be profitable or that it will not experience losses.

Drury Capital, Inc.

Drury traded its Diversified Trend-Following Program on behalf of Drury Master. The Diversified Trend-Following program was systematic and technical. Drury may have exercised judgment regarding liquidity issues. Systematic traders relied primarily on trading programs or models that generated trading signals. The systems utilized to generate trading signals were changed from time to time (although generally infrequently), but the trading instructions generated by the system being used were followed without significant additional analysis or interpretation.

The Diversified Trend-Following Program was built on elements of trend-following and diversification. The program emphasized diversification by trading metals, agricultural products, foreign exchange, stock indices, energy products, financial instruments and tropical products (softs).

The Diversified Trend-Following Program traded 40 portfolio instruments and was generally positioned in 25 of these instruments on average. Positions could have been short as well as long. The Diversified Trend-Following Program had no market or sector bias, as Drury believed that each instrument could have produced long-term profits through the application of independent technical analysis and risk management.

Graham Capital Management, L.P.

Graham trades its K4D program, a systematic, proprietary trading program on behalf of Graham Master.

Graham trades actively in both U.S. and foreign markets, primarily in futures contracts, forward contracts, spot contracts and associated derivative instruments such as options and swaps. Graham engages in exchange for physical transactions, which involve the exchange of a futures position for the underlying physical commodity without making an open competitive trade on an exchange. Instruments and contracts not traded on an organized exchange may be entered with banks, brokerage firms or other financial counterparties.

The K4D-15V Program utilizes multiple computerized trading models and offers broad diversification in both financial and non- financial markets, trading in approximately 65-80 global markets. It is intended to generate significant returns over time with an acceptable degree of risk and volatility. The computer models on a daily basis analyze the recent price action, the relative strength and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market.

Graham believes strongly in the importance of research and development activity and particularly in the development of new trading strategies and portfolio management techniques. Trading strategies developed by Graham research and added to Graham investment programs include not only trend systems but also other styles of systems, with varying time horizons. Such systems generally are based on computerized mathematical models and can rely both on technical and fundamental information as the basis for their trading decisions. Graham intends to add new trading strategies to its investment programs as well as to modify the systems currently in place in such programs in its ongoing efforts to keep pace with changing market conditions, and it anticipates that the constellation of trading strategies comprising each investment program will continue to grow and evolve over time. The decision to add or subtract systems or strategies from any investment program shall be at the sole discretion of Graham.

Willowbridge Associates Inc.

Willowbridge trades its w/Praxis Futures Trading Approach (“Praxis”) on behalf of Willowbridge Master. Praxis is a proprietary, discretionary trading system.

Praxis utilizes a fully discretionary trading strategy to build a portfolio consisting of futures on currency, fixed income, stock indices and commodities pursuant to Praxis. The approach trades commodities, futures, forwards, options, swaps, spot contracts in commodities, currencies and fixed income markets. All positions are closely monitored to evaluate risk parameter status. As markets move, positions are refined and expectations updated in response to current market conditions.

 

14


Aspect Capital Limited.

Aspect trades its Diversified Program on behalf of Aspect Master. The Diversified Program is a proprietary, systematic global futures trading program. Its goal is the generation of significant medium-term capital growth independent of stock and bond market returns within a rigorous risk management framework.

The Diversified Program applies a systematic and broadly diversified global investment system, which deploys multiple investment strategies that, primarily through the use of listed futures and OTC foreign exchange contracts, seek to identify and exploit directional moves in the market behavior of a broad range of financial instruments and other assets including (but not limited to) currencies, interest rates, indices, debt securities (including bonds) and commodities (including energy, metal and agricultural commodities). By maintaining comparatively small exposure to any individual market and maintaining positions in a variety of contracts, Aspect aims to achieve long-term diversification. Generally, the Diversified Program maintains positions in the majority of markets that have been identified as being available for investment by the program. Market concentration varies according to the strength of signals, volatility and liquidity, amongst other factors. The emphasis is upon structuring a genuinely diversified set of market risk allocations that is designed to maximize the probability of returns wherever profit opportunities appear. Market exposures are monitored daily and the level of exposure of the Diversified Program in each market is quantifiable at all times and changes in accordance with market volatility and liquidity.

The Diversified Program employs an automated system to collect, process and analyze market data (including current and historical price data) and identify and exploit directional moves in market behavior. The Diversified Program trades across a variety of frequencies to exploit trends over a range of timescales. Positions are taken according to the aggregate signal and are adjusted to attempt to control risk.

Altis Partners (Jersey) Limited.

Altis trades its Global Futures Portfolio Program on behalf of Altis Master. It is a proprietary, systematic, automated trading system. The Altis Global Futures Portfolio trading system currently trades in over 100 futures markets on recognized futures exchanges globally. Altis may add or remove markets from the trading system in response to changes in market liquidity. Under the fully automated system, changes in market prices are forecast over a number of future periods and the portfolio is optimized to take best advantage of these forecasts. Forecasts are derived from a number of quantitative market phenomena; for instance, directional movement components look for persistent upward or downward price movements over a number of time-scales, and anti-trending components are invoked when such movements may have gone too far too fast. Other inputs are derived from changes in perceived instrument volatility and the effect of one market against another closely correlated one.

Under the trading system, the relevant return forecasts, together with their corresponding measures of risk, and market correlation are re-estimated daily. Portfolio resources are then allocated to where the approach expects significant changes in prices, bearing in mind the need to diversify exposure to risk. As a result, portfolio composition is not fixed; there are no pre-assigned weightings to markets or sectors. Moreover, no one market is treated differently to its peers in terms of parameter inputs. Due to the number of inputs or indicators used, and their application across a broad range of markets, portfolio changes are generally small, except perhaps during periods of extreme volatility.

Krom River Trading Program.

Krom River traded its Commodity Program on behalf of KR Master, a systematic trading system that relied on fundamental and technical factors. The Commodity Program traded in at least 20 different markets including base metals, precious metals, energy, agricultural and softs. The trade types included long volatility, directional and relative value. The trading instruments had been exchange-listed futures and options, which had been traded on both fundamental and technical basis. Krom River’s Commodity Program did not trade OTC instruments, nor take physical deliveries.

JE Moody & Company LLC

The JEM Commodity Relative Value Program is a systematic program that uses quantitative models to detect and exploit price shifts and mispricings between related instruments in the energy, metal and agricultural markets, while employing hedging methods in an attempt to maintain approximate market or sector neutrality. The strategies do not make un-hedged directional bets. Most trades are implemented using offsetting long and short positions in futures and futures options, thus reducing exposure to sudden changes in market direction. As examples, such offsetting positions may be in different delivery months of the same commodity market (e.g., calendar or butterfly spreads), in different but related markets (e.g., crude oil and unleaded gasoline) or between contracts traded on different exchanges (e.g., New York and London copper).

Market coverage for the JEM Commodity Relative Value Program portfolio includes crude oil and petroleum distillates, natural gas, industrial metals, precious metals, grains, livestock, foodstuffs, fibers, and potentially other commodities. JE Moody utilizes primarily exchange-traded futures and futures options to implement its relative value trades, although trades may also be made using other instruments, such as commodity swaps or OTC derivatives contracts.

The trading opportunities captured by the JEM Commodity Relative Value Program models are believed to arise due to various factors, including: changes in relative supply and demand of different commodity contracts, the idiosyncratic actions of market participants, external events that may disrupt production (e.g., droughts, hurricanes, labor unrest or geopolitics), and risk premia associated with general uncertainties in future supply or demand. By virtue of their relative value nature, JEM Commodity Relative Value Program trades may be interpreted as providing market liquidity to directional traders who need it, and earning a risk premium by doing so.

Relative value strategies are frequently employed by hedge funds in the equity, fixed income, convertible bond and option markets, but are relatively uncommon in the commodity or managed futures arenas. Over extended time periods, relative value strategies have been observed to produce more consistent returns and higher Sharpe ratios than un-hedged, directional trading strategies. With the high leverage often used, however, some relative value managers have experienced significant losses, particularly when extreme market events have occurred.

 

15


JE Moody attempts to manage the risk of large losses by limiting the overall portfolio leverage and the degree of exposure to any single commodity market or sector. The Commodity Relative Value portfolio typically includes about 18 to 24 active relative value trades, with the number of open positions depending on the arbitrage opportunities available. The JEM Commodity Relative Value Program trades have low mutual correlation, cover multiple markets and sectors and thus enable meaningful diversification within the JEM Commodity Relative Value Program portfolio.

When few favorable relative value trading opportunities arise in the commodity markets, or as JE Moody may determine, JE Moody may choose to make relative value trades in the financial futures, options, swap or derivatives markets. At times when many or few trading opportunities are available, JE Moody may increase or reduce overall JEM Commodity Relative Value Program portfolio exposure.

To hedge offsetting long and short positions, JE Moody may use techniques such as static hedging, dynamic hedging and option overlays. Moreover, hedging may seek to achieve market or sector neutrality via various benchmarks, such as by being “contract neutral,” “dollar neutral” or “delta neutral.” No hedging strategy is perfect, but each has its costs, risks, advantages and limitations. Even with well hedged positions, there is usually some residual exposure to directional market movements. JE Moody seeks to balance the advantages of the hedging strategy used in a particular relative value trade versus the costs and risks of implementing the trade.

Boronia Capital Pty. Ltd.

Boronia trades its Boronia Diversified Program, a systematic trading program, on behalf of Boronia Trading Company. The trading systems used by Boronia are proprietary and confidential. The trading systems utilize quantitative techniques to generate returns in the financial markets. A diversified portfolio of over 60 liquid markets is traded across 4 asset classes and multiple time frames using futures on equity, bond, currency and commodity markets plus spot foreign exchange. Markets may be added or removed from the portfolio over time.

Trades are entered into markets on a fully automated basis directly by computer to the relevant exchange with no human intervention. The trading decisions are based on a number of robust and well researched proprietary algorithms developed by the advisor.

Since the inception of the trading program, Boronia continues to research new insights and other ways to improve its risk adjusted returns.

Kaiser Trading Group Pty. Ltd.

Kaiser traded its Global Diversified Program, a systematic trading program on behalf of Kaiser Trading Company. Kaiser took trading opportunities by using a systematic, computer based and statistically validated approach built around the trading psychology of the markets.

The system had four major components: R&D environment, money management, risk measurement and trading rules. The details of the system in its entirety are proprietary and confidential. Therefore, the following details are general in nature.

Prior to its termination on June 30, 2014, Kaiser had 23 trading rules in operation. The rules were based on pattern matching and were short term in nature and include both break and contrarian models. These rules were traded over 39 different markets including foreign exchange forward and futures and options on, bonds, global indices, metals, energy and soft commodities. Each trading rule was the same, using the same parameters, regardless of the markets traded.

The trading rules were systematically tested over a comprehensive database using the systems research environment. The criteria that determined whether a trading rule was to be accepted into the system included: profitability, robustness, consistency and diversification. Once a trading rule was accepted into the system it was integrated using the same money management and risk analytic principles and software that had been applied to the preceding trading rules.

Risk measurement was accomplished by calculating pertinent risk measures such as correlation between markets and volatility of markets. These risk measures were then used to automatically scale trading positions or eliminate other positions.

Money management principles and tools were applied in a similar fashion to each rule. Entry levels, stop-loss and stop-gain positions were calculated daily. These were checked and sent to market.

No assurance could have been given that the Advisors’ strategies would be successful or that they would generate profits for the Partnership.

The Cambridge Strategy Ltd.

Cambridge trades its Asian Markets Alpha Programme and the Emerging Markets Alpha Programme, each a proprietary, systematic trading program on behalf of Cambridge Master.

The Asian Markets Alpha Programme aims to profit from short and medium term moves in the Asian markets’ currency pairs. To achieve this, Cambridge employs a largely systematic approach, designed to perform across diverse market environments. The process combines three decision making tools: a Systematic Technical Strategy, a Systematic Fundamental Strategy and a Market Information Strategy. During periods of higher volatility, the Systematic Technical Strategy uses a series of proprietary trading algorithms operating over multiple timeframes. The algorithms combine trend continuation and trend reversal signals. During periods of lower volatility, the Systematic Fundamental Strategy reflects a predetermined set of positions designed to reflect ‘market’ views on the relative attractiveness of currencies versus the US dollar, thereby realizing the inherent benefits of the carry trade. The Market Information Strategy leverages the experience and global network of Cambridge’s portfolio managers to understand and exploit the behavior of other market participants and to participate in hedging and investment flows. It has characteristics often associated with discretionary managers. Cambridge’s proprietary Global Volatility Indicator serves as Cambridge’s regime shifting mechanism within the systematic strategies. Cambridge believes that long run success is achieved through successful mitigation of downside returns with risk controlled at the portfolio, strategy and individual trade levels.

