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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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Commission File number 0-16898
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ProFutures Diversified Fund, L.P.
--------------------------
(Exact name of Partnership as specified in charter)
Delaware 75-2197831
- ---------------------------------- --------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
ProFutures, Inc.
11719 Bee Cave Road
Suite 200
Austin, Texas 78738
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(Address of principal executive offices)
Partnership's telephone number
(800) 348-3601
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Securities registered pursuant to Section 12(b) of the Act
Title of each class. Name of each exchange on which registered.
- ----------------------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act
Units of Limited Partnership Interest
-------------------------------------
(Title of Class)
Indicate by check mark whether the Partnership (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
Partnership was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporation by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
State the aggregate market value of the voting and non-voting stock held by
non-affiliates computed by reference to the price at which the stock was last
sold, or the average bid and asked prices of such stock, as of the last
business day of the registrant's most recently completed second fiscal
quarter. (See definition of affiliate in Rule 405, 17 CFR 230.405.)
Page 2
Not applicable
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Financial Statements for the Years ended December 31, 2004, 2003
and 2002 with Report of Independent Registered Public Accounting Firm, the
annual report to securities holders for the fiscal year ended December 31,
2004, is incorporated by reference into Part II Item 8 and Part IV hereof and
filed as an exhibit herewith. Portions of the Registrant's Prospectus dated
July 31, 1994 and Supplement dated January 31, 1995 Post-Effective Amendment
No. 3 dated June 23, 1995 also are incorporated by reference in Part I, Part
II, Part III and Part IV of this Form 10-K
Page 3
PART I
Item 1. Business.
General
- -------
ProFutures Diversified Fund, L.P. (the "Partnership") is a limited
partnership organized on March 10, 1987, under the laws of the State of
Delaware. The business of the Partnership is the speculative trading of
futures contracts and other financial instruments. The Partnership
commenced its business operation in August 1987 under the name ATA
Research/ProFutures Diversified Fund, L.P. Effective June 1, 2000, the
Partnership changed its name from ATA Research/ProFutures Diversified
Fund, L.P. to ProFutures Diversified Fund, L.P. Effective October 1,
2000, ATA Research, Inc., the Partnership's co-general partner, withdrew
as co-general partner. ProFutures, Inc. remains as the sole General
Partner. The office of the Partnership is located at 11719 Bee Cave
Road, Suite 200, Austin, Texas 78738; the telephone number is (800)
348-3601.
Trading Activity
- ----------------
ProFutures, Inc., a Texas corporation, is the General Partner of the
Partnership which administers the business and affairs of the
Partnership (exclusive of its trading operations). Trading decisions
are made by independent Commodity Trading Advisors chosen by the
General Partner. At December 31, 2004, there are three Commodity
Trading Advisors: Campbell & Company, Inc., Grinham Managed Funds Pty.
Ltd., and Winton Capital Management Limited (collectively, the
"Advisors"). All advisory fees are paid by the Partnership. Advisors
may be changed from time to time by the General Partner.
ProFutures, Inc. is registered with the CFTC as a Commodity Trading
Advisor and Commodity Pool Operator and is a member of the NFA. Gary D.
Halbert is the Chairman and President, and principal stockholder, of
ProFutures, Inc., which was incorporated and began operation in
December, 1984, and specializes in speculative managed futures accounts.
The objective of the Partnership is to achieve appreciation of its
assets through speculative trading of futures contracts and interbank
forward currency contracts. It ordinarily maintains open positions for a
relatively short period of time. The Partnership's ability to make a
profit depends largely on the success of the Advisors in identifying
market trends and price movements and buying or selling accordingly.
The Partnership's Trading Policies are set forth on Page 59 of the
Partnership's Prospectus dated July 31, 1994, which is incorporated
herein by reference.
Material changes in the Trading Policies described in the Prospectus
must be approved by a vote of a majority of the outstanding Units of
Limited Partnership Interest. A change in contracts traded, however,
will not be deemed to be a material change in the Trading Policies.
Trading Methods and Advisors
- ----------------------------
Futures traders basically rely on either or both of two types of
analysis for their trading decisions, "technical" or "fundamental".
Technical analysis uses the theory that a study of the markets will
provide a means of anticipating price changes. Technical analysis
generally will include a study of actual daily, weekly and monthly price
fluctuations, volume variations and changes in open interest, utilizing
charts and/or computers for analysis of these items. Fundamental
analysis, on the other hand, relies on a study and evaluation of
external factors which affect the price of a futures contract in order
to predict prices. These include political and economic events, weather,
supply and demand and changes in interest rates.
The respective Advisors' trading strategies attempt to detect trends in
price movements for the commodities monitored by them. They normally
seek to establish positions and maintain such positions while the
Page 4
particular market moves in favor of the position and to exit the
particular market and/or establish reverse positions when the favorable
trend either reverses or does not materialize. These trading strategies
are not normally successful if a particular market is moving in an
erratic and non-trending manner.
Because of the nature of the commodities markets, prices frequently
appear to be trending when a particular market is, in fact, without a
trend. In addition, the trading strategies may identify a particular
market as trending favorably to a position even though actual market
performance thereafter is the reverse of the trend identified.
None of the Advisors or their respective principals own any Units of the
Partnership. The Partnership's Advisors are independent Commodity
Trading Advisors and are not affiliated with the General Partner;
however, they also may be Advisors to other commodity pools with which
the General Partner is currently associated and may own an interest in
those pools. Each Advisor is registered with the CFTC and is a member in
such capacity with the NFA. Because of their confidential nature,
proprietary trading records of the Advisors and their respective
principals are not available for inspection by the Limited Partners of
the Partnership.
Fees, Compensation and Expenses
- -------------------------------
The Partnership pays the General Partner a monthly management fee of 1/4
of 1% (3% annually) of month-end Net Asset Value. Effective October 16,
2004, the Partnership pays the General Partner an additional monthly
management fee of .0625% (.75% annually) of the Partnership's month-end
Net Asset Value for consulting services rendered to the Partnership.
On October 25, 2004, the Partnership entered into a consulting agreement
effective November 1, 2004, with Altegris Investments, Inc. (Altegris),
whereby Altegris will recommend the selection and termination of the
Advisors and the allocation and reallocation of the Partnership's
assets. Pursuant to the consulting agreement, Altegris receives a
monthly consulting fee equal to .0208% (.25% annually) of the
Partnership's month-end Net Asset Value. The consulting fee (included in
management fees in the statement of operations) earned by Altegris
totaled $13,651 for the year ended December 31, 2004.
