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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to__________________
Commission File Number 0-15442
DEAN WITTER CORNERSTONE FUND IV
(Exact name of registrant as specified in its charter)
New York 13-3393597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Demeter Management Corporation
825 Third Ave., 9th Floor
New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant?s telephone number, including area code (212) 310-6444
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check-mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No___________
DEAN WITTER CORNERSTONE FUND IV
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2003
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition as of June 30, 2003
(Unaudited) and December 31, 2002..........................2
Statements of Operations for the Quarters Ended
June 30, 2003 and 2002 (Unaudited).........................3
Statements of Operations for the Six Months Ended
June 30, 2003 and 2002 (Unaudited).........................4
Statements of Changes in Partners? Capital for the
Six Months Ended June 30, 2003 and 2002 (Unaudited)........5
Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (Unaudited).........................6
Notes to Financial Statements (Unaudited)...............7-11
Item 2. Management?s Discussion and Analysis of
Financial Condition and Results of Operations.......12-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................21-30
Item 4. Controls and Procedures.............................30-31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................32
Item 5 Other Information.................................... .32
Item 6. Exhibits and Reports on Form 8-K....................32-34
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF FINANCIAL CONDITION
June 30, December 31,
2003 2002
$ $
(Unaudited)
ASSETS
Equity in futures interests trading accounts:
Cash 114,260,919 103,560,309
Net unrealized gain (loss) on open contracts (MS & Co.) (1,784,270) 6,834,888
Total Trading Equity 112,476,649 110,395,197
Interest receivable (Morgan Stanley DW) 71,120 80,149
Due from Morgan Stanley DW 51,383 ?
Total Assets 112,599,152 110,475,346
LIABILITIES AND PARTNERS? CAPITAL
Liabilities
Redemptions payable 938,705 642,547
Accrued management fees 327,965 321,727
Accrued administrative expenses 153,786 169,156
Accrued incentive fees ? 1,500,021
Total Liabilities 1,420,456 2,633,451
Partners? Capital
Limited Partners (14,573.713 and
15,202.402 Units, respectively) 109,990,177 106,345,673
General Partner (157.479 and
213.889 Units, respectively) 1,188,519 1,496,222
Total Partners? Capital 111,178,696 107,841,895
Total Liabilities and Partners? Capital 112,599,152 110,475,346
NET ASSET VALUE PER UNIT 7,547.16 6,995.32
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF OPERATIONS
(Unaudited)
For the Quarters Ended June 30,
2003 2002
$ $
REVENUES
Trading profit (loss):
Realized 7,194,222 15,699,227
Net change in unrealized (375,996) 10,003,944
Total Trading Results 6,818,226 25,703,171
Interest income (Morgan Stanley DW) 239,007 334,233
Total 7,057,233 26,037,404
EXPENSES
Incentive fees 1,485,881 3,311,653
Management fees 1,027,245 941,439
Brokerage commissions (Morgan Stanley DW) 890,399 1,090,464
Administrative expenses 48,569 38,764
Total 3,452,094 5,382,320
NET INCOME 3,605,139 20,655,084
NET INCOME ALLOCATION
Limited Partners 3,565,060 20,388,103
General Partner 40,079 266,981
NET INCOME PER UNIT
Limited Partners 237.59 1,248.23
General Partner 237.59 1,248.23
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30,
2003 2002
$ $
REVENUES
Trading profit (loss):
Realized 22,880,873 14,763,585
Net change in unrealized (8,619,158) 1,853,297
Total Trading Results 14,261,715 16,616,882
Interest income (Morgan Stanley DW) 478,258 678,384
Total 14,739,973 17,295,266
EXPENSES
Incentive fees 2,301,291 1,959,836
Management fees 2,039,832 1,825,558
Brokerage commissions (Morgan Stanley DW) 1,835,489 1,648,798
Administrative expenses 98,313 76,951
Total 6,274,925 5,511,143
NET INCOME 8,465,048 11,784,123
NET INCOME ALLOCATION
Limited Partners 8,357,751 11,628,894
General Partner 107,297 155,229
NET INCOME PER UNIT
Limited Partners 551.84 725.75
General Partner 551.84 725.75
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF CHANGES IN PARTNERS? CAPITAL
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)
Units of
Partnership Limited General
Interest Partners Partner Total
$ $ $
Partners? Capital,
December 31, 2001 17,115.276 105,277,723 1,332,302 106,610,025
Net Income ? 11,628,894 155,229 11,784,123
Redemptions (809.900) (4,995,343) ? (4,995,343)
Partners? Capital,
June 30, 2002 16,305.376 111,911,274 1,487,531 113,398,805