 

16


The Emerging Markets Alpha Programme aims to profit from short and medium term moves in the developing markets’ currency pairs. To achieve this, Cambridge employs a largely systematic approach, designed to perform across diverse market environments. The process combines three decision making tools: a Systematic Technical Strategy, a Systematic Fundamental Strategy and a Market Information Strategy. During periods of higher volatility, the Systematic Technical Strategy uses a series of proprietary trading algorithms operating over multiple timeframes. The algorithms combine trend continuation and trend reversal signals. During periods of lower volatility, the Systematic Fundamental Strategy reflects a predetermined set of positions designed to reflect ‘market’ views on the relative attractiveness of currencies versus the US dollar, thereby realizing the inherent benefits of the carry trade. The Market Information Strategy leverages the experience and global network of Cambridge’s portfolio managers to understand and exploit the behavior of other market participants and to participate in hedging and investment flows. It has characteristics often associated with discretionary managers. Cambridge’s proprietary Global Volatility Indicator serves as Cambridge’s regime shifting mechanism within the systematic strategies. Cambridge believes that long run success is achieved through successful mitigation of downside returns with risk controlled at the portfolio, strategy and individual trade levels.

Specific Fund level performance information is included in Note 6 to the financial statements included in “Item 8. Financial Statements and Supplementary Data.”

For the period January 1, 2015 through December 31, 2015, the average allocation by commodity market sector for each of the Funds were as follows:

 

CMF Graham Capital Master Fund L.P.   

Currencies

     29.6%   

Energy

     7.3%   

Grains

     4.6%   

Interest Rates Non-U.S.

     11.7%   

Interest Rates U.S.

     6.1%   

Softs

     3.7%   

Metals

     12.2%   

Stock Indices

     24.8%   
CMF Willowbridge Master Fund L.P.   

Currencies

     68.4%   

Energy

     5.8%   

Interest Rates Non-U.S.

     1.2%   

Interest Rates U.S.

     14.4%   

Softs

     0.1%   

Metals

     1.5%   

Stock Indices

     8.6%   
CMF Aspect Master Fund L.P.   

Currencies

     37.8%   

Energy

     10.9%   

Grains

     3.8%   

Interest Rates Non-U.S.

     13.3%   

Interest Rates U.S.

     3.5%   

Livestock

     0.9%   

Metals

     12.7%   

Softs

     3.7%   

Stock Indices

     13.4%   

 

17


CMF Altis Partners Master Fund L.P.   

Currencies

     23.7%   

Energy

     8.9%   

Grains

     7.5%   

Interest Rates Non-U.S.

     9.0%   

Interest Rates U.S.

     3.1%   

Livestock

     3.6%   

Metals

     17.4%   

Softs

     9.5%   

Stock Indices

     17.3%   
JEM Master Fund L.P.   

Energy

     63.2%   

Grains

     7.9%   

Livestock

     22.9%   

Metals

     1.7%   

Softs

     4.3%   
Morgan Stanley Smith Barney Boronia I, LLC   

Currencies

     29.9%   

Energy

     9.7%   

Grains

     6.1%   

Interest Rates Non-U.S.

     12.2%   

Interest Rates U.S.

     4.9%   

Livestock

     0.4%   

Metals

     7.1%   

Softs

     5.3%   

Stock Indices

     24.4%   
Cambridge Master Fund L.P.   

Currencies

     100.0%   

 

18


(a) Liquidity.

The Partnership does not engage in the sales of goods or services. The Partnership’s assets are its (i) investment in Funds; (ii) equity in its trading account, consisting of cash and (iii) investment in U.S. Treasury bills, at fair value. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2015.

To minimize the risk relating to low margin deposits, the Partnership/Funds follow certain trading policies, including:

 

  (i)

The Partnership/Funds invests their assets only in commodity interests that an 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 an Advisor believes will permit it to enter and exit trades without noticeably moving the market.

 

  (ii)

An 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 Partnership’s net assets allocated to that Advisor.

 

  (iii)

The Partnership/Funds may occasionally accept physical 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 Partnership/Funds do not employ the trading technique commonly known as “pyramiding,” in which the speculator uses unrealized profits on existing positions as margin for the purchases or sale of additional positions in the same or related commodities.

 

  (v)

The Partnership/Funds do not utilize borrowings other than short-term borrowings if the Partnership/Funds take delivery of any cash commodities.

 

  (vi)

The Advisors may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Partnership/Funds. “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 Partnership/Funds 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 15.7%. 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 Funds.

In the normal course of business, the Partnership, through its investment in Funds, is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forward, futures, option and swap contracts, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, 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 OTC. Exchange-traded instruments include futures and certain standardized forward, swap 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. 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, swap and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 12.6% to 53.9% of the Fund’s contracts are traded OTC.

 

 

19


Market risk is the potential for changes in the value of the financial instruments traded by the Funds 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 Funds are 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/Funds’ 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/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds 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 Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that through MS&Co./CGM the Partnership’s/Funds’ counterparty is an exchange or clearing organization. The Partnership/Funds continue to be subject to such risks with respect to MS&Co.

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

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

The General Partner monitors and attempts to control the Partnership’s/Funds’ 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/Funds 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. (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 U.S. Treasury bills, money market mutual fund securities, commodity futures, forward, option and swap contracts 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 Partnership shall cease trading operations and liquidate all open positions under certain circumstances including a decrease in net asset value per Redeemable Unit to less than $400 as of the close of business on any trading day.

 

  (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 Advisors 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 and 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/Funds nor the Partnership’s commodity broker have control.

 

20


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 the net asset value per Redeemable Unit as of the end 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 generally are funded out of the Partnership’s cash holdings and/or redemptions from the Funds. For the year ended December 31, 2015, 40,641.1070 Redeemable Units were redeemed totaling $40,676,735 as well as 357.9740 General Partner Redeemable Units totaling $378,906. For the year ended December 31, 2014, 155,880.9060 Redeemable Units were redeemed totaling $134,564,735 as well as 2,188.3040 General Partner Redeemable Units totaling $1,914,039. For the year ended December 31, 2013, 130,543.6340 Redeemable Units were redeemed totaling $119,733,605 as well as 973.0000 General Partner Redeemable Units redeemed totaling $902,021.

For the year ended December 31, 2015, there were additional subscriptions of 1,201.8070 Redeemable Units totaling $1,259,286. For the year ended December 31, 2014, there were additional subscriptions of 2,795.8450 Redeemable Units totaling $2,457,437. For the year ended December 31, 2013, there were additional subscriptions of 10,974.3070 Redeemable Units totaling $10,139,653.

(c) Results of Operations.

For the year ended December 31, 2015, the net asset value per unit decreased 2.8% from $1010.09 to $981.45. For the year ended December 31, 2014, the net asset value per unit increased 12.2% from $900.28 to $1,010.09. For the year ended December 31, 2013, the net asset value per unit decreased 2.9% from $927.41 to $900.28.

The Partnership experienced a net trading gain of $9,695,899 before fees and expenses for the year ended December 31, 2015. Gains were primarily attributed to the Funds’ trading in energy, currency, metals, and global interest rate markets and were offset by trading losses in global stock index and agricultural futures. The net trading gain (or loss) realized from the Partnership’s investment in the Funds is disclosed under “Item 8. Financial Statements and Supplementary Data.”

The most significant losses were incurred within the global stock index sector during June from long positions in U.S., European, and Asian equity index futures as prices declined as concerns over Greece’s efforts to avoid a default weighed on global financial markets. Losses within this sector were also recorded during December from long positions in U.S., European, and Asian equity index futures as prices fell after weakness in Chinese economic data revived concern about the stability of the global economy. Additional losses were incurred within the global stock index sector during January from long positions in U.S. equity index futures as prices fell amid concern a tumble in oil prices and slowing overseas growth would adversely affect U.S. economic output. Losses were recorded within the agricultural markets during June from short positions in corn, soybeans, and wheat futures as prices rallied after heavy rainfall in the U.S. Midwest raised the potential for crop damage. Additional losses were incurred during April from short positions in sugar and coffee futures as prices advanced as wet weather slowed harvests in Brazil. The Partnership’s losses for the year were offset by gains achieved within the energy markets during November and December from short positions in crude oil and its related products as prices weakened after the OPEC nations failed to cut production amid a growing global supply glut. Additional gains were experienced during July from short positions in crude oil and its related products as prices declined as production levels in the U.S. reached record levels. Further gains in this sector were recorded during January, March, August, September, and October. Within the currency sector, gains were recorded during January from short positions in the Canadian dollar versus the U.S. dollar as the value of the Canadian currency moved lower over concerns falling oil prices would adversely affect the Canadian economy. Additional gains in this sector were experienced during May from short positions in the Japanese yen versus the U.S. dollar as the relative value of the yen fell after the release of strong U.S. employment figures and as the Bank of Japan pledged to continue its quantitative easing measures. Within the metals markets, gains were achieved during July from short positions in gold and silver futures as prices moved lower as a strengthening U.S. dollar curbed demand for precious metals as a store of value. 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 the European Central Bank would increase its quantitative easing measures to stimulate the Eurozone’s stagnant economy. Long positions in U.S. Treasury note futures were also profitable during January as prices advanced over investor concern a fall in crude oil prices would dampen inflation in the U.S. Additional gains were recorded from long positions in Canadian fixed income futures during January.

The Partnership experienced a net trading gain of $44,862,557 before fees and expenses for the year ended December 31, 2014. Gains were primarily attributed to the Funds’ trading in currencies, energy, grains, U.S. and non-U.S. interest rates, livestock and softs and were partially offset by losses in metals and indices. The net trading gain (or loss) realized from the Partnership’s investment in the Funds is disclosed under “Item 8. Financial Statements and Supplementary Data.”

The most significant gains were achieved within the fixed income sector during October, November, and December from long positions in European fixed income futures as prices advanced on increased speculation the European Central Bank would increase its quantitative easing measures to stimulate the Eurozone’s stagnant economy. Additional gains within the sector were experienced during May and August from long positions in European fixed income futures as prices moved higher as investors speculated central banking authorities in Europe and Asia would increase stimulus measures. Within the energy markets, gains were experienced primarily during November and December from short positions in crude oil and its related products as prices moved lower amid rising U.S. oil production and after the OPEC nations failed to cut output in response to the global supply glut. Within the currency sector, gains were experienced primarily during September 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 during September were recorded from short positions in the euro versus the U.S. dollar as the relative value of the dollar advanced after the U.S. Federal Reserve Bank indicated it was committed to keeping inflation in check. Within the agricultural sector, gains were recorded during September from short positions in wheat and corn futures as prices declined as favorable growing conditions in the U.S. Midwest increased speculation that crop totals would reach record levels during 2014. Additional gains were experienced during February and March from long positions in lean hog futures as prices moved higher. The Partnership’s gains for the year were partially offset by losses incurred within the metals markets during February from short positions in gold and silver futures as prices rallied after geo-political turmoil and concern over the strength of the U.S. economy increased demand for the precious metals as a store of value. During January, losses in the metals markets were recorded from long positions in copper futures as weakening manufacturing reports from China reduced demand for the industrial metal, thus pushing prices lower. Within the global stock index sector, losses were recorded primarily 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 incurred during December from long positions in European equity index futures as stagnant growth in economies across the Eurozone moved prices lower.

 

21


Interest income on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s, other than Boronia I, LLC and Kaiser I, LLC) brokerage account was earned at a rate equal to the monthly average of the 4 week U.S. Treasury bill discount rate. MS&Co. credits Boronia I, LLC and credited Kaiser I, LLC on 100% of the average daily equity maintained in cash in the account of Boronia I, LLC or Kaiser I, LLC during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount less 0.15% during such month. All interest accrued on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership. Interest income for the three months ended December 31, 2015 increased by $6,269 and decreased for the twelve months ended December 31, 2015 by $6,234, as compared to the corresponding periods in 2014. The increase in interest income for the three months is primarily due to the Partnership’s investment in U.S. Treasury bills during the three months ended December 31, 2015, as compared to the corresponding periods in 2014 and the decrease for the twelve months is due to lower average daily equity maintained in the Partnership’s account during the 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 during the reporting period depended on the average daily equity in the Partnership’s and the Funds’ accounts and upon interest rates over which neither the Partnership/the Funds nor MS&Co. had control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and twelve months ended December 31, 2015 decreased $199,683 and $5,512,196, respectively, as compared to the corresponding periods in 2014. The decrease in ongoing selling agent fees is due to a decrease in average net assets and a reduction to the ongoing selling agent fee rate for the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014.

General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership. 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 and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. General Partner fees for the three months ended December 31, 2015 decreased by $100,012, as compared to the corresponding period in 2014. The decrease in General Partner fees for the three months ending December 31, 2015 is primarily due to lower average net assets during the three months ended December 31, 2015, as compared to the corresponding period in 2014. General Partner fees for the twelve months ended December 31, 2015 was $2,324,802. This is a new fee implemented by the Partnership effective October 1, 2014.

Certain clearing fees are based on the number of trades executed by an Advisor for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees for the three and twelve months ended December 31, 2015 decreased by $145,745 and $304,008, respectively, as compared to the corresponding periods in 2014. The decrease in clearing fees is primarily due to a decrease in the number of trades during the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three and twelve months ended December 31, 2015 decreased $151,157 and $864,697, respectively, as compared to the corresponding periods in 2014. The decrease in management fees is due to a decrease in average net assets for the three and twelve months ended December 31, 2015, as compared to the corresponding periods in 2014.

Incentive fees are based on the new trading profits generated by each Advisor at the end of the quarter as defined in the respective management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and twelve months ended December 31, 2015 resulted in incentive fees of $0 and $1,694,935, respectively. Trading performance for the three and twelve months ended December 31, 2014 resulted in incentive fees of $0. To the extent an Advisor incurs a loss for the Partnership; the Advisor will not be paid incentive fees until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

The Partnership pays professional fees, which generally include certain offering costs and legal, accounting, administrative, filing, reporting and data processing fees. Professional fees for the years ended December 31, 2015 and 2014 were $655,176 and $603,840, respectively.

