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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 333-46550
SHAFFER DIVERSIFIED FUND, LP
----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4132934
(STATE OF FORMATION) (I.R.S EMPLOYER IDENTIFICATION NO.)
925 WESTCHESTER AVE 10604
WHITE PLAINS, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 800-352-5265
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
SHAFFER DIVERSIFIED FUND, LP
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Statements of Financial Condition 3
as of September 30, 2002 (unaudited)
and December 31, 2001 (audited)
Statements of Operations (unaudited) for the 4
Three Months and Nine Months ended September 30, 2002
and September 30, 2001
Statements of Cash Flows (uaudited) for the 5
Nine Months Ended September 30, 2002 and September 30, 2001
Statements of Changes in Partners' Capital 6
(unaudited) for the Nine Months Ended September 30, 2002
and September 30, 2001
Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION 18
- ---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF FINANCIAL CONDITION
September 30, 2002 (Unaudited) and December 31, 2001 (Audited)
September 30, December 31,
2002 2001
---- ----
ASSETS:
Equity in broker trading accounts
Cash and cash equivalents $ 153,255 $ --
United States government securities --
at market value (cost $942,485) 948,081
Unrealized gain on open futures contracts 47,211 --
---------- ----------
Deposits with broker 1,148,547 --
---------- ----------
Cash 718 586
Cash in escrow account -- 413,000
---------- ----------
718 413,586
---------- ----------
Total assets $1,149,265 $ 413,586
========== ==========
LIABILITIES:
Accounts payable $ 1,676 $ --
Brokerage fees on open contracts 519 --
Management fees payable to General Partner 3,591 --
Subscription deposits -- 413,000
---------- ----------
Total liabilities 5,786 413,000
---------- ----------
PARTNERS' CAPITAL (Net Asset Value)
General Partner - 50 units
outstanding at September 30, 2002
and 1 unit at December 31, 2001 51,383 586
Limited Partners - 1,062.685 units
outstanding at September 30, 2002
and 1 unit at December 31, 2001 1,092,096 --
---------- ----------
Total partners' capital
(Net Asset Value) 1,143,479 586
---------- ----------
Total partners' capital and liabilities $1,149,265 $ 413,586
========== ==========
See accompanying Notes to the Financial Statements.
3
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002 and 2001 and
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
INCOME
Trading gains
Realized $ 36,276 $ -- $ 98,492 $ --
Change in unrealized (54,765) -- 47,211 --
-------------------- -------------------
Gains (losses) from trading (18,489) -- 145,703 --
Investment income
Interest income 4,473 -- 10,402 --
-------------------- -------------------
Total income (loss) (14,016) -- 156,105 --
-------------------- -------------------
OPERATING EXPENSES:
Brokerage trading fees $ 6,731 $ -- $ 17,918 $ --
Management fees 10,940 -- 27,143 --
Operating expenses 5,217 663 15,003 1,232
-------------------- -------------------
Total expenses 22,888 663 60,064 1,232
-------------------- -------------------
Net income (loss) before special
allocation to the General Partner (36,904) (663) 96,041 (1,232)
Special allocation to the general partner 1,505 -- 19,052 --
-------------------- -------------------
NET INCOME (LOSS) AVAILABLE FOR
PRO RATA DISTRIBUTION $(38,409) $ (663) $ 76,989 $ (1,232)
==================== ===================
NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST
Weighted average number of units outstanding
during the period 1,068.225 2.00 1,051.718 2.00
==================== ===================
Net Income (Loss) per unit $ (35.96) $(331.50) $ 73.20 $(616.00)
==================== ===================
See accompanying Notes to the Financial Statements.
4
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 96,041 $ (1,232)
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Net change in unrealized - Futures Contracts (47,211) --
Net change in unrealized - US Government Securities (5,596)
Net (purchases) of investments
in United States Government Securities (942,485)
Increase in account payable and
accrued expenses 5,786 --
--------- ---------
Net cash used in operating activities (893,465) (1,232)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Addition of units 748,000 --
Sales charges and syndication fees (55,550) --
Redemption of units and withdrawals (58,598) --
--------- ---------
Net cash provided by financing activities 633,852 --
--------- ---------
Net decrease in cash and cash equivalents (259,613) (1,232)
CASH AND CASH EQUIVALENTS
Beginning of period 413,586 1,916
--------- ---------
End of period $ 153,973 $ 684
========= =========
End of period cash and cash equivalents consists of:
Cash in broker trading accounts 153,255 --
Cash in bank 718 684
--------- ---------
Total end of period cash and cash equivalents $ 153,973 $ 684
========= =========
Supplemental Disclosure of Non Cash Financing Activities:
Subscription deposits received in advance $ 413,000 $ --
========= =========
See accompanying Notes to the Financial Statements.