Partners? Capital,
December 31, 2002 15,416.291 106,345,673 1,496,222 107,841,895
Net Income ? 8,357,751 107,297 8,465,048
Redemptions (685.099) (4,713,247) (415,000) (5,128,247)
Partners? Capital,
June 30, 2003 14,731.192 109,990,177 1,188,519 111,178,696
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30,
2003 2002
$ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 8,465,048 11,784,123
Noncash item included in net income:
Net change in unrealized 8,619,158 (1,853,297)
(Increase) decrease in operating assets:
Interest receivable (Morgan Stanley DW) 9,029 (4,834)
Due from Morgan Stanley DW (51,383) (12,510)
Increase (decrease) in operating liabilities:
Accrued management fees 6,238 21,801
Accrued administrative expenses (15,370) (39,201)
Accrued incentive fees (1,500,021) 244,638
Net cash provided by operating activities 15,532,699 10,140,720
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in redemptions payable 296,158 419,489
Redemptions of Units (5,128,247) (4,995,343)
Net cash used for financing activities (4,832,089) (4,575,854)
Net increase in cash 10,700,610 5,564,866
Balance at beginning of period 103,560,309 101,084,842
Balance at end of period 114,260,919 106,649,708
The accompanying notes are an integral part
of these financial statements.
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
The unaudited financial statements contained herein include, in
the opinion of management, all adjustments necessary for a fair
presentation of the results of operations and financial condition
of Dean Witter Cornerstone Fund IV (the ?Partnership?). The
financial statements and condensed notes herein should be read in
conjunction with the Partnership?s December 31, 2002 Annual Report
on Form 10-K.
1. Organization
Dean Witter Cornerstone Fund IV is a New York limited partnership
organized to engage in the speculative trading of futures
contracts, options on futures contracts and forward contracts on
foreign currencies. The Partnership is one of the Dean Witter
Cornerstone Funds, comprised of the Partnership, Dean Witter
Cornerstone Fund II, and Dean Witter Cornerstone Fund III.
The Partnership?s general partner is Demeter Management
Corporation (?Demeter?). The non-clearing commodity broker is
Morgan Stanley DW Inc. (?Morgan Stanley DW?). The clearing
commodity brokers are Morgan Stanley & Co. Incorporated (?MS &
Co.?) and Morgan Stanley & Co. International Limited (?MSIL?).
Demeter, Morgan Stanley DW, MS & Co. and MSIL are wholly-owned
subsidiaries of Morgan Stanley. The trading managers of the
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Partnership are John W. Henry & Company, Inc. and Sunrise Capital
Management, Inc. (collectively, the ?Trading Managers?).
2. Related Party Transactions
The Partnership?s cash is on deposit with Morgan Stanley DW, MS &
Co. and MSIL in futures, forwards and options trading accounts to
meet margin requirements as needed. Morgan Stanley DW pays
interest on these funds based on a rate equal to the average yield
on current 13-week U.S. Treasury bills. The Partnership pays
brokerage commissions to Morgan Stanley DW.
3. Financial Instruments
The Partnership trades futures contracts, options on futures
contracts, and forward contracts on foreign currencies. Futures
and forwards represent contracts for delayed delivery of an
instrument at a specified date and price. Risk arises from
changes in the value of these contracts and the potential
inability of counterparties to perform under the terms of the
contracts. There are numerous factors which may significantly
influence the market value of these contracts, including interest
rate volatility.
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The market value of contracts is based on closing prices quoted
by the exchange, bank or clearing firm through which the
contracts are traded.
The Partnership?s contracts are accounted for on a trade-date
basis and marked to market on a daily basis. The Partnership
accounts for its derivative investments in accordance with the
provisions of Statement of Financial Accounting Standards No.
133, ?Accounting for Derivative Instruments and Hedging
Activities? (?SFAS No. 133?). SFAS No. 133 defines a derivative
as a financial instrument or other contract that has all three of
the following characteristics:
1) One or more underlying notional amounts or payment
provisions;
2) Requires no initial net investment or a smaller initial net
investment than would be required relative to changes in
market factors;
3) Terms require or permit net settlement.
Generally, derivatives include futures, forward, swaps or options
contracts and other financial instruments with similar
characteristics such as caps, floors and collars.