The Partnership experienced a net trading gain of $25,507,734 before fees and expenses for the year ended December 31, 2013. Gains were primarily attributed to the Funds’ trading in currencies, grains, U.S. interest rates, metals, softs and indices and were partially offset by losses in energy, non-U.S. interest rates and livestock. The net trading gain (or loss) realized from the Partnership’s investment in the Funds is disclosed under “Item 8. Financial Statements and Supplementary Data.”

In the energy markets, losses were incurred primarily during February from long futures positions in crude oil and its related products as prices fell amid concern fuel demand will decline. Additional losses in the sector were recorded in September from long positions in crude oil and its related products as prices declined over concerns an impasse in the U.S. Congress over budget negotiations would threaten demand from the world’s largest energy consuming nation. Losses within the energy sector were also incurred during June from short futures positions in crude oil and its related products as prices rose after the Syrian conflict spurred concern that the flow of supplies from the Middle East may be disrupted. Within the global interest rate sector, losses were recorded, primarily during May, from long positions in in U.S. and European fixed income futures as prices declined on reports signaling the global economic recovery was strengthening. Indicators that the U.S. Federal Reserve would curb its bond buying program further added to the downward price move during May. Additional losses within the global interest rate markets were recorded 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 the euro-area economy should gradually recover during 2013. The Partnership’s trading losses for the year were offset by trading gains achieved within the global stock index markets, primarily during January, from long positions in Asian, U.S., and European equity index futures as prices advanced amid positive global economic sentiment. Additional gains were recorded in October from long positions in U.S. and European equity index futures as prices advanced after U.S. lawmakers avoided a debt default and investors speculated the U.S. Federal Reserve Bank will maintain its stimulus measures. Further gains in this sector were recorded from March through May and in July, September, November, and December. Within the metals complex, gains were recorded during April and June from short positions in gold and silver futures as prices declined after U.S. economic data topped estimates, eroding the appeal of the precious metals. Within the currency markets, gains were recorded during January from short positions in Japanese yen versus U.S. dollar as the relative value of the yen declined dramatically following newly elected Prime Minister Shinzo Abe’s announced intention to devalue the Asian nation’s currency. Additional gains in the currency sector were recorded during December from short positions in the Japanese yen versus the U.S. dollar as the value of the yen fell amid speculation the Bank of Japan will continue unprecedented stimulus measures, while the U.S. Federal Reserve pares quantitative easing as the U.S. economy recovers. Within the agricultural markets, gains were achieved during December from short positions in wheat futures as prices declined as grain production worldwide climbed higher to record levels and outpaced global demand.

 

22


In the General Partner’s opinion, the Advisors continue to employ trading methods and produce results consistent with their expected performance given market conditions and the objectives of the Partnership. The General Partner continues to monitor the Advisors’ performance on a daily, weekly, monthly and annual basis to assure these objectives are met.

Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of certain of the Advisors to identify those price trends correctly. 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 Advisors are able to identify them, the Partnership expects to increase capital through operations.

In allocating the assets of the Partnership among the trading advisors, the General Partner considers, among other factors, past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the trading advisors and may allocate assets to additional advisors at any time. Each Advisor’s percentage allocation and trading program is described in the “overview” section of this Item 7.

(d) Off-Balance Sheet Arrangements. None.

(e) Contractual Obligations. None.

(f) Operational Risk.

The Partnership, directly or indirectly through its investment in the Funds, are exposed to market risk and credit risk, which arise in the normal course of their 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/Funds are subject to increased risks with respect to their trading activities in emerging markets, 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/Funds’ ability to gather, process, and communicate information efficiently and securely, without interruption, to customers and in the markets where the Partnership/Funds participate. 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 management’s authorization, and that financial information utilized by management and communicated to external parties, including the Partnership’s unit holders, creditors, and regulators, is free of material errors.

(g) Critical Accounting Policies.

Partnership’s Investments. The Partnership carries its investments in the Funds at fair value based on the respective Fund’s net asset value per unit as calculated by the Fund or the Partnership’s (1) net contribution to the Funds and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of the Funds.

Funds’ Investments. All commodity interests including derivative financial instruments and derivative commodity instruments, held by the Partnership and the Funds are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value 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 Funds’ Statements of Financial Condition. Net realized gains or losses and any net change in unrealized gains or losses from the preceding period are reported in the Funds’ Statements of Income and Expenses.

Funds’ 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.

 

23


The Funds consider 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 who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the year ended December 31, 2015 and 2014, the Funds 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 year ended December 31, 2015 and 2014, there were no transfers of assets and liabilities between Level 1 and Level 2.

Futures Contracts. The Funds trade 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 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 Funds 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 Funds. When the contract is closed, the Funds record 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 Funds’ Statements of Income and Expenses.

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Funds agree 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 Funds’ 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 Funds’ Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Funds’ Statements of Income and Expenses.

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Funds are cash settled based on prompt dates published by the LME. Variation margin may be made or received by the Funds 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 Funds. 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 Funds record 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 Funds’ Statements of Income and Expenses.

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

The Funds do 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 Funds’ Statements of Income and Expenses.

 

 

24


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

Introduction

All the Partnership assets are subject to the risk of trading loss directly and indirectly through its investment in the Funds. The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by them are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s/Funds’ 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 Partnership’s/Funds’ open positions and, consequently, in their earnings and cash balances. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s/Funds’ open positions and the liquidity of the markets in which they trade.

The Partnership/Funds rapidly acquire and liquidate 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 Partnership’s/Funds’ past performance is not necessarily indicative of their future results.

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

Materiality as used in this section, “Item 7A. 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 Partnership’s/Funds’ market sensitive instruments.

Quantifying the Partnership’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership’s/Funds’ 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 Securities 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 Partnership’s/Funds’ risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership’s/Funds’ mark-to-market accounting, any loss in the fair value of the Partnership’s open positions, including investments in the Funds, is directly reflected in the Partnership’s earnings (realized and unrealized) and cash balances. Exchange margin requirements have been used by the Partnership/Funds as the measure of its Value at Risk. Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%—99% of any one-day interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership/Funds), 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 Partnership’s/Funds’ futures and forward positions does not have any optionality component. However, the Advisors may trade commodity options. The Value at Risk associated with options is reflected in the following tables as the margin requirement attributable to the instrument underlying each option. Where this instrument is a futures contract, the futures margin, 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 Partnership/Funds in almost all cases fluctuate to a lesser extent than those of the underlying instruments.

In quantifying the Partnership’s/Funds’ Value at Risk, a 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 Partnership’s/Funds’ positions are rarely, if ever, 100% positively correlated have not been reflected.

The Partnership’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 advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the Funds over which they have been granted limited authority to make trading decisions. The first two trading Value at Risk tables reflect the market sensitive instruments held by the Partnership indirectly, through its investment in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments held by each Fund separately.

 

25


The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of December 31, 2015 and 2014. As of December 31, 2015, the Partnership’s total capitalization was $206,869,254.

 

    December 31, 2015  
          % of Total  

Market Sector

      Value at Risk             Capitalization      

Commodities

    $ 10,323,796          4.99    

Currencies

    25,986,493          12.56       

Equity

    3,491,933          1.69       

Interest Rates

    3,981,536          1.93       
 

 

 

   

 

 

 

Total

    $ 43,783,758          21.17    
 

 

 

   

 

 

 

As of December 31, 2014, the Partnership’s total capitalization was $253,104,986.

 

    December 31, 2014  
          % of Total  

Market Sector

      Value at Risk             Capitalization      

Commodities

    $ 10,776,711          4.25    

Currencies

    10,289,872          4.07       

Indices

    4,679,301          1.85       

Interest Rates

    6,897,711          2.73       
 

 

 

   

 

 

 

Total

    $ 32,643,595          12.90    
 

 

 

   

 

 

 

 

*

Annual average of month-end Value at Risk.

 

26


As of December 31, 2015, Willowbridge Master’s total capitalization was $348,699,949. The Partnership owned approximately 13.7% of Willowbridge Master. As of December 31, 2015, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

December 31, 2015  
              % of Total     High      Low      Average  

Market Sector

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

Currencies

           $ 76,807,828             22.03           $ 85,018,080               $ 173,995               $ 37,637,619       

Energy

       1,482,863             0.42            9,071,259             667,917             3,089,442       

Interest Rates U.S.

       4,144,323             1.19            16,624,123             367,325             3,833,031       
    

 

 

    

 

 

         

Total

           $ 82,435,014             23.64            
    

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

As of December 31, 2014, Willowbridge Master’s total capitalization was $315,540,363. The Partnership owned approximately 19.7% of Willowbridge Master. As of December 31, 2014, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

December 31, 2014  
            % of Total     High      Low      Average  

Market Sector

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

Currencies

       $ 12,241,960           3.88         $ 17,429,568           $ 12,311           $ 3,182,580   

Energy

     3,022,878           0.96          3,022,878         59,187         876,114   

Interest Rates U.S.

     4,491,327           1.42          10,074,313         537,550         3,058,860   
  

 

 

    

 

 

         

Total

       $ 19,756,165                           6.26   %         
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

27


As of December 31, 2015, Aspect Master’s total capitalization was $68,465,577. The Partnership owned approximately 55.3% of Aspect Master. As of December 31, 2015, Aspect Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Aspect for trading) was as follows:

 

December 31, 2015  
            % of Total     High      Low      Average  

Market Sector

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

Currencies

     $ 3,828,841             5.59           $ 7,618,931               $ 621,769               $ 4,403,903       

Energy

     1,762,255             2.57            1,969,743             529,815             1,264,041       

Grains

     659,130             0.96            659,130             169,143             465,015       

Indices

     1,018,193             1.49            3,365,637             476,501             1,708,786       

Interest Rates U.S.

     131,024             0.19            700,590             89,018             389,407       

Interest Rates Non-U.S.

     1,272,166             1.86            2,845,509             676,060             1,469,168       

Livestock

     142,395             0.21            197,120             42,240             94,870       

Metals

     1,538,342             2.25            2,140,747             635,320             1,398,537       

Softs

     233,924             0.34            609,644             131,849             411,387       
  

 

 

    

 

 

         

Total

     $ 10,586,270             15.46            
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

As of December 31, 2014, Aspect Master’s total capitalization was $78,370,668. The Partnership owned approximately 57.4% of Aspect Master. As of December 31, 2015, Aspect Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Aspect for trading) was as follows:

 

December 31, 2014  
              % of Total     High      Low      Average  

Market Sector

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

Currencies

       $ 5,363,857         6.84         $   8,988,668         $   4,216,734         $   6,042,682   

Energy

       1,391,555         1.78            2,217,050         350,285         1,038,970   

Grains

       177,860         0.23            1,084,329         177,860         478,736   

Indices

       1,694,021         2.16            3,786,974         433,618         2,147,069   

Interest Rates U.S.

       278,316         0.35            802,798         81,696         376,114   

Interest Rates Non-U.S.

       2,657,992         3.39            3,729,772         757,202         2,139,887   

Livestock

       115,830         0.15            217,350         29,040         109,643   

Metals

       641,723         0.82            1,569,663         534,577         901,895   

Softs

       453,010         0.58            478,791         169,885         351,314   
    

 

 

    

 

 

         

Total

       $   12,774,164         16.30     %         
    

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

28


As of December 31, 2015, Graham Master’s total capitalization was $52,801,159. The Partnership owned approximately 72.7% of Graham Master. As of December 31, 2015, Graham Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Graham for trading) was as follows:

 

December 31, 2015  
            % of Total     High      Low      Average  

Market Sector

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

Currencies

     $ 2,331,119             4.41           $ 4,887,561               $ 58,036               $ 2,513,001       

Energy

     995,500             1.89            1,134,705             243,890             726,523       

Grains

     534,820             1.01            621,445             112,442             430,838       

Interest Rates U.S.

     596,349             1.13            978,753             105,005             597,937       

Interest Rates Non-U.S.

     727,596             1.38            2,292,571             460,683             1,021,590       

Metals

     1,463,801             2.77            1,669,559             477,532             1,136,890       

Softs

     207,143             0.39            455,751             167,284             332,299       

Indices

     2,026,718             3.84            3,493,786             819,324             2,118,829       
  

 

 

    

 

 

         

Total

     $ 8,883,046             16.82            
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

As of December 31, 2014, Graham Master’s total capitalization was $48,491,666. The Partnership owned approximately 73.5% of Graham Master. As of December 31, 2015, Graham Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Graham for trading) was as follows:

 

December 31, 2014  
            % of Total     High      Low      Average  

Market Sector

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

Currencies

     $ 3,524,892           7.27         $     7,408,178         $     160,727         $     4,099,735   

Energy

     994,978           2.05            1,183,518         161,238         757,584   

Grains

     230,806           0.48            710,585         226,314         447,027   

Indices

     3,197,084           6.59            4,267,882         1,802,855         3,229,694   

Interest Rates U.S.

     684,915           1.41            922,384         375,684         646,928   

Interest Rates Non-U.S.