SHAFFER DIVERSIFIED FUND, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
NET ASSET VALUE
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Total Partners' Capital
Units General Limited Total
---------- -------------- ----------------- ------------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
Balances at December 31, 2001 2.00 $ (414) 1,000 $ 586
Additions 1,150.203 50,000 1,111,000 1,161,000
Allocation of net income
For the nine months ended September 30, 2002:
Special allocation to the General Partner 18.161 19,052 19,052
Net income available for
pro rata distribution 3,885 73,104 76,989
Sales charges and syndication fees (55,550) (55,550)
Redemptions and withdrawals (57.679) (21,140) (37,458) (58,598)
------------ ---------------- ----------------- -----------------
Balances at September 30, 2002 1,112.685 $ 51,383 $ 1,092,096 $ 1,143,479
============ ================ ================= =================
NINE MONTHS ENDED SEPTEMBER 30, 2001
Balances at December 31, 2000 2.00 $ 916 1,000 $ 1,916
Net loss for the nine months
ended September 30, 2001 (1,232) - (1,232)
------------ ---------------- ----------------- -----------------
Balances at September 30, 2001 2.00 $ (316) $ 1,000 $ 684
============ ================ ================= =================
Net asset value per unit
At September 30, 2002 $ 1,027.67
===============
At December 31, 2001 $ 293.00
===============
At September 30, 2001 $ 342.00
===============
See accompanying Notes to the Financial Statements.
6
SHAFFER DIVERSIFIED FUND, LP
NOTES TO FINANCIAL STATEMENTS
The financial statements are unaudited (except for the balance sheet information
as of December 31, 2001, which is derived from the Fund's audited financial
statements) and reflect all adjustments (consisting only of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The financial statements should be read in conjunction with the notes
thereto, together with management's discussion and analysis of financial
condition and results of operations. The results of operations for the three and
nine months ended September 30, 2002 are not necessarily indicative of the
results for the entire fiscal year ending December 31, 2002, or any future
interim period.
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) GENERAL DESCRIPTION
Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a
limited partnership organized on August 29, 2000 under the Delaware
Revised Uniform Limited Partnership Act. The Fund is a commodity
investment pool, whose purpose is to trade speculatively in the
United States futures markets. The business of the Fund is to seek
medium and long-term capital appreciation through speculative trading
in a diversified portfolio of commodity futures contracts and other
related interests in the United States commodity futures markets.
Specifically, the Fund invests in a diversified portfolio consisting
primarily of currency, interest rate, grain, metal and energy futures
contracts. The trading advisor and general partner of the Fund is
Shaffer Asset Management, Inc. ("Shaffer Asset"). In addition to
making all trading decisions in its capacity as trading advisor,
Shaffer Asset controls all aspects of the business and administration
of the Fund in its role as general partner.
The Fund originally filed a registration statement with the United
States Securities and Exchange Commission on September 25, 2000 for
the sale of a minimum of $1,000,000 and a maximum of $25,000,000 in
Units of Limited Partnership at $1,000.00 each, ($950.00 + $50.00
sales charges & syndication fees), which registration statement was
declared effective on October 16, 2001. The Fund's initial offering
period lasted approximately 120 days and ended February 13, 2002.
During the initial offering the Fund accepted subscriptions for 1,049
Units of Partnership Interests at a selling price of $1,000.00
($950.00 + $50.00 sales charges & syndication fees) for a total of
$1,049,000. Sales charges & syndication fees of $49,950 were
disbursed at closing and the Fund commenced trading activities with
net proceeds of $996,550.
The Fund will continue until December 31, 2025 unless terminated
earlier. However, if the Fund's investments experience a substantial
decline in value, as defined in the Partnership Agreement, the
Partnership will be dissolved.
B) FINANCIAL STATEMENT REPORTING
The Fund's financial statements are presented in conformity with
generally accepted accounting principles, which require using certain
estimates and assumptions made by the Fund's management that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from these estimates.
Transactions are accounted for on the trade date. Gains or losses are
realized when contracts are liquidated. Unrealized gains and losses
on open contracts (the difference between contract trade price and
market price) are reported in the statement of financial position as
a net gain or loss, as there exists a right of offset of unrealized
gains or losses in accordance with Financial Accounting Standards
Board Interpretation No. 39 - "Offsetting of Amounts Related to
Certain Contracts." Any change in net unrealized gain or loss from
the preceding period is reported in the statement of operations.