Prior to October 15, 2004, Kenmar Global Strategies Inc. (Kenmar)
assisted the General Partner in making decisions about which Advisors to
hire, the allocations among the Advisors and the day-to-day monitoring
and risk management of the Partnership's trading activities. Kenmar
received a monthly management fee of 1/12 of 1% (1% annually) of
month-end Net Asset Value. Effective October 15, 2004, ProFutures, Inc.
terminated the consulting agreement between Kenmar and the Partnership.
Accordingly, Kenmar was paid a pro rated monthly management fee for the
period October 1, 2004 through October 15, 2004. Management fees earned
by Kenmar totaled $266,317, $342,122 and $308,546 for the years ended
December 31, 2004, 2003 and 2002, respectively.
The current Advisors receive management fees ranging from 1% to 2%
annually of Allocated Net Asset Value (as defined in the trading
advisory contracts). Each of the Advisors receives a quarterly incentive
fee of 20% of Trading Profits (as defined). The quarterly incentive fees
are payable only on cumulative profits achieved by each Advisor. For
example, if one of the Advisors to the Partnership experiences a loss
after an incentive fee payment is made, that Advisor retains such
payments but receives no further incentive fees until such Advisor has
recovered the loss and then generated subsequent Trading Profits since
the last incentive fee was paid such Advisor. An incentive fee may be
paid to one Advisor but the Partnership may experience no change or a
decline in its Net Asset Value because of the performance of another
Advisor. The General Partner may allocate or reallocate the Partnership's
assets at any time among the current Advisors or any others that may be
selected. Upon termination of an Advisor's contract, or at any other time
in the discretion of the General Partner, the Partnership may employ
other advisors whose compensation may be calculated without regard to the
losses which may be incurred by the present Advisors. Similarly, the
Partnership may renew its relationship with each Advisor on the same or
different terms.
Page 5
Notional Funding Note: As of December 31, 2004, the Partnership has
allocated notional funds to Advisors equal to approximately 35% of the
Partnership's cash and/or other margin - qualified assets. Of course,
this percentage may be higher or lower over any given 12 month period.
The management fees paid to an Advisor, if any, are a percentage of the
nominal account size of the account if an account had been notionally
funded. The nominal account size is equal to a specific amount of funds
initially allocated to an Advisor which increases by profits and
decreases by losses in the account, but not by additions to or
withdrawals of actual funds from the account. Some, but not all,
Advisors are expected to be allocated notional funds, and not all of the
Advisors allocated notional funds are expected to be paid management
fees. Further, the amount of cash and/or other margin-qualified assets
in an account managed by an Advisor will vary greatly at various times
in the course of the Partnership's business, depending on the General
Partner's general allocation strategy and pertinent margin requirements
for the trading strategies undertaken by an Advisor.
The Partnership is obligated to pay its periodic operating expenses,
consisting substantially of preparation of the limited partners' tax
return information, filing and recording charges, legal, printing,
accounting and auditing fees plus non-recurring expenses. Those periodic
recurring expenses are estimated at approximately .5% of the
Partnership's average annual Net Asset Value. Non-recurring expenses,
not included within these estimates, include expenses associated with
significant litigation including, but not limited to, class action
suits, suits involving the indemnification provisions of the Agreement
of the Limited Partnership or any other agreement to which the
Partnership is a party; by their nature, the dollar amount of
non-recurring expenses cannot be estimated.
Additional descriptions and definitions are set forth in "Fees,
Compensation and Expenses" on Pages 30-35 of the Partnership's
Prospectus, dated July 31, 1994, which is incorporated herein by
reference.
Brokerage Arrangements
- ----------------------
The Partnership deposits funds with Man Financial Inc. to act as broker,
subject to Commodity Futures Trading Commission regulations and various
exchange and broker requirements. Margin requirements are satisfied by
the deposit of cash with such broker. The Partnership earns interest
income on its assets deposited with the broker.
Financial Information About Industry Segments
- ---------------------------------------------
The Partnership operates in only one industry segment, that of the
speculative trading of futures contracts and other financial
instruments. See also "Description of Futures Trading", pages 64 to 65
of the Prospectus dated July 31, 1994, which is incorporated herein by
reference.
Regulation
- ----------
The U.S. futures markets are regulated under the Commodity Exchange Act
(CEA), which is administered by the Commodity Futures Trading Commission
(CFTC), a federal agency created in 1974. The CFTC licenses and
regulates commodity exchanges, commodity brokerage firms (referred to in
the industry as "Futures Commission Merchants"), Commodity Pool
Operators, Commodity Trading Advisors and others. The General Partner is
registered with the CFTC as a Commodity Pool Operator and each Advisor
is registered as a Commodity Trading Advisor.
Futures professionals such as the General Partner and the Advisors are
also regulated by the National Futures Association (NFA), a
self-regulatory organization for the futures industry that supervises
the dealings between futures professionals and their customers. If the
pertinent CFTC registrations or NFA memberships were to lapse, be
suspended or be revoked, the General Partner would be unable to act as
the Partnership's Commodity Pool Operator, and the respective Advisors
as Commodity Trading Advisors, to the Partnership.
Page 6
The CFTC has adopted disclosure, reporting and recordkeeping
requirements for Commodity Pool Operators (such as the General Partner)
and disclosure and recordkeeping requirements for Commodity Trading
Advisors. The reporting rules require pool operators to furnish to the
participants in their pools a monthly statement of account, showing the
pool's income or loss and change in Net Asset Value and an annual
financial report, audited by an independent certified public accountant.
The CFTC and the exchanges have pervasive powers over the futures
markets, including the emergency power to suspend trading and order
trading for liquidation only (i.e., traders may liquidate existing
positions but not establish new positions). The exercise of such powers
could adversely affect the Partnership's trading.
Competition
- -----------
The Partnership may experience increased competition for the same
futures or option contracts. The Advisors may recommend similar or
identical trades to other accounts which they may manage; thus, the
Partnership may be in competition with such accounts for the same or
similar positions. Such competition may also increase due to the
widespread utilization of computerized trend-based trading methods
similar to the methods used by some of the Advisors. This Partnership
may also compete with other funds organized by the General Partner.
Financial Information About Foreign and Domestic Operations
- -----------------------------------------------------------
The Partnership does not expect to engage in any operations in foreign
countries nor does it expect to earn any portion of the Partnership's
revenue from customers in foreign countries.
Available Information
- ---------------------
The Partnership is an electronic filer with the Securities and Exchange
Commission (SEC). The SEC maintains an Internet Site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC
(http://www.sec.gov). The General Partner will voluntarily provide
electronic or paper copies of this filing free of charge upon request.
Item 2. Properties.
The Partnership does not own or lease any real property. The General
Partner currently provides all necessary office space at no additional
charge to the Partnership.
Item 3. Legal Proceedings.
The Partnership is not aware of any material pending legal proceedings
to which it is a party or to which any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the fiscal year ended December 31, 2004, no
matters were submitted to a vote of the holders of Units of Limited
Partnership Interest ("Units") through the solicitation of proxies or
otherwise.