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The net unrealized gains (losses) on open contracts, reported as a
component of ?Equity in futures interests trading accounts? on the
statements of financial condition, and their longest contract
maturities were as follows:
Net Unrealized Gains (Losses)
on Open Contracts Longest Maturities
Off- Off-
Exchange- Exchange- Exchange- Exchange-
Date Traded Traded Total Traded Traded
$ $ $
Jun. 30, 2003 - (1,784,270) (1,784,270) - Sep. 2003
Dec. 31, 2002 - 6,834,888 6,834,888 - Mar. 2003
The Partnership has credit risk associated with counterparty non-
performance. The credit risk associated with the instruments in
which the Partnership is involved is limited to the amounts
reflected in the Partnership?s statements of financial condition.
The Partnership also has credit risk because Morgan Stanley DW, MS
& Co. and MSIL act as the futures commission merchants or the
counterparties with respect to most of the Partnership?s assets.
Exchange-traded futures and futures-styled options contracts are
marked to market on a daily basis, with variations in value
settled on a daily basis. Morgan Stanley DW, MS & Co. and MSIL,
each as a futures commission merchant for the Partnership?s
exchange-traded futures and futures-styled options contracts, are
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS (CONLUDED)
required, pursuant to regulations of the Commodity Futures Trading
Commission (?CFTC?), to segregate from their own assets, and for
the sole benefit of their commodity customers, all funds held by
them with respect to exchange-traded futures and futures-styled
options contracts, including an amount equal to the net unrealized
gains (losses) on all open futures and futures-styled options
contracts. With respect to the Partnership?s off-exchange-traded
forward currency contracts, there are no daily settlements of
variations in value nor is there any requirement that an amount
equal to the net unrealized gains (losses) on open forward
contracts be segregated. With respect to those off-exchange-
traded forward currency contracts, the Partnership is at risk to
the ability of MS & Co., the sole counterparty on all of such
contracts, to perform. The Partnership has a netting agreement
with MS & Co. This agreement, which seeks to reduce both the
Partnership?s and MS & Co.?s exposure on off-exchange-traded
forward currency contracts, should materially decrease the
Partnership?s credit risk in the event of MS & Co.?s bankruptcy or
insolvency.
Item 2. MANAGEMENT?S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Partnership deposits its assets with Morgan
Stanley DW as non-clearing broker and MS & Co. and MSIL as
clearing brokers in separate futures, forwards and options trading
accounts established for each trading manager, which assets are
used as margin to engage in trading. The assets are held in either
non-interest bearing bank accounts or in securities and
instruments permitted by the CFTC for investment of customer
segregated or secured funds. The Partnership?s assets held by the
commodity brokers may be used as margin solely for the
Partnership?s trading. Since the Partnership?s sole purpose is to
trade in futures, forwards and options, it is expected that the
Partnership will continue to own such liquid assets for margin
purposes.
The Partnership?s investment in futures, forwards and options may,
from time to time, be illiquid. Most U.S. futures exchanges limit
fluctuations in prices during a single day by regulations referred
to as ?daily price fluctuations limits? or ?daily limits?. Trades
may not be executed at prices beyond the daily limit. If the
price for a particular futures or options contract has increased
or decreased by an amount equal to the daily limit, positions in
that futures or options contract can neither be taken nor
liquidated unless traders are willing to effect trades at or
within the limit. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no
trading. These market conditions could prevent the Partnership
from promptly liquidating its futures or options contracts and
result in restrictions on redemptions.
There is no limitation on daily price moves in trading forward
contracts on foreign currencies. The markets for some world
currencies have low trading volume and are illiquid, which may
prevent the Partnership from trading in potentially profitable
markets or prevent the Partnership from promptly liquidating
unfavorable positions in such markets, subjecting it to
substantial losses. Either of these market conditions could
result in restrictions on redemptions.
The Partnership has never had illiquidity affect a material
portion of its assets. Furthermore, there are no material
trends, demands, commitments, events or uncertainties known at the
present time that will result in, or that are reasonably likely to
result in, the Partnership?s liquidity increasing or decreasing in
any material way.
Capital Resources. The Partnership does not have, nor expect to
have, any capital assets. Redemptions of additional units of
limited partnership interest (?Unit(s)?) in the future will affect
the amount of funds available for investment in futures, forwards
and options in subsequent periods. It is not possible to estimate
the amount, and therefore the impact, of future redemptions
of Units.
There are no known material trends, favorable or unfavorable, that
would affect, nor any expected material changes to, the
Partnership?s capital resource arrangements at the present time.