Brokerage expenses and other trading fees paid directly to the broker
are included in "brokerage fees" and are charged to expenses when
contracts are open. United States government securities are stated at
cost plus accrued interest, which approximates market value.
7
C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and money market deposits
held at financial institutions and short term securities with
maturity dates of less than three months from the date of the
financial statements.
D) INCOME TAXES
The Partnership is not subject to income taxes. The partners report
their allocable share of income, expense and trading gains or losses
on their own tax returns.
E) ORGANIZATION COSTS AND OPERATING EXPENSES
The General Partner has agreed to pay all expenses associated with
the organization of the Fund. Shaffer Asset Management, Inc. has
incurred total costs in connection with the organization of the Fund
of approximately $463,000 through September 30, 2002.
The General Partner is disputing fees of approximately $183,000 for
legal services provided for the organizational and offering costs of
the Fund. The General Partner does not believe this dispute has a
material effect on the Fund.
The General Partner is also responsible for Fund operating expenses,
(excluding sales charges, syndication fees, continuing service fees,
management fees, incentive allocations, brokerage commissions and
extraordinary expenses) in excess of 0.5% of the average monthly net
asset value of the Fund. The Fund is only liable for payment of
operating expenses on a monthly basis as calculated based on the
limitations stated above. If the Fund terminates prior to completion
of payment of the calculated amounts to Shaffer Asset, Shaffer Asset
will not be entitled to any additional payments, and the Fund will
have no further obligation to Shaffer Asset. Shaffer Asset has
charged the Fund $3,641 for operating expenses through September 30,
2002.
F) REGULATION
The Fund's operations are regulated by the provisions of the
Commodity Exchange Act, the regulations of the Commodity Futures
Trading Commission, and the rules of the National Futures
Association. The Fund is subject to regulatory requirements under the
Securities Act of 1933 and the Securities Exchange Act of 1934. As a
commodity investment pool, the Fund is subject to the regulations of
the Commodity Futures Trading Commission, an agency of the United
States ("US") Government which regulates most aspects of the
commodity futures industry; the rules of the National Futures
Association, an industry self-regulatory organization; and the
requirements of the various commodity exchanges where the Fund
executes transactions. Additionally, the Fund is subject to the
requirements of Futures Commission Merchants or Brokers through which
the Fund trades.
In addition to such registration requirements, the CFTC and certain
commodity exchanges have established limits on the maximum net long
and net short positions which any person, including the Fund, may
hold or control in particular commodities. Most exchanges also limit
the maximum changes in futures contract prices that may occur during
a single trading day.
G) ALLOCATION OF INCOME
The General Partner and each Limited Partner share in the profits and
losses of the partnership in proportion to their respective interests
in the partnership, except for the incentive allocation to the
General Partner. A Limited Partner's loss is limited to the amount of
his or her investment.
8
H) NET ASSET VALUE PER UNIT
Net Asset Value is calculated by dividing the Net Assets of the Fund
at the end of the reporting period by the number of Fund Units
outstanding at the end of the reporting period.
The Net Assets of the Fund is equal to: total assets, less total
liabilities, of the Fund determined on the basis of generally
accepted accounting principles. Net Assets shall include any
unrealized profits or losses on open positions, and any fee or
expense including net asset fees accruing to the Fund.
NOTE 2. GENERAL PARTNER AND COMMODITY TRADING ADVISOR
The General Partner of the Fund is Shaffer Asset Management, Inc., which
conducts and manages the business of the Fund. The General Partner is also
the commodity-trading advisor of the Fund.
The Fund pays for management and servicing at an annual rate of 5% of
monthly net asset value of the Fund, calculated and payable monthly. Such
fees are allocated between the General Partner and the selling agents as
follows: 3.75% to the General Partner and 1.25% to the selling agents
during the first 12 months after an investment is made and 1% to the
General Partner and 4% to the selling agents thereafter for various
services performed on an ongoing basis.
New investors are charged a 5% sales commission of which the General
Partner receives approximately 20%.
The General Partner shares in all Fund income and losses to the extent of
its interest in the Fund. The General Partner also receives on a quarterly
basis an incentive allocation from the Fund equivalent to 15% per year of
any increase in the cumulative appreciation of the net asset value of the
Fund, as defined in the Partnership Agreement.
The General Partner has agreed to maintain a minimum net worth of not less
than the greater of $50,000 or 5% of contributions made to the Fund as
further defined in the Partnership Agreement. The General Partner is also
required to maintain a minimum capital contribution to the Fund of the
greater of $25,000 or 1% of contributions made to the Fund as further
defined in the Partnership Agreement.