PART II
Item 5. Market for Partnership's Securities and Related Security Holder
Matters.
The Partnership has filed a registration statement with the Securities
and Exchange Commission for the sale of up to $38,547,364 in Units of
Limited Partnership Interest. Such registration statement became
effective as of July 31, 1994. This offering was extended on January 31,
1995 and continued through April 30,
Page 7
1995. On June 23, 1995, Post-Effective Amendment No. 3 was filed to
deregister $20,721,920 of Units of Limited Partnership Interest. As of
December 31, 2004, a total of 11,882 Units are outstanding and held by
861 Unit holders, including 225 Units held by the General Partner and
its principals. During the calendar year 2004, a total of 1063 Units
were redeemed.
The General Partner has sole discretion in determining what
distributions, if any, the Partnership will make to its Unit holders.
The General Partner made no distributions as of December 31, 2004, or as
of the date hereof. A Limited Partner may request and receive redemption
of Units subject to restrictions in the limited partnership agreement.
Item 6. Selected Financial Data.
Following is a summary of certain financial information for the
Partnership for the calendar years 2004, 2003, 2002, 2001 and 2000.
2004
---------------
Realized Gains (Losses) $ 7,550,029
Change in Unrealized
Gains (Losses) on
Open Contracts (2,384,308)
Interest Income 442,893
Management Fees 2,160,170
Incentive Fees 1,138,118
Net Income (loss) 1,251,915
General Partner Capital 607,384
Limited Partner Capital 31,474,269
Partnership Capital 32,081,653
Net Asset Value per General
And Limited Partner Unit
at End of Year 2,699.92
Net Income (loss) per Unit* 100.52
2003
----------------
Realized Gains (Losses) $ 8,453,501
Change in Unrealized
Gains (Losses) on
Open Contracts 285,932
Interest Income 352,209
Management Fees 2,130,952
Incentive Fees 1,456,891
Net Income (loss) 4,462,334
General Partner Capital 584,564
Limited Partner Capital 33,041,117
Partnership Capital 33,625,681
Net Asset Value per General
And Limited Partner Unit
at End of Year 2,598.48
Net Income (loss) per Unit* 326.46
2002
----------------
Page 8
Realized Gains (Losses) $ 6,268,491
Change in Unrealized
Gains (Losses) on
Open Contracts 659,039
Interest Income 510,306
Management Fees 2,065,751
Incentive Fees 1,104,271
Net Income (loss) 3,057,896
General Partner Capital 511,577
Limited Partner Capital 31,618,764
Partnership Capital 32,130,341
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,274.04
Net Income (loss) per Unit* 201.95
2001
----------------
Realized Gains (Losses) $ 2,875,708
Change in Unrealized
Gains (Losses) on
Open Contracts 365,300
Interest Income 1,309,764
Management Fees 2,385,535
Incentive Fees 656,540
Net Income (loss) 201,219
General Partner Capital 458,665
Limited Partner Capital 33,325,130
Partnership Capital 33,783,795
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,038.84
Net Income (loss) per Unit* 11.05
2000
----------------
Realized Gains (Losses) $ (8,292,461)
Change in Unrealized
Gains (Losses) on
Open Contracts (2,089,239)
Interest Income 3,045,014
Management Fees 2,906,733
Incentive Fees 1,049,494
Net Income (loss) (13,427,731)
General Partner Capital 455,817
Limited Partner Capital 40,014,820
Partnership Capital 40,470,637
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,026.18
Net Income (loss) per Unit* (548.00)
Page 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Partnership commenced trading on August 3, 1987. The success of the
Partnership is dependent on the ability of the Advisors to generate
profits through speculative trading sufficient to produce substantial
capital appreciation after payment of all fees and expenses. Future
results will depend in large part upon the futures markets in general,
the performance of the Advisors for the Partnership and the amount of
redemptions and changes in interest rates. Due to the highly leveraged
nature of futures trading, small price movements may result in
substantial losses. Because of the nature of these factors and their
interaction, it is impossible to predict future operating results.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of income and expense during the reporting period. Management
believes that the estimates utilized in preparing the financial
statements are reasonable and prudent; however, actual results could
differ from those estimates. The Partnership's significant accounting
policies are described in detail in Note 1 to the Financial Statements.
The Partnership records all investments at fair value in its financial
statements, with changes in fair value reported as a component of
realized and change in unrealized trading gain (loss) in the Statements
of Operations. Generally, fair values are based on market prices;
however, in certain circumstances, estimates are involved in determining
fair value in the absence of an active market closing price (e.g. swap
and forward contracts which are traded in the inter-bank market).
(a) Liquidity. Substantially all of the Partnership's assets are held in
cash or cash equivalents. There are no restrictions on the liquidity of
these assets except for amounts on deposit with the broker needed to
meet margin requirements on open futures contracts.
Most United States exchanges (but generally not foreign exchanges, or
banks or broker-dealer firms in the case of foreign currency forward
contracts) limit by regulation the amount of fluctuation limits. The
daily limits establish the maximum amount the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of the trading session. Once the "daily limit" has been
reached in a particular commodity, no trades may be made at a price
beyond the limit. Positions in the commodity can then be taken or
liquidated only if traders are willing to effect trades at or within the
limit during the period for trading on such day. Because the "daily
limit" rule only governs price movement for a particular trading day, it
does not limit losses. The rule may, in fact, substantially increase
losses because it may prevent the liquidation of unfavorable positions.
Futures prices have occasionally moved the daily limit for several
consecutive trading days, and thereby prevented prompt liquidation of
futures positions on one side of the market, subjecting those futures
traders involved to substantial losses.
Liquidity will be of concern to the Partnership primarily in that the
futures markets in which the Advisors take positions may have periods in
which illiquidity makes it impossible or economically undesirable to
execute trades which its respective trading strategy would otherwise
suggest. Other than in respect of the functioning of the markets in
which it trades, liquidity will be of little relevance to the operation
of the Partnership except insofar as the General Partner is relatively
thinly capitalized. Nonetheless, the General Partner believes it has
sufficient funding to meet both its capital contribution and net worth
requirements based on capital contributions from the principals of the
General Partner, or alternative funding sources, including the stock
subscription from the Clearing Broker to ProFutures, Inc.