The Partnership has no off-balance sheet arrangements, nor
contractual obligations or commercial commitments to make future
payments that would affect the Partnership?s liquidity or capital
resources. The contracts traded by the Partnership are accounted
for on a trade-date basis and marked to market on a daily basis.
The value of futures contracts is the settlement price on the
exchange on which that futures contract is traded on a particular
day and the value of foreign currency forward contracts is based
on the spot rate as of the close of business, New York City time,
on a given day.
Results of Operations
General. The Partnership?s results depend on the Trading Managers
and the ability of the Trading Managers? trading programs to take
advantage of price movements or other profit opportunities in the
futures, forwards and options markets. The following presents a
summary of the Partnership?s operations for the three and six
month periods ended June 30, 2003 and 2002 and a general
discussion of its trading activities during each period. It is
important to note, however, that the Trading Managers trade in
various markets at different times and that prior activity
in a particular market does not mean that such market will be
actively traded by the Trading Managers or will be profitable in
the future. Consequently, the results of operations of the
Partnership are difficult to discuss other than in the context of
the Trading Managers? trading activities on behalf of the
Partnership and how the Partnership has performed in the past.
The Partnership?s results of operations set forth in the financial
statements on pages 2 through 11 of this report were prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the use of certain
accounting policies that affect the amounts reported in these
financial statements, including the following: The contracts the
Partnership trades are accounted for on a trade-date basis and
marked to market on a daily basis. The difference between their
cost and market value is recorded on the Statements of Operations
as ?Net change in unrealized profit/loss? for open (unrealized)
contracts, and recorded as ?Realized profit/loss? when open
positions are closed out, and the sum of these amounts constitutes
the Partnership?s trading revenues. Interest income revenue, as
well as management fees, incentive fees and brokerage commissions
expenses of the Partnership are recorded on an accrual basis.
Demeter believes that, based on the nature of the operations of
the Partnership, no assumptions relating to the application of
critical accounting policies other than those presently
used could reasonably affect reported amounts.
For the Quarter and Six Months Ended June 30, 2003
For the quarter ended June 30, 2003, the Partnership recorded
total trading revenues, including interest income, of $7,057,233
and posted an increase in net asset value per Unit. The most
significant gains of approximately 7.3% were recorded from long
positions in the euro versus the U.S. dollar during May as the
value of the euro strengthened to an all time high amid
uncertainty regarding the Bush Administration?s economic policy,
renewed fears of potential terrorist attacks against American
interests and investor preference for non-U.S. dollar denominated
assets. Additional gains of approximately 5.6% resulted from long
positions in the Australian dollar versus the U.S. dollar during
April, May and June as the Australian dollar?s value strengthened
in response to continued weakness in the U.S. dollar and higher
interest rates relative to those in the U.S., Europe and Asia. A
portion of the Partnership?s overall gains for the quarter was
offset by losses of approximately 3.8% recorded from short
positions in the British pound versus the U.S. dollar during
April, as the pound strengthened early in the month amid
expectations that the Bank of England would likely leave interest
rates unchanged, and during May, due to the release of lower than
expected unemployment data from Great Britain. Long positions in
the British pound versus the U.S. dollar during June resulted in
further losses as value of the pound reversed lower
following comments from the British Finance Minister concerning
the U.K.?s entry into the European Monetary Union. Additional
losses of approximately 1.8% and 1.2% resulted from positions in
the Japanese yen and Singapore dollar, respectively, versus the
U.S. dollar during May as the value of these currencies
strengthened and then reversed lower amid speculation that the
Bank of Japan favored a weaker yen to spur economic activity.
Smaller losses of approximately 0.8% stemmed from long positions
in the South African rand versus the U.S. dollar as the value of
the rand reversed lower during May amid growing speculation of an
interest rate cut by the Reserve Bank of South Africa. Total
expenses for the three months ended June 30, 2003 were $3,452,094,
resulting in net income of $3,605,139. The net asset value of a
Unit increased from $7,309.57 at March 31, 2003 to $7,547.16 at
June 30, 2003.
For the six months ended June 30, 2003, the Partnership recorded
total trading revenues, including interest income, of $14,739,973
and posted an increase in net asset value per Unit. The most
significant gains of approximately 13.0% were recorded from long
positions in the euro versus the U.S. dollar as the value of the
euro strengthened to an all time high during May amid uncertainty
regarding the Bush Administration?s economic policy, renewed fears
of potential terrorist attacks against American interests, and
investor preference for non-U.S. dollar denominated assets.