The General Partner has agreed to pay all expenses associated with the
organization of the Fund and the initial offering of the Units of the
limited and general partnership interest in the Fund. The General Partner
is responsible for Fund operating expenses, (excluding continuing service
fees, management fees, incentive allocations, brokerage commissions and
extraordinary expenses) in excess of 0.5% of the average monthly net asset
value of the Fund.
NOTE 3. DEPOSITS WITH BROKER AND FINANCIAL INSTITUTIONS
The Fund deposits assets with a broker subject to Commodity Futures Trading
Commission regulations and various exchange and broker requirements and
other financial institutions. The Fund satisfies margin requirements by
depositing U.S. Treasury bills and cash with such broker and other
financial institutions. The Fund earns interest income on these assets.
NOTE 4. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Fund are made by subscription agreement, subject to
acceptance by Shaffer Asset. As of September 30, 2002 funds received from
prospective limited partners whom Shaffer Asset has not yet admitted to the
Fund were zero.
The Fund is not required to make distributions, but a limited partner may
request and receive redemption of its Units owned, subject to restrictions
in the Partnership Agreement. Early redemption fees charged to the limited
partner apply through the first twelve months following purchase ranging
from 1% to 4% based on length of investment. After twelve months following
purchase of a Unit, no redemption fees will be charged. These fees are
payable to the General Partner. Shaffer Asset has received $1,458 in
redemption fees for the period ended September 30, 2002.
9
NOTE 5. TRADING ACTIVITIES AND RELATED RISKS
The Fund engages in the speculative trading of US commodity futures
contracts, which are derivative financial instruments. The Fund is exposed
to both market risk, the risk arising from changes in the market value of
the contracts, and credit risk, the risk of failure by another party to
perform.
Purchase and sale of futures contracts requires margin deposits with the
Commodity Broker. In the event of a broker's insolvency, it is possible
that the recovered amount of margin deposits could be less than the total
property deposited.
The amount of required margin and good faith deposits with the broker
usually ranges from 10% to 40% of net asset value. The market value of
securities held to satisfy such requirements at September 30, 2002 was
$199,196, which equals 17.42% of Net Asset Value.
The unrealized gain (loss) on open futures contracts at September 30, 2002
is comprised of the following:
Gross unrealized gains $ 48,186
Gross unrealized losses (975)
--------
Net unrealized gain $ 47,211
=========
Open contracts generally mature within three months: as of September 30,
2002 the latest maturity date for open futures contracts is December 2002.
However the Fund intends to close all contracts prior to maturity.
Shaffer Asset has established procedures to actively monitor market risk
and minimize credit risk, although there can be no assurance that they
will, in fact, succeed in doing so. Shaffer Asset's basic market risk
control procedures consist of continuously monitoring open positions,
diversification of the portfolio, protective stop orders and maintenance of
a margin-to-equity ratio that rarely exceeds 30%. Shaffer Asset seeks to
minimize credit risk primarily by depositing and maintaining the Fund's
assets at financial institutions and brokers, which Shaffer Asset believes
to be creditworthy. The limited partners bear the risk of loss only to the
extent of the market value of their respective investments and, in certain
specific circumstances, distributions and redemptions received.
NOTE 6. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements
reflect all adjustments, which were of a normal and recurring nature,
necessary for a fair presentation of financial position as of September 30,
2002, and the results of operations for the three and nine months ending
September 30, 2002 and 2001.
10
NOTE 7. FINANCIAL HIGHLIGHTS
The following information contains per unit operating performance data for
a unit outstanding during the entire three and nine months ended September
30, 2002, and other supplemental financial data. This information has been
derived from information presented in the financial statements.
Three Months Ended Nine Months Ended
September 30, 2002 September 30, 2002
(Unaudited) (Unaudited)
------------------ ------------------
Per Unit Performance (for a unit outstanding
from the initial trading period February 14, 2002)
Initial Offering Value Per Unit at February 14, 2002
and Net Asset Value per unit at June 30, 2002 $ 1,061.55 $ 1,000.00
Sales charges and syndication fees -- 50.00
------------- -----------
Net asset value 1,061.55 950.00
Income (loss) from operations:
Trading gains (losses) * (15.61) 142.89
Investment income 4.03 9.73
Operating expenses ** (22.30) (74.95)
------------- -----------
Total income (loss) from operations (33.88) 77.67
------------- -----------
Net Asset Value Per Unit at September 30, 2002 $ 1,027.67 $ 1,027.67
============= ===========
Total Return Year to Date *** -3.19% 8.18%
============= ===========
SUPPLEMENTAL DATA
Ratio to average net assets:
Average net assets 1,118,985 572,033
Operating expenses **, + 8.72% 18.44%
Investment income + 1.60% 2.42%
* Excludes brokerage commissions and other trading fees paid directly to the
broker.