(b) Capital Resources. The Partnership's initial offering and sale of
Units of Limited Partnership Interest commenced on May 27, 1987 and
ended on July 31, 1987 after having sold $6,130,568 of units at the
initial offering price of $1,000. The Partnership commenced trading
August 3, 1987. The Partnership continued offering Units through
February 29, 1988. Thereafter additional offerings of the Partnership's
Page 10
Units of Limited Partnership Interest occurred on April 15, 1988, August
24, 1991, May 14, 1992, November 30, 1992, August 30, 1993 and July 31,
1994. The offering effective July 31, 1994 was extended on January 31,
1995 and continued through April 30, 1995. In June 1995, Post-Effective
Amendment No. 3 was filed to deregister the Partnership's remaining
$20,721,920 of Units of Limited Partnership Interest.
Since the Partnership's business is the purchase and sale of various
commodity interests, it will make few, if any, capital expenditures.
(c) Results of Operations. The Partnership's net income (loss) for each
quarter of the years ended December 31, 2004 and 2003 consisted of the
following:
1st Qtr 2004 2nd Qtr 2004 3rd Qtr 2004 4th Qtr 2004
-----------------------------------------------------------
Gain (loss) from trading $5,320,555 $(4,042,807) $371,222 $2,660,482
Net investment (loss) (1,593,519) (503,276) (450,004) (510,738)
Net Income (Loss) 3,727,036 (4,546,083) (78,782) 2,149,744
Net income (loss) per Unit 290.01 (360.71) (6.40) 178.43
Increase (decrease) in 290.36 (360.50) (6.28) 177.86
Net Asset Value per Unit
Net Asset Value per Unit 2,888.84 2,528.34 2,522.06 2,699.92
at end of period
1st Qtr 2003 2nd Qtr 2003 3rd Qtr 2003 4th Qtr 2003
-----------------------------------------------------------
Gain (loss) from trading $3,863,024 $758,956 $(211,935) $3,458,645
Net investment (loss) (1,178,000) (578,844) (529,808) (1,119,704)
Net Income (Loss) 2,685,024 180,112 (741,743) 2,338,941
Net income (loss) per Unit 191.41 13.07 (54.65) 175.93
Increase (decrease) in 189.53 12.46 (53.94) 176.39
Net Asset Value per Unit
Net Asset Value per Unit 2,463.57 2,476.03 2,422.09 2,598.48
at end of period
Due to the speculative nature of trading commodity interests, the
Partnership's income or loss from operations may vary widely from period to
period. Management cannot predict whether the Partnership's future Net Asset
Value per Unit will increase or experience a decline.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Year Ended December 31, 2004
- ----------------------------
2004 had net income of $1,251,915 or $100.52 per Unit. At December 31, 2004,
partners' capital totaled $32,081,653, a net decrease of $1,544,028 from
December 31, 2003 including capital redemptions of $2,805,458. Net Asset Value
per Unit at December 31, 2004 amounted to $2,699.92, as compared to $2,598.48
at December 31, 2003, an increase of 3.90%.
Page 11
The net income for 2004 resulted primarily from trading gains in the energy
and interest rates market sectors, offset by losses in the agricultural and
metals market sectors.
Fourth Quarter 2004
- -------------------
The fourth quarter continued to be volatile for the markets, especially the
commodity markets. Oil and currencies were especially volatile. Many believe
the commodity markets will continue to be volatile due in part to increasing
demands on commodities from rapidly growing economies in China and India.
The Partnership had a gain of 2.87% in October. The Partnership achieved gains
in interest rates, foreign currencies and energy, with smaller gains in stock
indices. There were losses in base metals, with smaller losses in agricultural
commodities.
The Partnership had a gain of 4.79% in November. The Partnership's largest
gains were in foreign currencies (the dollar declined in value significantly),
stock indices, interest rates and metals. The Partnership experienced small
losses in energy and certain agricultural commodities.
The Partnership had a loss of 0.69% in December. The Partnership had the
largest gains in equities, with smaller gains in interest rates. There were
losses in energy, foreign currencies, metals and certain agricultural
commodities.
The Partnership ended the year with a modest gain.
Third Quarter 2004
- ------------------
The economy continued to grow in the third quarter of 2004, though at a slower
pace. The economic news was a little more mixed, with both good news and
not-so-good news. Overall though, the growth is continuing, though rising oil
prices, trading above $50 a barrel, could put a damper on things in the coming
months.
The Partnership had a loss of 0.50% in July 2004. It was once again a very
difficult month in the markets, especially for trend followers. The
Partnership had large gains in energy, with smaller gains in agricultural
commodities and foreign currencies. However, these gains were offset by losses
in equities, interest rates and metals.
The Partnership had a gain of 0.41% in August 2004. The Fund started out
strong in August, but some of the gains were lost as some of the trends
reversed. The Partnership had gains in bonds and interest rates, with smaller
gains in equities. There were losses mainly in foreign currencies, metals and
agricultural commodities.
The Partnership had a loss of 0.16% in September 2004. The Partnership had
large gains in energy, capitalizing on the recent surges in oil prices. There
were also smaller gains in agricultural commodities. There were also losses in
equities, foreign currencies, interest rates and metals.
Overall, the Partnership ended the third quarter 2004 with a total return of
(0.25)% for the quarter and (2.94)% for the nine months ended September 30,
2004. For the third quarter 2004, the majority of the Partnership's trading
gains were in the energy and interest rates sectors and the largest losses
were in the equities and foreign currencies sectors.
Second Quarter 2004
- -------------------
The economic recovery continued in the second quarter of 2004, and most
economic news was positive, though there was a little slowdown in June. The
futures markets were again volatile, especially in energy, interest rates and
currencies.
The Partnership had a loss of 7.27% in April 2004. The Partnership had large
losses in metals, interest rates, equities and foreign currencies, as well as
smaller losses in agriculture. The only bright spot was energy, where there
were some modest gains.
Page 12
The Partnership had a loss of 0.33% in May 2004. The Partnership had large
gains in energy, with smaller gains in foreign currencies and base metals.
There were losses in equities, agriculture, interest rates and precious
metals. Campbell and Winton, our main trend- followers were essentially flat
in May.
The Partnership had a loss of 5.30% in June 2004, which was another very
volatile and difficult month in the markets. The Partnership had losses in
nearly all sectors. Losses were especially large in foreign currencies and
energy.
Overall, the Partnership had a total return of (12.48)% for the quarter and
(2.70)% for the six months ended June 30, 2004. For the second quarter 2004,
the majority of the Partnership's trading gains were in the energy sector and
the largest loss was in foreign currencies.
First Quarter 2004
- ------------------
The economy continued to improve in the first quarter of 2004, and most
economic news was positive. The futures markets continued to be volatile,
especially energy and currencies.
The Partnership had a gain of 1.55% in January 2004. There were gains in
foreign currencies, stock indices and base metals, with smaller gains in
energy and interest rates. There were some losses in agriculture and precious
metals.
In February 2004, the Partnership had a gain of 8.80%. The largest gains were
in foreign currencies and interest rates, with smaller gains in energy,
agricultural commodities, metals and stock indices.