     2,292,571           4.73            2,318,863         695,485         1,720,207   

Metals

     658,941           1.36            2,154,978         360,017         1,169,173   

Softs

     333,883           0.69            584,007         137,321         266,647   
  

 

 

    

 

 

         

Total

     $ 11,918,070                           24.58     %         
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

29


As of December 31, 2015, Altis Master’s total capitalization was $44,314,279. The Partnership owned approximately 59.74% of Altis Master. As of December 31, 2015, Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follow:

 

December 31, 2015  
            % of Total     High      Low              Average          

Market Sector

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

Currencies

     $ 3,619,547             8.17           $ 4,043,379               $ 762,004               $ 2,314,790       

Energy

     486,097             1.10            1,849,188             317,820             823,518       

Grains

     903,643             2.04            1,584,736             341,578             683,784       

Indices

     1,354,076             3.05            2,594,991             430,768             1,621,815       

Interest Rates U.S.

     71,280             0.16            1,118,118             2,079             312,585       

Interest Rates Non-U.S.

     931,757             2.10            1,742,647             196,947             787,732       

Livestock

     380,936             0.86            802,340             81,978             355,740       

Metals

     1,967,779             4.44            2,182,160             655,693             1,639,449       

Softs

     1,094,704             2.47            1,320,826             331,654             907,082       
  

 

 

    

 

 

         

Total

     $ 10,809,819             24.39            
  

 

 

    

 

 

         

*      Annual average of month-end Value at Risk.

 

As of December 31, 2014, Altis Master’s total capitalization was $51,362,633. The Partnership owned approximately 67.4% of Altis Master. As of December 31, 2015, Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follow:

 

         

   

December 31, 2014  
            % of Total     High      Low              Average          

Market Sector

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

Currencies

     $ 762,004           1.49       $ 2,500,488           $ 676,543           $ 1,240,735     

Energy

     795,517           1.55          2,239,925           225,837           1,246,149     

Grains

     1,413,845           2.75          3,309,847           105,669           1,160,262     

Indices

     853,780           1.66          4,747,619           490,193           2,482,617     

Interest Rates U.S.

     261,305           0.51          1,592,113           33,462           332,514     

Interest Rates Non-U.S.

     1,659,921           3.23          2,147,638           159,067           874,705     

Livestock

     129,685           0.25          636,728           80,245           332,206     

Metals

     1,952,797           3.80          4,399,127           992,841           2,878,470     

Softs

     762,762           1.49          1,336,257           553,594           890,767     
  

 

 

    

 

 

         

Total

     $ 8,591,616           16.73   %         
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

30


As of December 31, 2015, JEM Master’s total capitalization was $11,125,506. The Partnership owned approximately 61.0% of JEM Master. As of December 31, 2015, JEM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to JE Moody for trading) was as follows:

 

December 31, 2015  
         

% of Total

   

High

   

Low

   

Average

 

Market Sector

 

  Value at Risk  

   

    Capitalization    

   

    Value at Risk    

   

    Value at Risk    

   

    Risk*    

 

Energy

    50,386          0.45       3,600,762        30,861        638,968   

Grains

    114,400          1.03          312,510        7,700        117,038   

Livestock

    296,505          2.66          884,015        20,790        395,455   

Softs

    49,555          0.45          200,695        3,300        87,216   
 

 

 

   

 

 

       

Total

    $ 510,846          4.59   %       
 

 

 

   

 

 

       

*      Annual average of month-end Value at Risk.

 

As of December 31, 2014, JEM Master’s total capitalization was $29,876,004. The Partnership owned approximately 70.6% of JEM Master. As of December 31, 2015, JEM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to JE Moody for trading) was as follows:

 

         

    

December 31, 2014  
         

% of Total

   

High

   

Low

   

Average

 

Market Sector

 

  Value at Risk    

   

    Capitalization    

   

    Value at Risk    

   

    Value at Risk    

   

    Risk*    

 

Energy

    $ 1,038,399          3.48       $ 4,200,379          $ 638,660          $     1,707,162     

Grains

    67,100          0.22          631,126          6,008          120,137     

Livestock

    821,645          2.75          1,089,315          24,750          336,630     

Softs

    119,955          0.40          267,465          4,290          65,936     
 

 

 

   

 

 

       

Total

    $ 2,047,099          6.85   %       
 

 

 

   

 

 

       

 

*

Annual average of month-end Value at Risk.

 

31


As of December 31, 2015, Boronia I, LLC’s total capitalization was $74,259,634. The Partnership owned approximately 48.8% of Boronia I, LLC. As of December 31, 2015, Boronia I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Boronia for trading) was as follows:

 

December 31, 2015  
           

% of Total

   

High

    

Low

    

    Average    

 

Market Sector

  

  Value at Risk  

    

  Capitalization  

   

  Value at Risk  

    

  Value at Risk  

    

Risk*

 

Currencies

     5,810,883             7.83         9,670,214             2,053,234             5,191,005       

Interest Rates

     2,205,898             2.97            6,694,425             920,459             2,940,943       

Equity

     1,325,953             1.79            9,574,905             1,217,103             4,374,314       

Commodity

     4,505,079             6.07            9,333,026             1,774,957             4,937,710       
  

 

 

    

 

 

         

Total

     $ 13,847,813             18.66            
  

 

 

    

 

 

         

*        Annual average of month-end Value at Risk.

 

As of December 31, 2014, Boronia I, LLC’s total capitalization was $104,262,934. The Partnership owned approximately 50.5% of Boronia I, LLC. As of December 31, 2015, Boronia I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Boronia for trading) was as follows:

 

           

    

December 31, 2014  
            % of Total     High      Low        Average    

Market Sector

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

Currencies

     $ 4,957,331           4.75       $ 11,301,501           $ 984,987           $ 4,077,565     

Interest Rates

     2,965,947           2.84          5,475,674           647,220           2,547,225     

Equity

     2,889,921           2.77          9,013,937           712,546           3,468,454     

Commodity

     5,125,195           4.92          6,835,307           1,782,819           3,476,070     
  

 

 

    

 

 

         

Total

     $ 15,938,394                   15.28          
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

32


As of December 31, 2015, Cambridge Master’s total capitalization was $59,709,922. The Partnership owned approximately 28.3% of Cambridge Master. As of December 31, 2015, Cambridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Boronia for trading) was as follows:

 

December 31, 2015  
           

% of Total

   

High

    

Low

    

    Average    

 

Market Sector

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

Currencies

     $ 23,516,491             39.38           $ 26,761,534               $ 5,371,077               $ 15,171,524       
  

 

 

    

 

 

         

Total

     $ 23,516,491             39.38            
  

 

 

    

 

 

         

 

*

Annual average of month-end Value at Risk.

 

33


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

The face value of the market sector instruments held by the Partnership/Funds 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 requirement on short notice) as well as many times the capitalization of the Partnership/Funds. The magnitude of the Partnership’s/Funds’ open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of the Partnership’s/Funds’ positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Partnership/Funds to incur severe losses over a short period of time. The foregoing Value at Risk tables — as well as the past performance of the Partnership/Funds — give no indication of this “risk of ruin.”

Non-Trading Risk

The Partnership/Funds have non-trading market risk on their foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.

Materiality as used in this section, “Item 7A. 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 Partnership’s/Funds’ market sensitive instruments.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding the Partnership’s/Funds’ market risk exposures — except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership/Funds manage their primary market risk exposures — constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s/Fund’s primary market risk exposures as well as the strategies used and to be used by the General Partner and the Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s/Fund’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 Partnership/Funds. There can be no assurance that the Partnership’s/Fund’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 Partnership as of December 31, 2015 by market sector.

Interest Rates. Interest rate movements directly affect the price of the futures and forward positions held by the Partnership/Funds 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 Partnership’s/Funds’ profitability. The Partnership’s/Funds’ primary interest rate exposure is to interest rate fluctuations in the United States and the other G-8 countries. However, the Partnership/Funds also take futures positions on the government debt of smaller nations (e.g., Australia).

Currencies. The Partnership’s/Funds’ currency exposure is subject 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 Partnership’s/Funds’ 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 U.S. dollar-based Partnership/Funds in expressing Value at Risk in a functional currency other than U.S. dollars.

Stock Indices. The Partnership’s/Funds’ primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Partnership/Funds are limited to futures on broadly based indices. As of December 31, 2015 the Partnership’s/Funds’ primary exposures were in the Chicago Mercantile Exchange (CME) stock indices. The General Partner/Managing Member anticipates little, if any, trading in non-G-8 stock indices. The Partnership/Funds are 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 Partnership/Funds to avoid being “whipsawed” into numerous small losses.)

Metals. The Partnership’s/Funds’ primary metal market exposure is to fluctuations in the price of gold and silver. Although the Advisors will from time to time trade base metals such as copper, the principal market exposures of the Partnership/Funds have consistently been in the precious metals, gold and silver.

Softs. The Partnership’s/Funds’ primary commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Coffee, cotton and sugar accounted for the bulk of the Partnership’s/Funds’ commodity exposure.

Energy. The Partnership’s/Funds’ primary energy market exposure is to natural 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 Partnership’s/Funds’ commodities exposure is to agricultural price movements which are often directly affected by severe or unexpected weather conditions.

 

34


Qualitative Disclosures Regarding Non-Trading Risk Exposure

The following was the only non-trading risk exposure of the Partnership/Funds as of December 31, 2015.

Foreign Currency Balances. The Partnership’s/Funds’ primary foreign currency balances are in Swiss francs, Euro and British pounds. The Advisors regularly convert foreign currency balances to dollars in an attempt to manage the Partnership’s/Funds’ non-trading risk.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The General Partner monitors and attempts to control the Partnership’s/Funds’ 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/Funds may be subject.

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

The Advisors apply their own risk management policies to their trading. The Advisors often follow diversification guidelines, margin limits and stop loss points to exit a position. The Advisors’ research of risk management often suggests ongoing modifications to their trading programs.

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

 

35


Item 8. Financial Statements and Supplementary Data.

TACTICAL DIVERSIFIED FUTURES FUND 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; Condensed Schedules of Investments 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. Additional financial information has been filed as Exhibits to this Form 10-K.

 

36


To the Limited Partners of

Tactical Diversified Futures Fund 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,

 

Tactical Diversified Futures Fund L.P.

Ceres Managed Futures LLC

522 Fifth Avenue

New York, NY 10036

(855) 672-4468

 

37


Management’s Report on Internal Control Over

Financial Reporting

The management of Tactical Diversified Futures Fund 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 Tactical Diversified Futures Fund 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,

Tactical Diversified Futures Fund L.P.

   

Steven Ross

Chief Financial Officer and Director

Ceres Managed Futures LLC

General Partner,

Tactical Diversified Futures Fund L.P

 

38


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Tactical Diversified Futures Fund L.P.:

We have audited the accompanying statements of financial condition of Tactical Diversified Futures Fund L.P. (the “Partnership”), including the 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 Tactical Diversified Futures Fund 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

 

39


Tactical Diversified Futures Fund L.P.

Statements of Financial Condition

December 31, 2015 and 2014

 

     December 31,     December 31,  
     2015     2014  

Assets:

    

Investment in Funds, at fair value (Note 6)

     $   210,548,183          $  251,089,677     

Redemptions receivable from Funds

     -               8,902,959     

Equity in trading account:

    

Cash (Note 3c)

     425,263          308,426     
  

 

 

   

 

 

 

Total assets

     $ 210,973,446          $ 260,301,062     
  

 

 

   

 

 

 

Liabilities and Partners’ Capital:

    

Liabilities:

    

Accrued expenses:

    

Ongoing selling agent fee (Note 3c)

     $ 351,622          $ 433,835     

Management fees (Note 3b)

     222,936          271,280     

Incentive fees (Note 3b)

     -               1,468,835     

General Partner fees (Note 3a)

     175,255          216,340     

Professional fees

     315,729          259,575     

Redemptions payable to Limited Partners (Note 7)

     3,038,650          4,546,211     
  

 

 

   

 

 

 

Total liabilities

     4,104,192          7,196,076     
  

 

 

   

 

 

 

Partners’ Capital (Notes 1 and 6):

    

General Partner, 2,477.6854 and 2,835.6594 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     2,431,723          2,864,272     

Limited Partners, 208,301.6758 and 247,740.9758 Redeemable Units outstanding at December 31, 2015 and 2014, respectively

     204,437,531          250,240,714     
  

 

 

   

 

 

 

Total partners’ capital

     206,869,254          253,104,986     
  

 

 

   

 

 

 

Total liabilities and partners’ capital

     $ 210,973,446          $ 260,301,062     
  

 

 

   

 

 

 

Net asset value per Redeemable Unit

     $ 981.45          $ 1,010.09     
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

40


Tactical Diversified Futures Fund L.P.

Schedule of Investments

December 31, 2015

 

            % of Partners’    
Investment in Funds   Fair value     Capital  

CMF Willowbridge Master Fund L.P.

    $ 47,827,925          23.12  

CMF Aspect Master Fund L.P.

    37,891,702          18.31     

CMF Graham Capital Master Fund L.P.

    38,390,905          18.56     

CMF Altis Partners Master Fund L.P.

    26,474,103          12.80     

JEM Master Fund L.P.

    6,784,895          3.28     

Morgan Stanley Smith Barney Boronia I, LLC

    36,257,683          17.53     

Cambridge Master Fund L.P.