During January and April, gains were also experienced from
long positions in the euro versus the U.S. dollar as the U.S.
dollar?s value weakened amid renewed fears of a military conflict
with Iraq, increased tensions with North Korea, and weak U.S.
economic data. Additional gains of approximately 7.6% resulted
from long positions in the Australian dollar versus the U.S.
dollar as the Australian currency strengthened in response to
continued weakness in the U.S. dollar, higher interest rates
relative to those in the U.S., Europe and Asia, and higher gold
prices earlier in the year. Smaller gains were provided from long
positions in the New Zealand dollar versus the U.S. dollar as the
New Zealand dollar?s value increased on the heels of higher gold
prices and strength in the Australian dollar. A portion of the
Partnership?s overall gains during the first half of the year was
offset by losses of approximately 4.2% and 2.7% from positions in
the Japanese yen and Singapore dollar, respectively, versus the
U.S. dollar as the value of these currencies moved without
consistent direction versus the U.S. dollar. Losses of
approximately 4.2% resulted during April and May from short
positions in the British pound versus the U.S. dollar as the value
of the pound strengthened early in the month amid expectations
that the Bank of England would likely leave interest rates
unchanged and the release of lower than expected unemployment data
from Great Britain. During June, losses stemmed from long
positions in the British pound versus the U.S. dollar as its value
increased early in the month, amid expectations that the Bank of
England would likely leave interest rates unchanged, and
then reversed lower, after the British Finance Minister released
positive comments regarding the U.K.?s entry prospects into the
European Monetary Union. Total expenses for the six months ended
June 30, 2003 were $6,274,925, resulting in net income of
$8,465,048. The net asset value of a Unit increased from
$6,995.32 at December 31, 2002 to $7,547.16 at June 30, 2003.
For the Quarter and Six Months ended June 30, 2002
For the quarter ended June 30, 2002, the Partnership recorded
total trading revenues, including interest income, of $26,037,404
and posted an increase in net asset value per Unit. The most
significant gains of approximately 10.3% were recorded primarily
during May and June from previously established long positions in
the euro as its value strengthened relative to the U.S. dollar
amid falling equity prices, concerns regarding corporate
accounting integrity, and weak U.S. economic data. Gains of
approximately 4.3% and 2.9% from previously established long
positions in the Swiss franc and the Norwegian krone,
respectively, were recorded as the value of the currencies also
strengthened relative to the U.S. dollar due to the
aforementioned reasons. Additional gains of approximately 2.5%
were recorded from long positions in the Australian dollar
relative to the U.S. dollar as its value benefited from the
weakness in the U.S. dollar and rising gold prices. Total
expenses for the three months ended June 30, 2002 were
$5,382,320, resulting in net income of $20,655,084. The
net asset value of a Unit increased from $5,706.46 at March 31,
2002 to $6,954.69 at June 30, 2002.
For the six months ended June 30, 2002, the Partnership recorded
total trading revenues, including interest income, of $17,295,266
and posted an increase in net asset value per Unit. The most
significant gains of approximately 8.1% were recorded primarily
during May and June from previously established long positions in
the euro as its value strengthened relative to the U.S. dollar
amid falling equity prices, concerns regarding corporate
accounting integrity, and weak U.S. economic data. Gains of
approximately 3.7% and 3.0% from previously established long
positions in the Swiss franc and the Norwegian krone,
respectively, were recorded as the value of these currencies also
strengthened relative to the U.S. dollar due to the
aforementioned reasons. Additional gains of approximately 3.4%
were recorded from long positions in the Australian dollar
relative to the U.S. dollar as its value benefited from the
weakness in the U.S. dollar and rising gold prices. Total
expenses for the six months ended June 30, 2002 were $5,511,143,
resulting in net income of $11,784,123. The net asset value of a
Unit increased from $6,228.94 at December 31, 2001 to $6,954.69
at June 30, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Introduction
The Partnership is a commodity pool engaged primarily in the
speculative trading of futures, forwards and options. The market-
sensitive instruments held by the Partnership are acquired for
speculative trading purposes only and, as a result, all or
substantially all of the Partnership?s assets are at risk of
trading loss. Unlike an operating company, the risk of market-
sensitive instruments is central, not incidental, to the
Partnership?s main business activities.
The futures, forwards and options traded by the Partnership
involve varying degrees of related market risk. Market risk is
often dependent upon changes in the level or volatility of
interest rates, exchange rates, and prices of financial
instruments and commodities. Fluctuations in market risk based
upon these factors result in frequent changes in the fair value
of the Partnership?s open positions, and consequently, in its
earnings and cash flow.