In March 2004, the Partnership had a gain of 0.62%. There were gains in
interest rates, agricultural commodities and metals. Most of these gains were
offset by losses in foreign currencies and equities.
Overall, the Partnership ended the quarter with a total return of 11.17%. The
largest trading gains were in the foreign currencies, interest rate and metal
sectors.
Year Ended December 31, 2003
- ----------------------------
2003 had net income of $4,462,334 or $326.46 per Unit. At December 31, 2003,
partners' capital totaled $33,625,681, a net increase of $1,495,340 from
December 31, 2002 including capital redemptions of $2,966,994. Net Asset Value
per Unit at December 31, 2003 amounted to $2,598.48, as compared to $2,274.04
at December 31, 2002, an increase of 14.27%.
The net income for 2003 resulted primarily from trading gains in the foreign
currencies, agricultural, energy, equities and metals markets, partially
offset by losses in the interest rates markets.
Fourth Quarter 2003
- -------------------
The economy continued to grow in the fourth quarter, though at a slower pace
than the third quarter. The futures markets were very volatile, with many
trends underway that the traders were able to capitalize on.
The Partnership had a gain of 2.99% in October 2003. The Partnership had large
gains in foreign currencies and stock indices, with smaller gains in
agricultural commodities and base metals. There were some losses in interest
rates and energy.
In November 2003, the Partnership had a loss of 1.07%. The Partnership had
small gains in foreign currencies and precious metals. However, there were
losses in most of the other sectors that offset these gains.
In December 2003, the Partnership had a gain of 5.29%. The Partnership had
gains in foreign currencies and precious metals. There were small losses in
the other sectors.
Page 13
The Partnership had a total return of 7.28% for the quarter and 14.27% for the
year ended December 31, 2003. For the fourth quarter 2003, the majority of the
Partnership's trading gains were in foreign currencies and the largest loss
was in interest rates.
Third Quarter 2003
- ------------------
The economy continued to improve in the third quarter. The equity markets were
mostly up. Most analysts expect the economy to continue to improve for the
remainder of the year.
The Partnership had a loss of 3.46% in July. The Partnership had losses in
bonds and other interest rate contracts and foreign currencies. There were
gains in stock indices, metals, energy and certain agricultural commodities.
In August 2003, the Partnership had a gain of 1.22%. The Partnership had gains
in foreign currencies, energy, stock indices and metals. There were losses in
bonds and certain agricultural commodities.
In September 2003, the Partnership had a small gain of 0.10%. The Partnership
had gains in foreign currencies, which were offset by losses in energy. The
other sectors were generally flat.
The Partnership had a total return of (2.18)% for the quarter and 6.51% for
the nine months ended September 30, 2003. For the third quarter 2003, the
majority of the Partnership's trading gains were in stock indices and the
largest loss was in energy. In September 2003, two new traders, Rhicon
Currency and Conquest Capital, were added to the Partnership.
Second Quarter 2003
- -------------------
Futures were somewhat more stable in the second quarter as compared to the
first. The war with Iraq ended, and the stock markets began a steady climb
that lasted through the end of the quarter.
In April 2003, the Partnership had a gain of 0.11%. There were gains in
currencies, primarily because of the falling dollar. However, these gains were
mostly offset by losses in nearly all of the other sectors.
In May 2003, the Partnership gained 4.95%. The Partnership had gains in
interest rates, especially bonds. There were also gains in currencies, metals,
and stock indices. There were some losses in energy and certain agricultural
commodities.
In June 2003, the Partnership has a loss of 4.34%. There were losses in
interest rates, especially bonds. There were also losses in energy, metals and
certain agricultural commodities. Most other sectors were basically flat.
At the beginning of June 2003, notional funds were added back to trading, as
the leverage was increased back to 150%. This is about the same level as
before the notional funds were temporarily eliminated several months ago.
The Partnership had a total return of 0.51% for the quarter and 8.88% for the
six months ended June 30, 2003. For the second quarter 2003, the majority of
the Partnership's trading gains were in foreign currencies and the largest
loss was in energy futures.
First Quarter 2003
- ------------------
The futures markets were quite volatile in the first quarter of 2003. The
looming war with Iraq caused energy prices to skyrocket. Many other markets
were choppy due to this uncertainty. Consumer confidence dropped dramatically.
The traders were able to capitalize on the volatility in the markets.
In January 2003, the Partnership gained 5.32%. There were large gains in
foreign currencies and energy, with smaller gains in interest rates, precious
and base metals and stock indices. There were some small losses in grains.
Page 14
In February 2003 , the Partnership gained 8.19%. There were large gains in
energy, with smaller gains in interest rates and currencies. There were some
small losses in stock indices and metals. Most other sectors were basically
flat.
In February 2003, the Partnership eliminated most of its notional funding and
traded at near 100% of assets, rather than 150% of assets (with notional
funding). One advisor, Campbell & Company, also scaled back their open
positions. These changes were made due to the uncertainty of the pending war
with Iraq.
In March 2003, the Partnership lost 4.93%. There were large losses in most
sectors, especially energy, after oil prices dropped. Some of the gains from
the previous two months were reversed in March 2003.
Also in March 2003, Quay Capital Management had a change of its top
management, resulting in the departure of one of the principals responsible
for trading the account. As a result, they were terminated as one of the
Advisors in the Fund. No replacement Advisor was selected by month-end.
Overall, the Partnership had a total return of 8.33% for the three months
ended March 31, 2003. The majority of the Partnership's trading gains were in
energy and foreign currencies and the largest loss was in stock index futures.
Year Ended December 31, 2002
- ----------------------------
2002 had net income of $3,057,896 or $201.95 per Unit. At December 31, 2002,
partners' capital totaled $32,130,341, a net decrease of $1,653,454 from
December 31, 2001 including capital redemptions of $4,711,350. Net Asset Value
per Unit at December 31, 2002 amounted to $2,274.04, as compared to $2,038.84
at December 31, 2001, an increase of 11.54%.
The net income for 2002 resulted primarily from trading gains in the foreign
currencies and interest rates markets, partially offset by losses in the
agricultural, energy, equities and metals markets.
Fourth Quarter 2002
- -------------------
The futures markets continued to be very volatile in the fourth quarter of
2002. The ongoing threat of war with Iraq, and its impact on the energy
markets, caused much of the volatility. Gold prices soared in part due to this
uncertainty, as well as uncertainty over economic prospects for the future.
The equity markets were up, for the most part, at the end of the quarter.
In October, the Partnership lost 6.66%. There were very large losses in
interest rates, energy and foreign currencies. There were also smaller losses
in other sectors.
In November, the Partnership lost another 2.14%. There were gains in foreign
currencies, base metals, and stock indices but these were offset by losses in
interest rates, energy and precious metals.