    16,920,970          8.18     
 

 

 

   

 

 

 

Total investment in Funds, at fair value

    $   210,548,183          101.78  
 

 

 

   

 

 

 

See accompanying notes to financial statements.

 

41


Tactical Diversified Futures Fund L.P.

Schedule of Investments

December 31, 2014

 

            % of Partners’    
Investment in Funds   Fair value     Capital  

CMF Willowbridge Master Fund L.P.

    $ 62,129,797          24.55  

CMF Aspect Master Fund L.P.

    44,990,232          17.77     

CMF Graham Capital Master Fund L.P.

    35,625,655          14.07     

CMF Altis Partners Master Fund L.P.

    34,598,755          13.67     

JEM Master Fund L.P.

    21,079,026          8.33     

Morgan Stanley Smith Barney Boronia I, LLC

    52,666,212          20.81     
 

 

 

   

 

 

 

Total investment in Funds, at fair value

    $   251,089,677          99.20  
 

 

 

   

 

 

 

See accompanying notes to financial statements.

 

42


Tactical Diversified Futures Fund L.P.

Statements of Income and Expenses

for the years ended

December 31, 2015, 2014 and 2013

 

    2015     2014     2013  

Investment Income:

     

Interest income allocated from Funds

    $ 30,065          $ 36,299          $ 112,023     
 

 

 

   

 

 

   

 

 

 

Expenses:

     

Expenses allocated from Funds

    4,018,497          8,057,422          6,589,976     

Ongoing selling agent fees (Note 3c)

    4,664,139          10,176,335          24,446,857     

General Partner fees (Note 3a)

    2,324,802          639,011          -          

Management fees (Note 3b)

    2,807,792          3,672,489          6,332,311     

Incentive fees (Note 3b)

    1,694,935          -               214,722     

Professional fees

    655,176          603,840          345,892     
 

 

 

   

 

 

   

 

 

 

Total expenses

    16,165,341          23,149,097          37,929,758     
 

 

 

   

 

 

   

 

 

 

Net investment income (loss)

    (16,135,276)         (23,112,798)         (37,817,735)    
 

 

 

   

 

 

   

 

 

 

Trading Results:

     

Net gains (losses) on investment in Funds:

     

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

    20,924,263          42,270,714          17,025,029     

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

    (11,228,364)         2,591,843          8,482,705     
 

 

 

   

 

 

   

 

 

 

Total trading results

    9,695,899          44,862,557          25,507,734     
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    $ (6,439,377)         $ 21,749,759          $ (12,310,001)    
 

 

 

   

 

 

   

 

 

 

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

    $ (28.64)         $ 109.81          $ (27.13)    
 

 

 

   

 

 

   

 

 

 

Weighted average Redeemable Units outstanding

    232,010.8995          329,443.1807          478,297.7823     
 

 

 

   

 

 

   

 

 

 

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

See accompanying notes to financial statements.

 

43


Tactical Diversified Futures Fund L.P.

Statements of Changes in Partners’ Capital

for the years ended

December 31, 2015, 2014 and 2013

 

    Limited     General        
    Partners     Partner     Total  

Partners’ Capital, December 31, 2012

    $ 482,620,894          $ 5,561,644          $ 488,182,538     

Net income (loss)

    (12,173,352)         (136,649)         (12,310,001)    

Subscriptions of 10,974.3070 Redeemable Units

    10,139,653          -               10,139,653     

Redemptions of 130,543.6340 Redeemable Units

    (119,733,605)         -               (119,733,605)    

Redemptions of 973.0000 General Partner Redeemable Units

    -               (902,021)         (902,021)    
 

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2013

    360,853,590          4,522,974          365,376,564     

Net income (loss)

    21,494,422          255,337          21,749,759     

Subscriptions of 2,795.8450 Redeemable Units

    2,457,437          -               2,457,437     

Redemptions of 155,880.9060 Redeemable Units

    (134,564,735)         -               (134,564,735)    

Redemptions of 2,188.3040 General Partner Redeemable Units

    -               (1,914,039)         (1,914,039)    
 

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2014

    250,240,714          2,864,272          253,104,986     

Net income (loss)

    (6,385,734)         (53,643)         (6,439,377)    

Subscriptions of 1,201.8070 Redeemable Units

    1,259,286          -               1,259,286     

Redemptions of 40,641.1070 Redeemable Units

    (40,676,735)         -               (40,676,735)    

Redemptions of 357.9740 General Partner Redeemable Units

    -               (378,906)         (378,906)    
 

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2015

    $       204,437,531          $ 2,431,723          $ 206,869,254     
 

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit:

 

2013:

     $ 900.28     
  

 

 

 

2014:

     $   1,010.09     
  

 

 

 

2015:

     $ 981.45     
  

 

 

 

See accompanying notes to financial statements.

 

44


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

1.

Partnership Organization:

Tactical Diversified Futures Fund L.P. (the “Partnership”) is a limited partnership organized under the partnership laws of the State of New York on December 3, 2002 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 commodity interests that are traded by the Partnership indirectly through its investment in the Funds (as defined in Note 6 “Investment in Funds”) are volatile and involve a high degree of market risk. The General Partner (as 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.

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 were made for the Partnership by Graham Capital Management, L.P., (“Graham”), Willowbridge Associates Inc. (“Willowbridge”), Aspect Capital Limited (“Aspect”), Altis Partners (Jersey) Limited (“Altis”), JE Moody & Company LLC (“JE Moody”), Boronia Capital Pty. Ltd. (“Boronia”), and The Cambridge Strategy (Asset Management) Limited (“Cambridge”) (each an “Advisor” and collectively, the “Advisors”), each of which is a registered commodity trading advisor. Krom River Trading AG and Krom River Investment Management (Cayman) Limited (collectively, “Krom River”) was terminated as an advisor to the Partnership as of December 31, 2014. Drury Capital, Inc. (“Drury”) and Kaiser Trading Company Pty. Ltd. (“Kaiser”) were terminated as advisors to the Partnership as of June 30, 2014. References herein to “Advisors,” may include, as relevant, Krom River, Drury and Kaiser. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors indirectly through investments in the Funds.

Between March 27, 2003 (commencement of the offering period) and April 30, 2003, 36,616 redeemable units of limited partnership interest (“Redeemable Units”) were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until April 30, 2003, at which time they were turned over to the Partnership for trading. The Partnership was authorized to publicly offer 300,000 Redeemable Units during the initial public offering period. As of December 4, 2003, the Partnership was authorized to publicly offer an additional 700,000 Redeemable Units. As of October 7, 2004, the Partnership was authorized to publicly offer an additional 1,000,000 Redeemable Units. As of June 30, 2005, the Partnership was authorized to publicly offer the 2,000,000 Redeemable Units previously registered. The public offering of Redeemable Units terminated on November 30, 2008. The Partnership currently privately and continuously offers up to 200,000 Redeemable Units to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

During the years ended December 31, 2015 and 2014, the Partnership’s/Funds’ 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.

 

45


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

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

The Partnership will be liquidated upon the first to occur of the following: (1) December 31, 2022; (2) the net asset value per Redeemable Unit decreases to less than $400 per Redeemable Unit as of the close of any business day; or (3) the occurrence of certain other circumstances as set forth in the limited partnership agreement of the Partnership (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 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.

 

  c.

Partnership’s Investments. The Partnership carries its investments in the Funds at fair value based on the respective Fund’s net asset value per unit as calculated by the Fund or the Partnership’s (1) net contribution to the Funds and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of the Funds.

Funds’ Investments. All commodity interests including derivative financial instruments and derivative commodity instruments, held by the Partnership and the Funds 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 Funds’ Statements of Financial Condition. Net realized gains or losses and any net change in unrealized gains or losses from the preceding period are reported in the Funds’ 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.

 

46


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

  e.

Investment Company Status. Effective January 1, 2014, the Partnership adopted Accounting Standard 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 is calculated in accordance with investment company guidance. See Note 8, “Financial Highlights.”

 

  g.

Fair Value of Financial Instruments. The carrying value of the Partnership’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.

 

  h.

Recent Accounting Pronouncements. In May 2015, the 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 in 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.

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 Partnership’s financial statements and related disclosures.

 

47


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

  i.

Reclassification. Certain prior period amounts have been reclassified to conform to current period presentation. Amounts reported as professional fees were previously reported separately as professional fees and other in the Statements of Financial Condition and Statements of Income and Expenses. Amounts reported as expenses allocated from Funds were previously reported separately as clearing fees allocated from Funds and as part of other expenses in the Statements of Income and Expenses. In addition, management fees and incentive fees allocated from Boronia previously included within management fees and incentive fees are now included with expenses allocated from Funds in the Statements of Income and Expenses. In the financial highlights, the ongoing selling agent fees and clearing fees allocated from the Funds 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.

 

  j.

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 other than described in Note 10 to the financial statements, no events have occurred that require adjustments to or disclosure in the financial statements.

 

3.

Agreements:

 

  a.

Limited Partnership Agreement:

The General Partner administers the business and affairs of the Partnership including selecting one or more advisors to make trading decisions for the Partnership. The General Partner has agreed to make capital contributions, if necessary, so that its general partnership interest will be equal to the greater of (1) an amount that will entitle the General Partner to an interest of at least 1% in each material item of Partnership income, gain, loss, deduction or credit and (2) the greater of (i) 1% of the partners’ contributions to the Partnership or (ii) $25,000. Effective October 1, 2014, the Partnership pays the General Partner a monthly administrative fee (“General Partner fees”) (formerly, the administrative fees) in return for its services equal to 1/12th of 1% (1% per year) of month-end Net Assets of the Partnership. Month-end Net Assets, for the purpose of calculating General Partner fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fees, management fees, incentive fee accruals, the General Partner fee and any redemptions or distributions as of the end of such month.

 

  b.

Management Agreement:

The General Partner, on behalf of the Partnership, has entered into management agreements (each a “Management Agreement”) with the Advisors. The Advisors are not affiliated with one another, are not affiliated with the General Partner, MS&Co. or CGM and are not responsible for the organization or operation of the Partnership.

 

48


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

The Partnership paid Drury and will pay Graham a monthly management fee equal to 1/12th of 1.75% (1.75% per year) of month-end Net Assets allocated to the Advisor. Prior April 1, 2014, the Partnership paid Graham a monthly management fee of 1/6 of 1% (2% per year) of month-end Net Assets allocated to the Advisor. The Partnership paid JE Moody a monthly management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets allocated to the Advisor. The Partnership will pay Aspect and Willowbridge a monthly management fee equal to 1/12th of 1.5% (1.5% per year) of month-end Net Assets allocated to the Advisors. The Partnership will pay Altis a monthly management fee equal to 1/12th of 1.25% (1.25% per year) of month-end Net Assets allocated to Altis. Prior to August 1, 2015, the Partnership paid Altis a monthly management fee equal to 1/12th of 1.5% (1.5% per year) of month-end Net Assets allocated to Altis. From October 2013 to December 31, 2014 the Partnership paid Krom River a monthly management fee equal to 1/12th of 1% (1% per year), of month-end Net Assets allocated to the Advisor. Prior to October 1, 2013, Krom River received a monthly management fee equal to 2% per year. Boronia Trading Company will pay Boronia a monthly management fee of 1.5% per year of the aggregate net assets of the Boronia Trading Company as of the first day of each month. Prior to January 1, 2015, Boronia Trading Company paid Boronia a monthly management fee of 1.875% per year of the aggregate net assets of the Boronia Trading Company as of the first day of each month. During prior periods included in this report, Kaiser Trading Company paid Kaiser a monthly management fee of 2% per year of the aggregate net assets of Kaiser Trading Company as of the first day of each month. The Partnership will pay Boronia and Kaiser indirectly, the Partnership’s pro rata portion of the management fee of the Boronia Trading Company and Kaiser Trading Company (together with the Boronia Trading Company, the “Trading Companies,”) respectively (as both are defined in Note 6, “Investments in Funds”). Month-end Net Assets, for the purpose of calculating General Partner fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fees and any redemptions or distributions as of the end of such month. Each Management Agreement may be terminated upon notice by either party.

In addition, the Partnership is obligated to pay Altis, Aspect, Graham, JE Moody and Willowbridge an incentive fee, payable quarterly, equal to 20% and Cambridge an incentive fee, payable quarterly, equal to 15% of the New Trading Profits, as defined in each Management Agreement, earned by each Advisor for the Partnership during each calendar quarter. Boronia will receive an incentive fee equal to 20% of the New Trading Profits earned by Boronia I, LLC. To the extent an Advisor incurs a loss for the Partnership, 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. The incentive fee paid by Boronia I, LLC is allocated to the Partnership based on its proportionate ownership interest of Boronia I, LLC.

In allocating the assets of the Partnership among the trading advisors, the General Partner considers, among other factors, past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the trading advisors and may allocate assets to additional advisors at any time.

 

  c.