The Partnership?s total market risk is influenced by a wide
variety of factors, including the diversification among the
Partnership?s open positions, the volatility present within the
markets, and the liquidity of the markets. At different times,
each of these factors may act to increase or decrease the
market risk associated with the Partnership.
The Partnership?s past performance is not necessarily indicative
of its future results. Any attempt to numerically quantify the
Partnership?s market risk is limited by the uncertainty of its
speculative trading. The Partnership?s speculative trading may
cause future losses and volatility (i.e., ?risk of ruin?) that
far exceed the Partnership?s experience to date or any reasonable
expectations based upon historical changes in market value.
Quantifying the Partnership?s Trading Value at Risk
The following quantitative disclosures regarding the Partnership?s
market risk exposures contain ?forward-looking statements? within
the meaning of the safe harbor from civil liability provided for
such statements by the Private Securities Litigation Reform Act of
1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). 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.
The Partnership accounts for open positions on the basis of mark-
to-market accounting principles. Any loss in the market value of
the Partnership?s open positions is directly reflected in the
Partnership?s earnings, whether realized or unrealized, and its
cash flow. Profits and losses on open positions of
exchange-traded futures, forwards and options are settled daily
through variation margin.
The Partnership?s risk exposure in the market sectors traded by
the Trading Managers is estimated below in terms of Value at Risk
(?VaR?). The VaR model used by the Partnership includes many
variables that could change the market value of the Partnership?s
trading portfolio. The Partnership estimates VaR using a model
based upon historical simulation with a confidence level of 99%.
Historical simulation involves constructing a distribution of
hypothetical daily changes in the value of a trading portfolio.
The VaR model takes into account linear exposures to price and
interest rate risk. Market risks that are incorporated in the VaR
model include equity and commodity prices, interest rates, foreign
exchange rates, and correlation among these variables. The
hypothetical changes in portfolio value are based on daily
percentage changes observed in key market indices or other market
factors (?market risk factors?) to which the portfolio is
sensitive. The historical observation period of the Partnership?s
VaR is approximately four years. The one-day 99% confidence level
of the Partnership?s VaR corresponds to the negative change in
portfolio value that, based on observed market risk factors, would
have been exceeded once in 100 trading days. In other words, one-
day VaR for a portfolio is a number such that losses in this
portfolio are estimated to exceed the VaR only one day in
100. VaR typically does not represent the worst-case outcome.
VaR is calculated using historical simulation. Demeter uses
approximately four years of daily market data (1,000 observations)
and revalues its portfolio (using delta-gamma approximations) for
each of the historical market moves that occurred over this time
period. This generates a probability distribution of daily
?simulated profit and loss? outcomes. The VaR is the appropriate
percentile of this distribution. For example, the 99% one-day VaR
would represent the 10th worst outcome from Demeter?s simulated
profit and loss series.
The Partnership?s VaR computations are based on the risk
representation of the underlying benchmark for each instrument or
contract and do not distinguish between exchange and non-
exchange-traded instruments and are also not based on exchange-
and/or dealer-based margin requirements.
VaR models, including the Partnership?s, are continuously
evolving as trading portfolios become more diverse and modeling
techniques and systems capabilities improve. Please note that
the VaR model is used to numerically quantify market risk for
historic reporting purposes only and is not utilized by either
Demeter or the Trading Managers in their daily risk management
activities. Please further note that VaR as described above may
not be comparable to similarly titled measures used by
other entities.
The Partnership?s Value at Risk in Different Market Sectors
The following table indicates the VaR associated with the
Partnership?s open positions as a percentage of total net assets
by primary market risk category at June 30, 2003 and 2002. At
June 30, 2003 and 2002, the Partnership?s total capitalization
was approximately $111 million and $113 million, respectively.
Primary Market June 30, 2003 June 30, 2002
Risk Category Value at Risk Value at Risk
Currency (1.53)% (2.97)%
The VaR for a market category represents the one-day downside risk
for the aggregate exposures associated with this market category.
The table above represents the VaR of the Partnership?s open
positions at June 30, 2003 and 2002 only and is not necessarily
representative of either the historic or future risk of an
investment in the Partnership. Because the Partnership?s only
business is the speculative trading of futures, forwards and
options, the composition of its trading portfolio can change
significantly over any given time period, or even within a single
trading day. Any changes in open positions could positively or
negatively materially impact market risk as measured by VaR.
The table below supplements the quarter-end VaR by
presenting the Partnership?s high, low and average VaR, as a
percentage of total net assets for the four quarterly reporting
periods from July 1, 2002 through June 30, 2003.