In December, the Partnership had a gain of 7.79%. There were gains in interest
rates, foreign currencies and energy which offset the losses in the base
metals, equities and agricultural sectors.
The Partnership finished the year with a gain of 11.54%. The volatility in the
futures markets allowed some traders to capitalize on trends in various
markets.
Third Quarter 2002
- ------------------
The futures markets continued to be volatile in the third quarter of 2002. The
equity markets suffered losses during the quarter, which significantly
impacted the commodities markets. The looming threat of war with Iraq also had
an impact on the markets, especially oil and gas futures.
In July, the Partnership gained 6.89%. There were gains in interest rates and
stock indices along with gains in certain agricultural commodities. These
gains were partially offset by losses in the energy complex and metals.
Page 15
In August, the Partnership gained another 3.87%. Again, there were gains in
interest rate markets. There were also gains in energy, precious metals,
grains and livestock. There were losses in foreign currencies, stock index
futures, and base metals.
In September, the Partnership had yet another gain of 4.94%. There were gains
in interest rates along with gains in stock indices and energy. There were
losses in precious metals.
The Partnership had a total return of 16.51% for the quarter and 13.29% for
the nine months ended September 30, 2002. For the third quarter 2002, the
majority of the Partnership's trading gains were in interest rate futures and
stock index futures and the largest loss was in foreign currencies.
Second Quarter 2002
- -------------------
The futures markets continued to be volatile in the second quarter of 2002,
though there was a surge at the end of the quarter. The extreme volatility of
the equity markets, mainly on the downside, had a major impact on the
commodities markets. Many of the US and overseas stock indices and foreign
currencies were very active. Some of this was the result of the corporate
scandals that continue to rock the markets.
In April, the Partnership lost 4.43%. Although there were gains in Swiss
Francs, natural gas, and Euros, they were more than offset by losses in the
German Stock Index, the Canadian Dollar, the NASDAQ 100, and various bond
futures.
In May, the Partnership was essentially flat, with a gain of .26%. There were
gains in foreign currencies due to the drop of the U.S. dollar. There were
also gains in precious metals and agricultural commodities. The gains were
offset by losses in the energy complex, interest rates and some metals.
In June, the Partnership had a gain of 10.26%. There were gains in Euro
futures, and a gain in EuroDollar futures. There were also gains in various
stock indices. There were losses in British Pounds, the Nikkei Stock Index,
and Gold, but these were more than offset by the gains.
The Partnership had a total return of 5.65% for the quarter and (2.77)% for
the six months ended June 30, 2002. For the second quarter 2002, the majority
of the Partnership's trading gains were in foreign currencies and the largest
loss was in the energy markets.
First Quarter 2002
- ------------------
The futures markets remained choppy in the first quarter of 2002. While the
economy was showing some signs of improvement, there were also some negative
signs that caused uncertainty. The troubles in the Middle East lead to large
increases in oil and gas prices. Gold prices also moved higher early in the
quarter, but gave back some of their gains at the end of the quarter.
In January 2002, the Partnership lost 6.25%. There were large losses in stock
indices and agricultural commodities. Large losses were also incurred in
interest rates and metals. Many of the other sectors were essentially flat.
In February 2002, the Partnership lost 5.58%. The Partnership once again
experienced losses in stock indices and interest rates. In addition, there
were also losses in the energy complex and foreign currencies. There were some
gains in agricultural commodities and precious metals. These however, were not
enough to offset the losses.
In March 2002, the Partnership managed to gain 3.97%. There were gains in the
energy complex, including Brent Crude Oil and Unleaded Gas. There were also
some gains in bonds and stock indices. There were losses in currencies,
including the Japanese Yen and the Swiss Franc. There were also some small
losses in cotton and aluminum. These losses however were not enough to offset
the gains.
Page 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a commodity investment pool engaged in the trading of U.S.
and foreign futures contracts, options on U.S. and foreign futures contracts
and other commodity interests, including forward contracts on currencies
(collectively, "commodity interests"). These market sensitive derivative
instruments are acquired for speculative trading purposes. All, or
substantially all, of the Partnership's assets are, accordingly, subject to
the risk of trading loss. Unlike an operating company, the risk involved in
trading market sensitive derivative instruments is integral, not incidental,
to the Partnership's business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including commodity price levels, the level and volatility of interest rates,
foreign currency exchange rates, equity price levels, the market value of
financial instruments and contracts, the diversification effects among the
Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership acquires and liquidates, generally on a short-term basis, both
long and short positions in a wide range of commodities markets. Consequently,
it is not possible to predict how a particular market scenario projected into
the future will affect performance, and the Partnership's past performance is
not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Partnership's speculative trading and the recurrence in the
markets traded by the Partnership 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 experience to date. In light
of the foregoing, as well as the risks and uncertainties intrinsic to all
future projections, the inclusion of the quantitative disclosure included in
this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to the Value at Risk or by the Partnership's attempts to manage its
market risk.
Materiality, as used in this section, 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 market sensitive commodity interests.
Quantitative Disclosures About Trading 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 (such as the terms and amounts related to
particular contracts and commodity interests held during or at the end of the
reporting period).
Risk exposure in the various market sectors traded by the Partnership's
Advisors is quantified below in terms of Value at Risk. Commodity interests
are recorded in the financial statements at fair market value; therefore, any
loss in the fair value of the Partnership's open positions is directly
reflected in the Partnership's earnings (realized or unrealized) and cash
flow.
The Partnership has used commodity exchange maintenance margin requirements as
the measure of its Value at Risk in a given market sector. Maintenance margin
requirements are set by exchanges to equal or exceed the maximum losses
reasonably expected to be incurred in the fair value of any given contract in
95% - 99% of any one-day intervals. The maintenance margin levels are
established by brokers 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
Page 17
near-term one-day price fluctuation. Maintenance margin has been used rather
than the more generally available initial margin, because initial margin
includes a credit risk component which is not relevant to Value at Risk.
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 2004 and
2003. All open position trading risk exposures of the Partnership have been
included in calculating the figures set forth below. As of December 31, 2004
and 2003, the Partnership's total capitalization was approximately $32.1
million and $33.6 million, respectively.
December 31, December 31,
2004 2003
------------------- -------------------
% of % of
Value at Total Value at Total
Market Sector Sector Capitalization Risk Capitalization
----------------- ------ -------------- ---- --------------
Agriculture $ 213,471 0.67% $ 110,000 0.33%
Currencies 1,267,315 3.95% 1,348,000 4.01%
Energy and Other 135,190 0.42% 584,000 1.74%
Stock Indices 1,753,085 5.46% 1,675,000 4.99%
Interest Rates 1,231,253 3.84% 1,520,000 4.52%
Metals 328,433 1.02% 509,000 1.51%
---------- ------- --------- -------
Total $4,928,747 15.36% $5,746,000 17.10%
========== ====== ========== ======
The following table indicates the total annual returns for 2004 by market
category based on trading gains and losses (before commissions, interest,
other fees and expenses) earned during the year. These returns are calculated
based on the net asset value per unit at the beginning of the fiscal year
2004.