Customer Agreements/Selling Agent Agreement:

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

 

49


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

Under the CGM Customer Agreement, the Partnership paid CGM a monthly brokerage fee equal to 1/12th of 5.5% (5.5% per year) of month-end Net Assets, 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 accruals, the monthly management fees and other expenses and any redemptions or distributions as of the end of such month. The Partnership paid for exchange, service, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively the “CGM clearing fees”) directly and through its investment in the Funds cleared through CGM. CGM clearing fees were allocated to the Partnership based on its proportionate share of each Fund. During the term of the CGM Customer Agreement, all of the Partnership’s assets that were not held in the Funds’ accounts at CGM (or with respect to the Trading Companies, at MS&Co.) 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 a Fund’s except for the Trading Companies’) 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 will pay 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 Funds. MS&Co. clearing fees are allocated to the Partnership based on its proportionate share of each Fund. 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 Funds’ 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 a Fund’s, except for the Trading Companies) brokerage account at the rate equal to the monthly average of the 4-Week U.S. Treasury bill discount rate. MS&Co. has agreed to pay the Trading Companies on 100% of the average daily equity maintained in cash in each Trading Company’s respective brokerage account at the rate equal to the monthly average of the 4-Week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of these interest credits, daily funds do not include monies due to the Trading Companies on or with respect to futures, forward, or option contracts that have not been received. 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 ongoing selling agent fee was paid at a rate equal to 5.5% per year of month-end Net Assets. Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 5.5% to an annual rate of 3%. On October 1, 2014, the monthly ongoing selling agent fee was further reduced from an annual rate of 3% to an annual rate of 2%. Morgan Stanley Wealth Management will pay a portion of its ongoing selling agent fees to properly registered or exempted selling agents and to 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 fees, incentive fee accruals, the monthly management fees, the General Partner fee, other expenses and any redemptions or distributions as of the end of such month.

 

50


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

4.

Trading Activities:

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

During the second quarter of 2013, CMF Graham Capital Master Fund L.P. (“Graham Master”) entered into a futures brokerage account agreement and a foreign exchange brokerage account agreement with MS&Co. In the second quarter of 2013, CMF Aspect Master Fund L.P. (“Aspect Master”) and CMF Drury Capital Master Fund L.P. (“Drury Master”) also entered into a foreign exchange brokerage account agreement with MS&Co. Graham Master, Aspect Master and Drury Master commenced foreign exchange trading through accounts at MS&Co on or about May 1, 2013 and Graham Master commenced futures trading through an account at MS&Co on or about June 17, 2013. During the first quarter of 2014, Willowbridge Master Fund L.P. (“Willowbridge Master”) also entered into a foreign exchange brokerage account agreement with MS&Co. During the third quarter of 2013, Drury Master, Willowbridge Master, Aspect Master, KR Master Fund L.P. (“KR Master”) and CMF Altis Partners Master Fund L.P. (“Altis Master”) entered into a futures brokerage account agreement with MS&Co. Dury Master, Willowbridge Master, Aspect Master, KR Master and Altis Master commenced futures trading through accounts at MS&Co on or about July 8, 2013, July 29, 2013, July 15, 2013, August 5, 2013 and July 29, 2013, respectively. JEM Master Fund L.P. (“JEM Master”) entered in a futures account agreement with MS&Co and commenced trading through an account at MS&Co on or about October 10, 2013. Morgan Stanley Smith Barney Boronia I, LLC continues to be, and Morgan Stanley Smith Barney Kaiser I, LLC was, parties to a futures brokerage account agreement with MS&Co.

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

Ongoing selling agent fees are, and brokerage commissions were, calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Trading and transaction fees are based on the number of trades executed by the Advisors for the Funds.

 

5.

Fair Value Measurements:

Funds’ 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.

 

51


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

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 Funds consider 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 who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the year ended December 31, 2015 and 2014, the Funds 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 year ended December 31, 2015 and 2014, there were no transfers of assets and liabilities between Level 1 and Level 2.

 

6.

Investment in Funds:

On March 1, 2005, the assets allocated to Aspect for trading were invested in Aspect Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 131,340.8450 units of Aspect Master with cash equal to $122,786,448 and a contribution of open commodity futures and forward contracts with a fair value of $8,554,397. Aspect Master permits accounts managed by Aspect using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Aspect Master. Individual and pooled accounts currently managed by Aspect, including the Partnership, are permitted to be limited partners of Aspect Master. The General Partner and Aspect believe that trading through this structure should promote efficiency and economy in the trading process.

On July 1, 2005, the assets allocated to Willowbridge for trading were invested in Willowbridge Master (formerly CMF Willowbridge Argo Master Fund L.P.), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 95,795.8082 units of Willowbridge Master with cash equal to $85,442,868 and a contribution of open commodity futures and forward contracts with a fair value of $10,352,940. Willowbridge Master permits accounts managed by Willowbridge using its wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Willowbridge have agreed that Willowbridge will trade the assets allocated to Willowbridge at a level up to 3 times the amount of assets allocated. Prior to January 1, 2013, Willowbridge traded the Partnership’s assets pursuant to its Argo Trading System.

 

52


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

On August 1, 2005, the assets allocated to Drury for trading were invested in Drury Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 120,720.7387 units of Drury Master with cash equal to $117,943,206 and a contribution of open commodity futures and forward contracts with a fair value of $2,777,533. Drury Master permitted accounts managed by Drury using the Diversified Trend-Following Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Drury Master on June 30, 2014 for cash equal to $11,948,244.

On June 1, 2006, the assets allocated to Graham for trading were invested in Graham Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 101,486.0491 units of Graham Master with cash equal to $103,008,482. Graham Master permits accounts managed by Graham using the K4D-15V Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Graham Master. Individual and pooled accounts currently managed by Graham, including the Partnership, are permitted to be limited partners of Graham Master. The General Partner and Graham believe that trading through this structure should promote efficiency and economy in the trading process.

On May 1, 2011, the assets allocated to Krom River for trading were invested in KR Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in KR Master with cash equal to $65,000,000. KR Master permitted commodity pools managed by Krom River using the Krom River Commodity Program, a proprietary, discretionary system which was traded on both a fundamental and technical basis, to invest together in one trading vehicle. The Partnership fully redeemed its investment in the KR Master on December 31, 2014 for cash equal to $8,902,959.

On May 1, 2011, the assets allocated to Altis for trading were invested in Altis Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 21,851.9469 units of Altis Master with cash equal to $70,000,000. Altis Master permits commodity pools managed now and in the future by Altis using the Global Futures Portfolio Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Altis Master. Individual and pooled accounts currently managed by Altis, including the Partnership, are permitted to be limited partners of Altis Master. The General Partner and Altis believe that trading through this structure should promote efficiency and economy in the trading process.

On January 1, 2013, the assets allocated to Boronia for trading were invested in Morgan Stanley Smith Barney Boronia I, LLC (“Boronia I, LLC” or “Boronia Trading Company”), a limited liability company organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Boronia I, LLC with cash equal to $36,000,000. Boronia I, LLC permits accounts managed by Boronia using the Boronia Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the manager of Boronia I, LLC. Individual and pooled accounts currently managed by Boronia, including the Partnership, are permitted to be members of Boronia I, LLC. The General Partner and Boronia believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Boronia agreed that Boronia will trade the Partnership’s assets allocated to Boronia at a level up to 1.5 times the amount of assets allocated.

On January 1, 2013, the assets allocated to Kaiser for trading were invested in Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC” or “Kaiser Trading Company” and together with the Boronia Trading Company, the “Trading Companies”), a limited liability company organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Kaiser I, LLC with cash equal to $30,000,000. Kaiser I, LLC permitted accounts managed by Kaiser using the Global Diversified Trading Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Kaiser Trading Company on June 30, 2014 for cash equal to $29,367,227.

 

53


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

On August 1, 2013, the assets allocated to JE Moody for trading were invested in JEM Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 11,968.0895 units of JEM Master with cash equal to $15,820,000. JEM Master permits accounts managed by JE Moody using the JEM Commodity Relative Value Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner for JEM Master. Individual and pooled accounts currently managed by JE Moody, including the Partnership, are permitted to be limited partners of JEM Master. The General Partner and JE Moody believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and JE Moody agreed that JE Moody will trade the Partnership’s assets allocated to JE Moody at a level that is up to 3 times the amount of assets allocated.

On December 1, 2015, the assets allocated to Cambridge for trading were invested in Cambridge Master Fund L.P. (Cambridge Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Cambridge Master with cash equal to $17,000,000. Cambridge Master permits accounts managed by Cambridge using the Asian Markets Alpha Programme and the Emerging Markets Alpha Programme, each a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Cambridge Master. Individual and pooled accounts currently managed by Cambridge, including the Partnership, are permitted to be limited partners of Cambridge Master. The General Partner and Cambridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Cambridge agreed that Cambridge will trade the Partnership’s assets allocated to Cambridge at a level that is up to 1.5 times the amount of assets allocated. The amount of leverage may be increased or decreased in the future. However, in no event will the amount of leverage be greater than 2 times the amount of assets allocated.

The General Partner is not aware of any material changes to the trading programs discussed above during the year ended December 31, 2015.

Aspect Master’s, Willowbridge Master’s, Graham Master’s, Altis Master’s, JEM Master’s, Boronia I, LLC’s, and Cambridge Master’s (collectively, the “Funds”) trading of futures, forward 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 Funds engaged in such trading through commodity brokerage accounts maintained with MS&Co. During a prior period included in this report, certain of the Funds and the Partnership engaged in such trading through commodity brokerage accounts maintained with CGM. References herein to “Funds” may also include as relevant, references to Drury Master, KR Master and Kaiser I, LLC.

Generally, a limited partner/member in the Funds withdraws all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, a limited partner/member may request a withdrawal as of the end of any day if such request is received by the General Partner/Trading Manager at least three days in advance of the proposed withdrawal day.

Management fees, General Partner and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Boronia which are charged at the Boronia Trading Company level and Kaiser (prior to its termination on June 30, 2014) which were charged at the Kaiser Trading Company level. All clearing fees are borne by the Funds and allocated to the Funds’ limited partners, including the Partnership. Professional fees and other expenses are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level. All other fees are charged at the Partnership level.

 

54


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

At December 31, 2015, the Partnership owned approximately 13.7% of Willowbridge Master, 55.3% of Aspect Master, 72.7% of Graham Master, 59.7% of Altis Master, 61.0% of JEM Master, 48.8% of Boronia I, LLC and 28.3% of Cambridge Master. At December 31, 2014, the Partnership owned approximately 19.7% of Willowbridge Master, 57.4% of Aspect Master, 73.5% of Graham Master, 73.4% of KR Master (prior to its redemption on December 31, 2014), 67.4% of Altis Master, 70.6% of JEM Master and 50.5% of Boronia I, LLC. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to the investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.

Summarized information reflecting the total assets, liabilities and capital for the Funds is shown in the following tables.

 

     December 31, 2015  
         Total Assets            Total Liabilities            Total Partners’    
Capital
 

Willowbridge Master

     $ 366,002,932           $ 17,302,983           $ 348,699,949     

Aspect Master

     68,986,804           521,227           68,465,577     

Graham Master

     52,819,144           17,985           52,801,159     

Altis Master

     44,778,165           463,886           44,314,279     

JEM Master

     11,192,959           67,453           11,125,506     

Boronia I, LLC

     74,378,857           119,223           74,259,634     

Cambridge Master

     59,992,404           282,482           59,709,922     
     December 31, 2014  
                   Total Partners’  
     Total Assets      Total Liabilities      Capital  

Willowbridge Master

     $ 332,179,217           $ 16,638,854           $ 315,540,363     

Aspect Master

     78,421,434           50,766           78,370,668     

Graham Master

     68,175,989           19,684,323           48,491,666     

KR Master

     12,415,386           12,415,386           -        

Altis Master

     51,413,912           51,279           51,362,633     

JEM Master

     29,918,670           42,666           29,876,004     

Boronia I, LLC

     106,126,940           1,864,006           104,262,934     

 

55


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

Summarized information reflecting the net investment income (loss), total trading results and net income (loss) of the Funds is shown in the following tables.

 

     For the Year Ended December 31, 2015  
       Net Investment            Total Trading          Net Income  
     Income (Loss)      Results      (Loss)  

Willowbridge Master

     $ (783,256)           $ 6,652,400          $ 5,869,144    

Aspect Master

     (225,822)           8,457,822          8,232,000    

Graham Master

     (195,170)           3,492,009          3,296,839    

Altis Master

     (290,420)           1,080,015          789,595    

JEM Master

     (865,124)           1,989,416          1,124,292    

Boronia I, LLC

     (5,553,365)           (1,907,916)         (7,461,281)   

Cambridge Master

     (86,844)           9,062,618          8,975,774    
     For the Year Ended December 31, 2014  
       Net Investment            Total Trading              Net Income      
     Income (Loss)      Results      (Loss)  

Drury Master

     $ (89,782)           $ (1,655,418)         $ (1,745,200)   

Willowbridge Master

     (688,357)           46,239,150          45,550,793    

Aspect Master

     (296,488)           19,798,779          19,502,291    

Graham Master

     (242,965)           16,201,289          15,958,324    

KR Master

     (159,030)           893,723          734,693    

Altis Master

     (359,914)           5,510,697          5,150,783    

JEM Master

     (1,002,655)           (1,233,774)         (2,236,429)   

Boronia I, LLC

     (8,018,719)           25,120,740          17,102,021    

Kaiser I, LLC

     (868,868)           (5,469,979)         (6,338,847)   

 

56


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

Summarized information reflecting the Partnership’s investment in, and the operations of, the Funds are shown in the following tables.