Primary Market Risk Category High Low Average
Currency (4.19)% (1.26)% (2.73)%
Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the
Partnership is typically many times the applicable margin
requirements. Margin requirements generally range between 2% and
15% of contract face value. Additionally, the use of leverage
causes the face value of the market sector instruments held by the
Partnership to typically be many times the total capitalization of
the Partnership. The value of the Partnership?s open positions
thus creates a ?risk of ruin? not usually found in other
investments. The relative size of the positions held may cause
the Partnership to incur losses greatly in excess of VaR within a
short period of time, given the effects of the leverage employed
and market volatility. The VaR tables above, as well as the past
performance of the Partnership, give no indication of such ?risk
of ruin?. In addition, VaR risk measures should be viewed in light
of the methodology?s limitations, which include the following:
* past changes in market risk factors will not always result in
accurate predictions of the distributions and correlations of
future market movements;
* changes in portfolio value caused by market movements may
differ from those of the VaR model;
* VaR results reflect past trading positions while future risk
depends on future positions;
* VaR using a one-day time horizon does not fully capture the
market risk of positions that cannot be liquidated or hedged
within one day; and
* the historical market risk factor data used for VaR estimation
may provide only limited insight into losses that could be
incurred under certain unusual market movements.
The VaR tables above present the results of the Partnership?s VaR
for its market risk exposure at June 30, 2003 and 2002, and for
the end of the four quarterly reporting periods from July 1, 2002
through June 30, 2003. Since VaR is based on historical data, VaR
should not be viewed as predictive of the Partnership?s future
financial performance or its ability to manage or monitor risk.
There can be no assurance that the Partnership?s actual losses on
a particular day will not exceed the VaR amounts indicated above
or that such losses will not occur more than once in 100 trading
days.
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. The Partnership did not have any
foreign currency balances at June 30, 2003.
At June 30, 2003, the Partnership?s cash balance at Morgan Stanley
DW was approximately 102% of its total net asset value. A decline
in short-term interest rates will result in a decline in the
Partnership?s cash management income. This cash flow risk is not
considered to be material.
Materiality, as used throughout this section, is based on an
assessment of reasonably possible market movements and any
associated potential losses, taking into account the leverage,
optionality and multiplier features of the Partnership?s market-
sensitive instruments, in relation to the Partnership?s net
assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership?s
market risk exposures - except for (A) those disclosures that are
statements of historical fact and (B) the descriptions of how the
Partnership manages its primary market risk exposures - constitute
forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Securities Exchange Act.
The Partnership?s primary market risk exposures as well as the
strategies used and to be used by Demeter and the Trading
Managers 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 risk controls to
differ materially from the objectives of such strategies.
Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political
upheavals, changes in historical price relationships, an influx of
new market participants, increased regulation and many other
factors could result in material losses as well as in material
changes to the risk exposures and the risk management strategies
of the Partnership. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following was the only trading risk exposure of the
Partnership at June 30, 2003. It may be anticipated, however,
that market exposure will vary materially over time.
Currency. The Partnership?s currency market exposure at June 30,
2003 was to exchange rate fluctuations, primarily fluctuations
which disrupt the historical pricing relationships between
different currencies and currency pairs. Interest rate changes
as well as political and general economic conditions influence
these fluctuations. The Partnership trades a large number of
currencies. At June 30, 2003, the Partnership's greatest
exposure was to outright U.S. dollar positions. Outright
positions consist of the U.S. dollar vs. other currencies.
These other currencies include major and minor currencies.
Demeter does not anticipate that the risk profile of the
Partnership's currency sector will change significantly in the
future. The currency trading VaR 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.-based Partnership in expressing VaR in a functional currency
other than U.S. dollars.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
At June 30, 2003, there was no non-trading risk exposure because
the Partnership did not have any foreign currency balances.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Managers, separately, attempt to
manage the risk of the Partnership?s open positions in essentially
the same manner in all market categories traded. Demeter attempts
to manage market exposure by diversifying the Partnership?s assets
among different Trading Managers, each of whose strategies focus
on different trading approaches, and monitoring the performance of
the Trading Managers daily. In addition, the Trading Managers
establish diversification guidelines, often set in terms of the
maximum margin to be committed to positions in any one market
sector or market-sensitive instrument.
Demeter monitors and controls the risk of the Partnership?s
non-trading instrument, cash. Cash is the only Partnership
investment directed by Demeter, rather than the Trading Managers.