Trading
Gain/(Loss)
-----------
Agriculture (0.08)%
Currencies 0.06 %
Energy and Other 5.29 %
Stock Indices 0.57 %
Interest Rates 10.25 %
Metals (0.12)%
-----------
15.97 %
===========
The face value of the market sector instruments held by the Partnership is
typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally range between approximately 1% and
10% of contract face value) as well as many times the capitalization of the
Partnership. The magnitude of the Partnership's open positions creates a risk
of loss not typically found in most other financial instruments. Because of
the size of its positions, certain market conditions - unusual, but
historically recurring from time to time - could cause the Partnership to
incur severe losses over a short period of time. The foregoing Value at Risk
table - as well as the past performance of the Partnership - give no
indication of the magnitude of this risk of loss.
Qualitative Disclosures About Trading Risk
The following qualitative disclosures regarding the Partnership's market risk
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) 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
Page 18
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 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. There can be no assurance that
the Partnership'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
and during the year ended December 31, 2004, by market sector.
Stock Indices
- -------------
The Partnership's primary equity exposure is to fluctuations in equity prices.
The stock index futures traded by the Partnership are limited to futures on
broadly based indices. As of December 31, 2004, the Partnership's exposure was
to stock indices in the U.S., European, Australian and Asian markets. The
General Partner anticipates that the Partnership will primarily be exposed to
the risk of adverse price trends or static markets in the major U.S. and
global equity indices.
Metals
- ------
The Partnership's primary metals market exposure is to fluctuations in the
price of both precious and base metals. As of December 31, 2004, the
Partnership's primary exposures were to aluminum, nickel, copper, tin, gold,
silver, lead and zinc. The General Partner anticipates that the Partnership
will continue to be exposed to the metals markets.
Agriculture
- -----------
The Partnership's primary agriculture commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. The Partnership's agriculture commodities exposure was
primarily to pork bellies, cattle, cotton, lumber and soy bean products as of
December 31, 2004. The General Partner anticipates that agriculture
commodities such as meats and fibers may also be a potential market exposure.
Currencies
- ----------
The Partnership's currency exposure is to exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. These fluctuations are
influenced by interest rate changes as well as political and general economic
conditions. The Partnership trades long and short positions in a large number
of currencies, including cross-currency positions between two currencies other
than the U.S. dollar. As of December 31, 2004, the Partnership's primary
exposures were in Australian Dollars, Canadian Dollars British Pounds,
Japanese Yen, Swiss Francs and Euros. The General Partner anticipates that the
risk profile of the Partnership's currency sector will predominantly relate to
the U.S. and major European and Asian countries. The currency trading Value at
Risk figure includes foreign margin amounts converted into U.S. dollars with
an incremental adjustment to reflect the exchange rate risk inherent to the
dollar-based Partnership in expressing Value at Risk in a functional currency
other than dollars.
Interest Rates
- --------------
Interest rate movements directly affect the value of commodity interests
related to U.S. and foreign bonds and bond indices, and indirectly affect the
value of its equity index and currency positions. Interest rate movements in
one country, as well as relative interest rate movements between countries,
can materially impact the Partnership's profitability. The Partnership's
primary interest rate exposure is to interest rate fluctuations in the United
States and the major European and Asian countries. However, the Partnership
may also take positions affected by interest rates
Page 19
on the government debt of smaller nations, such as Australia. The General
Partner anticipates that interest rates in such major countries will be a
primary market exposure of the Partnership for the foreseeable future. The
changes in interest rates which would likely have the most effect on the
Partnership are changes in long-term, as opposed to short-term, rates. Most of
the financial instruments underlying the commodity interests held by the
Partnership during the year were medium- to long-term instruments.
Consequently, even a material change in short-term rates might have little
effect on the Partnership if medium- to long-term rates were to remain steady.
Energy
- ------
The Partnership's energy market exposure is to gas and oil price movements,
often resulting from political developments in the Middle East.
Disclosures About Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not
needed to maintain margin requirements. However, these balances (as well as
the market risk they represent) are immaterial.
The Partnership also has non-trading cash flow risk as a result of investing a
substantial portion of its assets in interest-bearing deposits with brokers.
If short-term interest rates decline, then cash flow from interest income
related to broker deposits will also decline.
Qualitative Disclosures About Managing Risk Exposure
The means by which the General Partner and the Advisors attempt to manage the
risk of the Partnership's open positions is essentially the same in all market
categories traded. The General Partner attempts to manage market exposure by
(i) diversifying the Partnership's assets among different Advisors whose
strategies focus on different market sectors and trading approaches, and (ii)
monitoring the Partnership's actual market exposures on a daily basis and
reallocating assets away from Advisors, as necessary, if an over-concentration
develops and persists in any one market sector or market sensitive commodity
interest. Each Advisor applies its own risk management policies to its
trading. These Advisor policies generally limit the total exposure that may be
taken per "risk unit" of assets under management. In addition, many Advisors
follow diversification guidelines (often formulated in terms of the maximum
margin which they will commit to positions in any one contract or group of
related contracts), as well as imposing "stop-loss" points at which open
positions must be closed out. Certain Advisors treat their risk control
policies as strict rules; others only as general guidelines for controlling
risk.
Item 8. Financial Statements and Supplementary Data.
Financial statements meeting the requirements of Regulation S-X are
listed following this report. The Supplementary Financial information
specified by Item 302 of Regulation S-K is included in Item 7(c), Results
of Operations.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
ProFutures, Inc., as General Partner of ProFutures Diversified Fund,
L.P., with the participation of the General Partner's President and
Chief Financial Officer, has evaluated the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) with
respect to the Partnership as of the end of the period covered by this
annual report. Based on their evaluation, the President and Chief
Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in the General Partner's
internal control over financial reporting applicable to the Partnership
identified in connection with the evaluation required by paragraph (d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the last
Page 20
fiscal quarter that have materially affected, or are reasonably likely
to materially affect, internal control over financial reporting
applicable to the Partnership.
PART III
Item 10. Directors and Executive Officers of the Partnership.
The Partnership is a limited partnership and therefore does not have
any directors or officers. The Partnership's General Partner,
ProFutures, Inc., administers and manages the affairs of the
Partnership.
The Board of Directors of ProFutures, Inc., in its capacity as the audit
committee for the Partnership, has determined that Debi B. Halbert
qualifies a an "audit committee financial expert" in accordance with the
applicable rules and regulations of the Securities and Exchange
Commission. She is not independent of management.