 

     December 31, 2015      For the year ended December 31, 2015            
                          Expenses                   
     % of Partnership’s                                                Net            
     Net      Fair      Income                    Management      Incentive      Income          Investment            Redemptions    

Funds

   Assets      Value      (Loss)        Clearing Fees        Other      Fee      Fee      (Loss)      Objective    Permitted
                           Commodity   

Willowbridge Master

     23.12%         $ 47,827,925          $ 1,057,948          $ 129,770          $ 14,998          $ -               $ -               $ 913,180        Portfolio    Monthly
                           Commodity   

Aspect Master

     18.31%         37,891,702          4,617,152          73,252          52,750          -               -               4,491,150        Portfolio    Monthly
                           Commodity   

Graham Master

     18.56%         38,390,905          2,446,215          79,626          62,130          -               -               2,304,459        Portfolio    Monthly
                           Commodity   

Altis Master

     12.80%         26,474,103          812,714          129,062          54,994          -               -               628,658        Portfolio    Monthly
                           Commodity   

JEM Master

     3.28%         6,784,895          1,404,720          506,338          55,587          -               -               842,795        Portfolio    Monthly
                           Commodity   

Boronia I, LLC

     17.53%         36,257,683          (533,992)         1,402,168          189,514          812,211          455,860          (3,393,745)       Portfolio    Monthly
                           Commodity   

Cambridge Master

     8.18%         16,920,970          (78,793)         800          (563)         -               -               (79,030)       Portfolio    Monthly
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total

        $ 210,548,183          $ 9,725,964          $ 2,321,016          $   429,410          $ 812,211          $ 455,860          $ 5,707,467          
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       
     December 31, 2014      For the year ended December 31, 2014            
                          Expenses                   
     % of Partnership’s                                                Net            
     Net      Fair      Income                    Management      Incentive      Income          Investment            Redemptions    

Funds

   Assets      Value      (Loss)        Clearing Fees        Other      Fee      Fee      (Loss)      Objective    Permitted
                           Commodity   

Drury Master

     0.00%         $ -               $ (1,532,410)         $ 30,208          $ 49,587          $ -               $ -             $ (1,612,205)       Portfolio    Monthly
                           Commodity   

Willowbridge Master

     24.55%         62,129,797          13,565,103          298,476          64,050          -               -               13,202,577        Portfolio    Monthly
                           Commodity   

Aspect Master

     17.77%         44,990,232          11,266,656          108,668          83,999          -               -               11,073,989        Portfolio    Monthly
                           Commodity   

Graham Master

     14.07%         35,625,655          8,260,756          66,382          52,688          -               -               8,141,686        Portfolio    Monthly
                           Commodity   

KR Master

     0.00%         -               632,424          66,420          75,744           -               -               490,260        Portfolio    Monthly
                           Commodity   

Altis Master

     13.67%         34,598,755          3,357,993          190,568          81,196          -               -               3,086,229        Portfolio    Monthly
                           Commodity   

JEM Master

     8.33%         21,079,026          (806,742)         631,720          81,982          -               -               (1,520,444)       Portfolio    Monthly
                           Commodity   

Boronia I, LLC

     20.81%         52,666,212          13,121,825          1,074,596          143,421          768,327          3,697,637          7,437,844        Portfolio    Monthly
                           Commodity   

Kaiser I, LLC

     0.00%         -               (2,966,749)         157,986          49,710          284,057          -               (3,458,502)       Portfolio    Monthly
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

Total

        $ 251,089,677          $   44,898,856          $ 2,625,024          $   682,377          $   1,052,384          $   3,697,637          $   36,841,434          
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

7.

Subscriptions, Distributions and Redemptions:

Subscriptions are accepted monthly from investors who become limited partners on the first day of the month after their subscriptions are 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 as of the end of each month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions.

 

57


8.

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)

     $ 40.15         $ 181.53       $ 51.89    

Net investment loss

     (68.79)        (71.72)        (79.02)   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) for the year

     (28.64)        109.81         (27.13)   

Net asset value per Redeemable Unit, beginning of year

     1,010.09         900.28         927.41    
  

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of year

     $ 981.45         $ 1,010.09       $ 900.28    
  

 

 

   

 

 

   

 

 

 
             2015                     2014                     2013          

Ratios to average net assets:

      

Net investment loss*

     (7.0)       (8.2)       (8.7)  
  

 

 

   

 

 

   

 

 

 

Operating expense

     6.1        6.9        8.2   

Incentive fees

     0.9        1.3        0.5   
  

 

 

   

 

 

   

 

 

 

Total expenses

     7.0        8.2        8.7   
  

 

 

   

 

 

   

 

 

 

Total return:

      

Total return before incentive fees

     (1.9)       13.5        (2.4)  

Incentive fees

     (0.9)       (1.3)       (0.5)  
  

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (2.8)       12.2        (2.9)  
  

 

 

   

 

 

   

 

 

 

 

*

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 of the Partnership and include the income and expenses allocated from the Funds.

 

58


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

9.

Financial Instrument Risks:

In the normal course of business, the Partnership, through its investment in Funds, are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forward, futures, option and swap contracts, whose values re based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, 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, swap 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. 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, swap and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 12.6% to 53.9% of the Fund’s contracts are traded OTC.

Futures Contracts. The Funds trade 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 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 Funds 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 Funds. When the contract is closed, the Funds record 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 Funds’ Statements of Income and Expenses.

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Funds agree 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 Funds’ 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 Funds’ Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Funds’ Statements of Income and Expenses.

 

59


Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

 

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 Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Funds 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 Funds. 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 Funds record 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 Funds’ Statements of Income and Expenses.

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

The Funds do 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 Funds’ Statements of Income and Expenses.

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

Market risk is the potential for changes in the value of the financial instruments traded by the Funds 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 Funds are 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/Funds’ 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/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds 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 Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that through MS&Co./CGM the Partnership’s/Funds’ counterparty is an exchange or clearing organization. The Partnership/Funds continue to be subject to such risks with respect to MS&Co.

 

60


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

The General Partner monitors and attempts to control the Partnership’s/Funds’ 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/Funds 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 Funds’ business, these instruments may not be held to maturity.

 

10.

Subsequent Events:

Effective January 1, 2016, the monthly management fee paid to JE Moody was reduced to 1/12th of 1.5% (1.5% per year).

 

61


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

   $ 3,942,404      $ 15,510,709      $ (28,443,934   $ 18,686,720   

Total investment income

     11,610        12,278        2,701        3,476   

Total expenses

     (3,072,634     (3,366,321     (3,679,406     (6,046,980
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 881,380      $ 12,156,666      $ (32,120,639   $ 12,643,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit

   $ 3.58      $ 52.89      $ (135.94   $ 50.83   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     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

   $ 38,185,503      $ 15,425,555      $ 11,645,184      $ (20,393,685

Total investment income

     5,341        5,544        7,794        17,620   

Total expenses

     (6,222,541     (5,041,436     (4,676,256     (7,208,864
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 31,968,303      $ 10,389,663      $ 6,976,722      $ (27,584,929
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net asset value per Redeemable Unit

   $ 121.64      $ 37.76      $ 19.79      $ (69.38
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

62


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 Securities 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 Securities 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.

 

63


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 Trading Advisors.

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) MSSBH 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 or until his or her death, resignation or removal.

Directors of the General Partner are responsible for overall corporate governance of the General Partner and meet periodically to consider strategic decisions regarding the General Partner’s activities. Under CFTC rules, each Director of the General Partner is deemed to be a principal of the General Partner and, as a result, is listed as such with the NFA. Patrick T. Egan, Feta Zabeli and Steven Ross serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions.

Patrick T. Egan, age 47, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Egan has been a principal and registered as an associated person of the General Partner, and is an associate member of NFA. Since October 2014, Mr. Egan has served as President and Chairman of the Board of Directors of the General Partner. Since August 2013, Mr. Egan has been registered as a swap associated person of the General Partner. From September 2013 to May 2014, Mr. Egan served as a Vice President of Morgan Stanley Strategies LLC, (formerly, Morgan Stanley GWM Feeder Strategies LLC), which acts as a general partner to multiple alternative investment entities, and Morgan Stanley AI GP LLC, (formerly, Morgan Stanley HedgePremier GP LLC), which acts as a general partner and administrative agent to numerous hedge fund feeder funds. From September 2013 to May 2014, Mr. Egan was registered as an associated person and listed as a principal of each such entity. Since January 2013, each such entity has been registered as a commodity pool operator with the CFTC. Mr. Egan was responsible for overseeing the implementation of certain CFTC and NFA regulatory requirements applicable to such entities. From June 2009 to December 2014, Mr. Egan was employed by Morgan Stanley Smith Barney LLC, a financial services firm, where his responsibilities included serving as Executive Director and as Co-Chief Investment Officer for Morgan Stanley Managed Futures from June 2009 through June 2011 and as Chief Risk Officer for Morgan Stanley Managed Futures from June 2011 through October 2014. Since October 2014, Mr. Egan has been responsible for management of the day-to-day operations of Morgan Stanley Managed Futures. Since January 2015, Mr. Egan has been employed by the General Partner. From November 2010 to October 2014, Mr. Egan was registered as an associated person of Morgan Stanley Smith Barney LLC. From April 2007 through June 2009, Mr. Egan was employed by MS & Co., a financial services firm, where his responsibilities included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From April 2007 through November 2010, Mr. Egan was registered as an associated person of MS & Co. From March 1993 through April 2007, Mr. Egan was employed by Morgan Stanley DW Inc., a financial services firm, where his initial responsibilities included serving as an analyst and manager within the Managed Futures Department (with primary responsibilities for product development, due diligence, investment analysis and risk management of the firm’s commodity pools) and later included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From February 1998 through April 2007, Mr. Egan was registered as an associated person of Morgan Stanley DW Inc. From August 1991 through March 1993, Mr. Egan was employed by Dean Witter Intercapital, the asset management arm of Dean Witter Reynolds, Inc., where his responsibilities included serving as a mutual fund administration associate. Mr. Egan also served as a Director from November 2004 through October 2006, and from November 2006 through October 2008 of the Managed Funds Association’s Board of Directors, a position he was elected to by industry peers for two consecutive two-year terms. Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.

Steven Ross, age 44, has been Chief Financial Officer and a principal of the General Partner since July 2014 and a Director of the General Partner since February 2016. Mr. Ross has been employed by Morgan Stanley Investment Management, a financial services firm, since September 2005, where his responsibilities include serving as an Assistant Treasurer of Morgan Stanley with respect to certain investment vehicles publicly offered by Morgan Stanley. Mr. Ross is also an Executive Director of the Morgan Stanley Fund Administration Group where he is responsible for finance and accounting matters for certain private funds offered by Morgan Stanley. Before joining Morgan Stanley Investment Management, Mr. Ross was employed by JPMorgan Investor Services Co., a financial services firm, from December 1997 through September 2005, where his responsibilities included serving as a Vice President responsible for the accounting of certain funds sponsored by JP Morgan Chase & Co. and other large fund families serviced by JPMorgan Investor Services Co. From April 1997 to December 1997, Mr. Ross was employed by Investors Bank & Trust, a financial services firm, where his responsibilities included performing mutual fund accounting for financial services firms. Mr. Ross began his career at Putnam Investments LLC, a financial services firm, where he was responsible for providing broker services for certain funds sponsored by Putnam Investments LLC from August 1996 to April 1997. Mr. Ross received a B.S. in Accounting from Rhode Island College in May 1995.

M. Paul Martin, age 57, has been a Director of the General Partner since October 2014. Mr. Martin has also served as Managing Director – Global Operations of Morgan Stanley Investment Management, a financial services firm, since June 2006, where his responsibilities include managing all elements of in-sourced and out-sourced global operations, and serving as a senior member of Morgan Stanley Investment Management’s Management, Risk Management, & New Products Committees. Mr. Martin has been listed as a principal of the General Partner since October 2014. Mr. Martin previously served as the Managing Director and Chief Operating Officer of Morgan Stanley Fund Services, a financial services firm, where his responsibilities included launching the Hedge Fund Administration business and being responsible for operations, fund accounting and administration, technology and compliance, from May 2004 through May 2006. Previously, Mr. Martin served as Managing Director – Institutional Investment Operations of Morgan Stanley Investment Management from January 1995 until April 2004, where his responsibilities included trading room support, portfolio administration, service provider management, and derivatives processing and control. From April 1994 through January 1995, Mr. Martin served as Senior Vice President and Head of Custody Operations for Fidelity Investments, a financial services firm. From October 1989 through April 1994, Mr. Martin served as Executive Director and Head of Global Operations for Morgan Stanley Trust Company, a financial services firm. Mr. Martin also served as Vice President – Information Technology for MS & Co., a financial services firm, from June 1984 through October 1989, where his responsibilities included acting as Senior Developer and Programming Manager – Prime Brokerage and Securities Clearance Systems, and as Part-time Manager – IT Training Program. From February 1984 through May 1984, Mr. Martin served as a Senior Analyst in the Financial Control Group of Shearson Lehman Brothers, Inc., a financial services firm. From October 1980 through January 1984, Mr. Martin served as a Senior Consultant – Management Information Consulting Division at Arthur Andersen & Co., an accounting firm, where his responsibilities included programming and programming supervisory roles at large governmental agencies. Mr. Martin received a B.S. in Business Administration - Finance from Georgetown University in May 1980 and an M.B.A. in Finance from New York University in June 1993.