Item 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly
report, the President and Chief Financial Officer of the
general partner, Demeter, have evaluated the
effectiveness of the Partnership?s disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) of the Exchange Act), and have judged such
controls and procedures to be effective.
(b) There have been no significant changes in the
Partnership?s internal controls or in other factors that
could significantly affect these controls subsequent to
the date of their evaluation.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 5. OTHER INFORMATION
Changes in Management. The following changes have been made to
the Board of Directors and Officers of Demeter:
Mr. Robert E. Murray resigned the position of Chairman of the
Board of Directors of Demeter.
Mr. Jeffrey A. Rothman, President and Director of Demeter, was
named Chairman of the Board of Directors of Demeter.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.01 Limited Partnership Agreement of the Partnership, dated
as of December 11, 1986, is incorporated by reference to
Exhibit 3.01 of the Partnership?s Annual Report on Form
10-K for the fiscal year ended December 31, 1987 (File
No. 0-15442).
10.01 Management Agreement among the Partnership, Demeter and
John W. Henry and Co., Inc. dated as of May 1, 1987, is
incorporated by reference to Exhibit 10.01 of the
Partnership?s Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 (File No. 0-15442).
10.02 Management Agreement among the Partnership, Demeter and
Sunrise Capital, Inc. (formerly Sunrise Commodities
Management Inc.) dated as of May 1, 1987, is incorporated
by reference to Exhibit 10.02 of the Partnership?s Annual
Report on Form 10-K for the fiscal year ended December
31, 1987 (File No. 0-15442).
10.03 Dean Witter Cornerstone Funds Exchange Agreement, dated
as of May 31, 1984, is incorporated by reference to
Exhibit 10.04 of the Partnership?s Annual Report on
Form 10-K for the fiscal year ended December 31, 1987
(File No. 0-15442).
10.04 Amended and Restated Customer Agreement between the
Partnership and Morgan Stanley DW Inc., dated as of June
22, 2000, is incorporated by reference to Exhibit 10.01
of the Partnership?s Form 8-K (File No. 0-15442) filed
with the Securities and Exchange Commission on November
13, 2001.
10.05 Commodity Futures Customer Agreement between Morgan
Stanley & Co. Incorporated and the Partnership, and
acknowledged and agreed to by Morgan Stanley DW Inc.,
dated as of May 1, 2000, is incorporated by reference to
Exhibit 10.02 of the Partnership?s Form 8-K (File No. 0-
15442) filed with the Securities and Exchange Commission
on November 13, 2001.
10.06 Foreign Exchange and Options Master Agreement between
Morgan Stanley & Co. Incorporated and the Partnership,
dated as of April 30, 2000, is incorporated by reference
to Exhibit 10.04 of the Partnership?s Form 8-K (File No.
0-15442) filed with the Securities and Exchange
Commission on November 13, 2001.
10.07 Securities Account Control Agreement among the
Partnership, Morgan Stanley & Co. Incorporated, and
Morgan Stanley DW Inc., dated as of May 1, 2000, is
incorporated by reference to Exhibit 10.03 of the
Partnership?s Form 8-K (File No. 0-15442) filed with the
Securities and Exchange Commission on November 13, 2001.
10.08 Amendment to Management Agreement between the Partnership
and John W. Henry & Company, Inc., dated as of November
30, 2000, is incorporated by reference to Exhibit 10.1 of
the Partnership?s Form 8-K (File No. 0-15442) filed with
the Securities and Exchange Commission on January 3,
2001.
10.09 Amendment to Management Agreement between the Partnership
and Sunrise Capital Management, Inc., dated as of
November 30, 2000, is incorporated by reference to
Exhibit 10.2 of the Partnership?s Form 8-K (File
No. 0-15442) filed with the Securities and Exchange
Commission on January 3, 2001.
31.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to rules 13(a)-15(e) and 15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 Certification of President of Demeter Management
Corporation, the general partner of the Partnership,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Chief Financial Officer of Demeter
Management Corporation, the general partner of the
Partnership, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(B) Reports on Form 8-K ? None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dean Witter Cornerstone Fund IV
(Registrant)
By: Demeter Management Corporation
(General Partner)
August 8, 2003 By: /s/Jeffrey D. Hahn
Jeffrey D. Hahn
Director and Chief Financial Officer
The General Partner which signed the above is the only party
authorized to act for the Registrant. The Registrant has no
principal executive officer, principal financial officer,
controller, or principal accounting officer and has no Board of
Directors.
? 6 ?
DEAN WITTER CORNERSTONE FUND IV
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)