The Partnership has adopted a Code of Ethics that applies to the
Partnership and its affiliates as well as the Executive Officers of
ProFutures, Inc. The Partnership's Code of Ethics is attached hereto as
an Exhibit.
Item 11. Executive Compensation.
As discussed above, the Partnership does not have any officers,
directors or employees. The General Partner received monthly management
fees which aggregated $1,050,783 for 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) As of December 31, 2004, a total of 11,882 Units are issued and
outstanding, representing 1 General Partner and 860 Limited
Partners. The Partnership knows of no one person who owns
beneficially more than 5% of the Units of Limited Partnership
Interest.
(b) The General Partner and its principals owned 225 Units as of
December 31, 2004, having an aggregate value of $607,384, which is
approximately 1.9% of the Net Asset Value of the Partnership
(c) Changes in control. None have occurred and none are expected.
Item 13. Certain Relationships and Related Transactions.
The Partnership's Prospectus, dated July 31, 1994, Pages 16-18, which is
incorporated herein by reference, contains information concerning the
relationships and transactions between the General Partner, the Clearing
Broker and the Partnership.
Item 14. Principal Accounting Fees and Services.
Arthur F. Bell, Jr. & Associates, L.L.C. billed the Partnership
aggregate fees for services rendered to the Partnership for the last
two fiscal years as follows:
2004 2003
Audit Fees (1) $ 49,936 $ 42,611
Audit-Related Fees (2) $ 39,330 $ 25,614
Tax Fees (3) $ 7,703 $ 4,242
All Other Fees (4) $ 3,600 $ 2,600
Page 21
(1) Audit fees relate to the annual audit, quarterly reviews, and
assistance with and review of documents filed with the Securities
and Exchange Commission.
(2) Audit-Related Fees relate to the monthly recalculation of net
asset value and net asset value per unit, from information
provided by the General Partner, and consultation on the
preparation of month-end account statements provided to each
partner.
(3) Tax Fees relate to the preparation of the U.S. Partnership and
applicable state information tax returns.
(4) All Other Fees relate to the preparation of performance records
and related footnotes for the Partnership and each Advisor.
The Board of Directors of ProFutures, Inc., in its capacity as the audit
committee for the Partnership, approved all of the services described above.
The audit committee has determined that the payments made to its independent
accountant for non-audit services are compatible with maintaining such
auditor's independence.
The audit committee explicitly pre-approves all audit and non-audit services
and all engagement fees and terms, except as otherwise permitted by
regulation.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements.
The following are included with the 2004 Report of
Independent Registered Public Accounting Firm, a copy of
which is filed herewith as Exhibit 13.01
Affirmation of ProFutures, Inc.
Report of Independent Registered Public Accounting Firm
Statements of Financial Condition
Condensed Schedules of Investments
Statements of Operations
Statements of Changes in Partners' Capital
Notes to Financial Statements
(a)(2) Schedules are omitted for the reason that all required
information is contained in the financial statements
included in (a)(1) above or are not applicable.
(a)(3) Exhibits as required by Item 601 of Regulation S-K.
*1.1 Form of Selling Agreement between the
Partnership and ProFutures Financial
Group, Inc.
*1.2 Form of Additional Selling Agents
Agreement between ProFutures
Page 22
Financial Group, Inc. and certain
Additional Selling Agents.
*3.1 Agreement of Limited Partnership
(attached to the Prospectus as Exhibit
A).
*3.2 Subscription Agreement and Power of
Attorney (attached to the Prospectus
as Exhibit B).
*3.3 Request for Redemption Form (attached
to the Prospectus as Exhibit C).
*5.1 Opinion of Counsel as to the legality
of the Units.
*8.1 Tax Opinion of Counsel
10.4 Form of Consulting Agreement between
the Registrant and Kenmar Global
Strategies Inc.
*10.6 Form of Amended and Restated Stock
Subscription Agreement by and between
ABN AMRO Incorporated and ProFutures,
Inc.
---------
* The foregoing forms of exhibits were filed in the April 6, 1987
Registration Statement No. 33-13008 and/or Post-Effective Amendment No. 1
thereto filed March 11, 1988, and/or the June 5, 1991 Registration
Statement No. 33-41073, and/or Pre-Effective Amendment No. 1 thereto
filed August 8, 1991, and/or Post-Effective Amendment No. 1 thereto filed
March 26, 1992; and/or the October 14, 1992 Registration Statement No.
33-53324, and/or the November 17, 1992 Pre-effective Amendment No. 1
thereto and/or the July 2, 1993 Registration Statement No. 33-65596,
and/or the Pre-Effective Amendment No. 1 thereto filed August 16, 1993,
and Supplement dated December 3, 1993, Post-Effective Amendment No. 2
thereto filed June 30, 1994 and Supplement dated January 31, 1995, and/or
Post-Effective Amendment No. 3 dated June 23, 1995; and/or Form 10-K for
the year ended 2001; and/or Form 10-Q for the quarter ended June 30,
2002. Accordingly, such exhibits are incorporated herein by reference and
notified herewith.
(b) Exhibits.
13.1 2004 Report of Independent Registered Public Accounting
Firm.
14.1 Code of Ethics.
31.01 Certification of Gary D. Halbert, President, pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
31.02 Certification of Debi B. Halbert, Chief Financial Officer,
pursuant to Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934.
32.01 Certification of Gary D. Halbert, President, pursuant to 18
U.S.C. Section 1350 as enacted by Section 906 of The
Sarbanes-Oxley Act of 2002.
32.02 Certification of Debi B. Halbert, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350 as enacted by Section 906
of The Sarbanes-Oxley Act of 2002.
(c) Financial Statement Schedules.
Not Applicable or information included in the financial
statements.
Page 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROFUTURES DIVERSIFIED FUND, L.P.
(Partnership)
March 30, 2005 By /s/ GARY D. HALBERT
- -------------- ---------------------------------------
Date Gary D. Halbert, President and Director
ProFutures, Inc.
General Partner
March 30, 2005 By /s/ DEBI B. HALBERT
- -------------- --------------------------------------
Date Debi B. Halbert, Chief Financial Officer,
Treasurer and Director
ProFutures, Inc.
General Partner
Page 24
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 in the capacities and on the dates indicated.
March 30, 2005 By /s/ GARY D. HALBERT
- -------------- ---------------------------------------
Date Gary D. Halbert, President and Director
ProFutures, Inc.
General Partner
March 30, 2005 By /s/ DEBI B. HALBERT
- -------------- --------------------------------------
Date Debi B. Halbert, Chief Financial Officer,
Treasurer and Director
ProFutures, Inc.
General Partner
Page 25