 

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Feta Zabeli, age 56, has been a Director of the General Partner since October 2014. Mr. Zabeli is also Global Head of Risk for Morgan Stanley Investment Management’s Traditional Asset Management business where he is responsible for investment risk of all equity, fixed income, money market, multi-asset class and alternatives portfolios. He is also responsible for counterparty and quantitative model risk for the traditional asset management business. He joined Morgan Stanley in January 2012. Mr. Zabeli has been listed as a principal of Morgan Stanley Investment Management since February 2015 and the General Partner since October 2014. Mr. Zabeli was on garden leave in December 2011. From February 2006 to November 2011, Mr. Zabeli was Senior Vice President, and most recently Global Co-Head of Risk, for AllianceBernstein L.P., a global investment firm, with various risk management assignments in Hong Kong, Tokyo, London and New York. From August 2006 to April 2009, Mr. Zabeli was based in Hong Kong for AllianceBernstein as the Director of Risk Management for Asia Pacific. From April 2009 to July 2011, he was based in Tokyo for AllianceBernstein as both Director of Risk Management for Asia Pacific and Head of Risk Management for Japan. From July 2011 to November 2011, he was based in London for AllianceBernstein as Global Head of Operational & Credit/Counterparty Risk. In these roles at AllianceBernstein he was responsible for the full range of risk management functions including investment, operational and credit/counterparty risk. Prior to his Risk Management roles at Morgan Stanley and AllianceBernstein, Mr. Zabeli held positions as a managing director at Citigroup Asset Management, the asset management division of Citigroup, an international financial services company, from April 1998 to January 2006, where he worked as a quantitative research analyst and portfolio manager, and director at BARRA Inc., a global provider of risk analytic tools to investment institutions, from September 1993 to March 1998, where he developed risk models and applications. Mr. Zabeli received a B.S. in Aerospace Engineering from Rensselaer Polytechnic Institute in May 1982, an M.S. in Electrical Engineering from the University of Southern California in May 1988 and an M.B.A. from the University of California at Los Angeles in August 1992.

The Partnership has not adopted a code of ethics that applies to officers because it has no officers. In addition, the Partnership has not adopted any procedures by which investors may recommend nominees to the Partnership’s board of directors and has not established an audit committee because it has no board of directors.

 

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Item 11. Executive Compensation.

The Partnership has no directors or officers. Its affairs are managed by the General Partner. For the year ended December 31, 2015, as compensation for its services, the Partnership paid the General Partner General Partner fees, as described under “Item 1. Business.” During the fourth quarter of 2015, the General Partner earned $538,999 in General Partner fees. Morgan Stanley Wealth Management, an affiliate of the General Partner, is the selling agent for the Partnership and receives an ongoing selling agent fee for such services, as described under “Item 1. Business.” For the year ended December 31, 2015, Morgan Stanley Wealth Management earned $4,664,139 in ongoing selling agent fees from the Partnership. MS&Co., an affiliate of the General Partner, is the commodity broker for the Partnership/Funds and receives trading fees for such services, as described under “Item 1. Business.” For the year ended December 31, 2015, MS&Co. earned $2,321,016 in trading fees from the Partnership. As compensation for their services, the Partnership pays the Advisors management and incentive fees as described under “Item 1. Business.” For the year ended December 31, 2015, the Advisors earned $3,620,003 in management fees and $2,150,795 in incentive fees. An Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

(a) Security ownership of certain beneficial owners. As of February 29, 2016, the Partnership knows of no person who beneficially owns more than 5% of the Redeemable Units outstanding.

(b) Security ownership of management. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by the General Partner.

The following table indicates securities owned by management as of December 31, 2015:

 

(1) Title of Class

 

(2) Name of

Beneficial Owner

 

(3) Amount and Nature

of Beneficial Ownership

 

(4) Percent of

Class

     

General Partner Redeemable Units

 

General Partner

 

2,477.6854

 

1.18%

(c) Changes in control. None.

Item 13. Certain Relationships and Related Transactions and Director Independence.

(a) Transactions with related persons. None.

(b) Review, approval or ratification of transactions with related persons. Not applicable.

(c) Promoters and certain control persons. MS&Co., CGM, Morgan Stanley Wealth Management and the General Partner would be considered promoters for purposes of Item 404(c) of Regulation S-K. The nature and the amounts of compensation each promoter received or will receive, if any, from the Partnership are set forth under “Item 1. Business” and “Item 11. Executive Compensation.”

Item 14. Principal Accountant Fees and Services.

(1) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte & Touche LLP (“Deloitte”) in the years ended December 31, 2015 and 2014 for the audit of the Partnership’s annual financial statements, review of financial statements included in the Partnership’s Forms 10-Q and 10-K and other services normally provided in connection with regulatory filings or engagements were:

 

2015

  

$325,200

  

2014

  

$302,600

  

(2) Audit-Related Fees. None.

(3) Tax Fees. The Partnership did not pay Deloitte any amounts in 2015 and 2014 for professional services in connection with tax compliance, tax advice, and tax planning.

(4) All Other Fees. None.

(5) Not Applicable.

(6) Not Applicable.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

 

(a)(1) Financial Statements:

        Statements of Financial Condition at December 31, 2015 and 2014.

        Condensed Schedules of Investments 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.

        Notes to Financial Statements.

(2) Exhibits:

  3.1   

Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.2 to the Registration on Form S-1 filed on December 20, 2002 and incorporated herein by reference).

  (a)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 99.2 to the current report on Form 8-K filed on November 3, 2009 and incorporated herein by reference).

  (b)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 99.3 to the current report on Form 8-K filed on November 3, 2009 and incorporated herein by reference).

  (c)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 99.4 to the current report to Form 8-K filed on November 3, 2009 and incorporated herein by reference).

  (d)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the current report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).

  (e)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 29, 2010 (filed as Exhibit 3.1(e) to the current report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).

  (f)   

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the current report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).

  (g)   

Certificate of Amendment to the Certificate of Limited Partnership dated August 7, 2013 (filed as Exhibit 3.1(g) to the Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

  3.2   

Limited Partnership Agreement (filed as Exhibit A to the Post-Effective Amendment No. 5 to the Registration on Form S-1 filed on April 22, 2008 and incorporated herein by reference).

  (a)   

Amendment No. 1 to the Limited Partnership Agreement, dated May 31, 2009 (filed as Exhibit 99.1 to the current report on Form 8-K filed on November 3, 2009 and incorporated herein by reference).

  (b)   

Amendment No. 2 to the Limited Partnership Agreement dated as of August 8, 2014 and effective October 1, 2014 (filed as Exhibit 3.2(b) to the Quarterly Report on Form 10-Q filed August 13, 2014 and incorporated herein by reference)

  10.1   

Amended and Restated Customer Agreement among the Partnership and Salomon Smith Barney Inc. (filed as Exhibit 10.1 to the Pre-Effective Amendment No. 2 to the Registration on Form S-1 filed on March 18, 2003 and incorporated herein by reference).

  (a)   

Commodity Futures Customer Agreement between the Partnership and MS&Co. (filed as Exhibit 10.1(b) to the Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

  (b)   

U.S. Treasury Securities Purchase Authorization Agreement, between the Partnership and MS&Co., effective June 1, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 4, 2015 and incorporated herein by reference).

  10.2   

Subscription Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York(file as Exhibit 10.2 to the Form 10-K filed on March 27, 2013).

 

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  (a)

  

Fifth Amendment to the Escrow Agreement among the Bank of New York, the General Partner and Morgan Stanley Smith Barney LLC (filed as Exhibit 10.2(a) to the Form 10-K filed on March 27, 2013).

  10.3

  

Management Agreement among the Partnership, the General Partner and Graham (filed as Exhibit 10.5 to the Registration on Form S-1 filed on December 20, 2002).

  (a)

  

Letter from the General Partner extending Management Agreement with Graham from June 30, 2015 through June 30, 2016 (dated June 1, 2015 and filed herewith).

  (b)

  

Amendment No. 1 to the Management Agreement between the Partnership, the General Partner and Graham, effective April, 2014 (filed as Exhibit 10.3(b) to the Quarterly Report on the Form 10-Q filed on May 14, 2014 and incorporated herein by reference).

  10.4

  

Management Agreement among the Partnership, the General Partner and Willowbridge (filed as Exhibit 10.7 to the Registration on Form S-1 filed on December 20, 2002).

  (a)

  

Amendment to the Management Agreement, dated January 1, 2013, by and among the Partnership, the General Partner and Willowbridge (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 7, 2013).

  (b)

  

Letter from the General Partner extending Management Agreement with Willowbridge from June 30, 2015 through June 30, 2016 (dated June 1, 2015 and filed herewith).

  10.5

  

Management Agreement among the Partnership, the General Partner and Drury (filed as Exhibit 10.4 to the Pre- Effective Amendment No. 1 to the Registration on Form S-1 filed on February 14, 2003).

  (a)

  

Letter from the General Partner extending Management Agreement with Drury from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.5(a) to the Annual Report on Form 10-K filed on March 31, 2014 and incorporated herein by reference).

  10.8

  

Management Agreement among the Partnership, the General Partner and Aspect (filed as Exhibit 10.4 to the Form 10-K filed on March 16, 2005 and incorporated herein by reference).

  (a)

  

Letter from the General Partner extending Management Agreement with Aspect from June 30, 2015 through June 30, 2016 (dated June 1, 2015 and filed herewith).

  10.9

  

Management Agreement among the Partnership, the General Partner and Altis (filed as Exhibit 10.13 to the Form 8-K filed on May 3, 2011 and incorporated herein by reference).

  (a)

  

Letter from the General Partner extending Management Agreement with Altis from June 30, 2015 through June 30, 2016 (dated June 1, 2015 and filed herewith).

  (b)

  

Amendment to the Management Agreement dated August 1, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 6, 2015 and incorporated herein by reference).

  10.10

  

Management Agreement among the Partnership, the General Partner and Krom River (filed as Exhibit 10.14 to the Form 8-K filed on May 3, 2011 and incorporated herein by reference).

  (a)

  

Letter from the General Partner extending Management Agreement with Krom River from June 30, 2014 through June 30, 2015 (dated June 1, 2014 and filed as Exhibit 10.10(a) to the Form 10-K filed on March 30, 2015 and incorporated herein by reference).

  (b)

  

Amendment to the Management Agreement dated October 1, 2013, by and among the Partnership, the General Partner and Krom River (filed as exhibit 10.1 to the current report on From 8-K filed on October 7, 2013 and incorporated herein by reference).

  10.11

  

Amended and Restated Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, dated March 3, 2016 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 8, 2016 and incorporated herein by reference).

  10.12

  

Form of Subscription Agreement (filed as Exhibit 10.12 to the Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

  10.13

  

Management Agreement among the Partnership, the General Partner and JE Moody (filed as Exhibit 10.1 to the Form 8-K filed on August 7, 2013 and incorporated herein by reference).

  10.14

  

Amended and Restated Master Services Agreement by and among the Partnership, the General Partner and SS&C Technologies, Inc. (filed as Exhibit 10.2 to the Current Report on Form 8-K filed on August 6, 2015 and incorporated herein by reference).

  10.15

  

Management Agreement among the Partnership, the General Partner and Cambridge (filed as Exhibit 10.1 to the Form 8-K filed on December 4, 2015 and incorporated herein by reference).

  99.1

  

Financial Statements of CMF Aspect Master Fund L.P.

  99.2

  

Financial Statements of CMF Willowbridge Master Fund L.P.

  99.3

  

Financial Statements of CMF Graham Capital Master Fund L.P.

 

68


  99.4

  

Financial Statements of CMF Altis Partners Master Fund L.P.

  99.5

  

Financial Statements of JEM Master Fund L.P.

  99.6

  

Financial Statements of Morgan Stanley Smith Barney Boronia I, LLC.

  99.7

  

Financial Statements of Cambridge Master Fund L.P.

  The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by reference:

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

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

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

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

 

  101.INS

 

XBRL Instance Document.

  101.SCH

 

XBRL Taxonomy Extension Schema Document.

  101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

  101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

  101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

  101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

69


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TACTICAL DIVERSIFIED FUTURES FUND L.P.

 

By:

 

Ceres Managed Futures LLC

(General Partner)

   

By:

 

/s/ Patrick T. Egan

 
 

Patrick T. Egan

 
 

President and Director

 
 

Date: March 28, 2016

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

 

/s/ Patrick T. Egan

    

/s/ Feta Zabeli

 
 

Patrick T. Egan

    

Feta Zabeli

 
 

President and Director

    

Director

 
 

Ceres Managed Futures LLC

    

Ceres Managed Futures LLC

 
 

Date: March 28, 2016

    

Date: March 28, 2016

 
 

/s/ Steven Ross

    

/s/ M. Paul Martin

 
 

Steven Ross

    

M. Paul Martin

 
 

Chief Financial Officer and Director

    

Director

 
 

(Principal Accounting Officer)

    

Ceres Managed Futures LLC

 
 

Ceres Managed Futures LLC

    

Date: March 28, 2016

 
 

Date: March 28, 2016

      

Supplemental Information to be Furnished With Reports Filed Pursuant To Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.

Annual Report to Limited Partners

No proxy material has been sent to Limited Partners.

 

70