** Includes brokerage commissions and other trading fees paid directly to the
broker and incentive fees paid to the general partner.
*** Not annualized
+ Annualized
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Shaffer Diversified Fund, LP (the "Partnership" or the "Fund") is a limited
partnership organized on August 29, 2000 under the Delaware Revised Uniform
Limited Partnership Act as an investment vehicle that allows investors to
include commodity futures contracts traded on the United States commodity
futures markets in their portfolios in the same way that they include mutual
funds, money market funds and limited partnerships.
The Fund originally filed a registration statement with the United States
Securities and Exchange Commission on September 25, 2000 for the sale of a
minimum of $1,000,000 and a maximum of $25,000,000 in Units of Limited
Partnership at $1,000.00 each, ($950.00 + $50.00 sales charges & syndication
fees), which registration statement was declared effective on October 16, 2001.
The Fund's initial offering period lasted approximately 120 days and ended
February 13, 2002. During the initial offering the Fund accepted subscriptions
for 1,049 Units of Limited Partnership Interests at a selling price of $1,000.00
($950.00 + $50.00 sales charges & syndication fees) for a total of $1,049,000.
Selling charges and expenses of $49,950.were disbursed at closing and the Fund
commenced trading activities with net proceeds of $996,550. The Fund commenced
trading February 14, 2002.
LIQUIDITY
The Fund deposits its assets with commodity brokers in a separate futures
trading account established for the trading advisor, 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 Fund's assets held by
the commodity broker may be used as margin solely for the Fund's trading. Since
the Fund's sole purpose is to trade in futures, it is expected that the Fund
will continue to own such liquid assets for margin purposes.
The Fund's investment in futures 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 contract has increased or decreased by an amount equal to the
daily limit, positions in that futures 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 Fund
from promptly liquidating its futures contract and result in restrictions on
redemptions.
CAPITAL RESOURCES
The Fund does not have, or expect to have, any capital assets. Redemptions,
exchanges and sales of additional Units in the future will affect the amount of
funds available for investments in futures interests in subsequent periods. It
is not possible to estimate the amount and therefore the impact of future
redemptions.
FINANCIAL INSTRUMENTS
The Fund is a party to financial instruments with elements of off-balance sheet
market and credit risk. The Fund trades futures in interest rates, currencies,
energies, grains and precious metals. In entering into these contracts, the Fund
is subject to the market risk that such contracts may be significantly
influenced by market conditions, such as interest rate volatility, resulting in
such contracts being less valuable. If the markets should move against all of
the positions held by the Fund at the same time, and if the trading advisor is
unable to offset positions of the Fund, the Fund could lose all of its assets
and investors would realize a 100% loss.
In addition to market risk, in entering into futures contracts there is a credit
risk to the Fund that the counterparty on a contract will not be able to meet
its obligations to the Fund. The ultimate counterparty of the futures contracts
traded on the U.S. exchanges in which the Fund trades are the clearinghouses
associated with such exchange. In general, a clearinghouse is backed by the
membership of the exchange and will act in the event of non-performance by one
of its members or one of its member's customers, which should significantly
reduce this credit risk. For example, a clearinghouse may cover a default by
drawing upon a defaulting member's mandatory contributions and/or non-defaulting
members' contributions to a clearinghouse guarantee fund, established lines or
letters of credit with banks, and/or the clearinghouse's surplus capital and
other available assets of the exchange and clearinghouse, or assessing its
members.
12
There is no assurance that a clearinghouse or exchange will meet its obligations
to the Fund, and the general partner and commodity brokers will not indemnify
the Fund against a default by such parties.
Shaffer Asset deals with the market risks of the Fund in several ways. It
monitors the Fund's credit exposure to each exchange on a daily basis,
diversification of the portfolio, protective stop orders and maintenance of a
margin-to-equity ratio that rarely exceeds 30%. Shaffer Asset seeks to minimize
credit risk primarily by depositing and maintaining the Fund's assets at
financial institutions and brokers, which Shaffer Asset believes to be
creditworthy. The commodity brokers inform the Fund, as with all their
customers, of its net margin requirements for all its existing open positions,
but do not break that net figure down, exchange by exchange.
RESULTS OF OPERATIONS
The Fund commenced trading operations February 14, 2002.
The return for the nine months ending September 30, 2002 was 8.18%. Of the 8.18%
increase, approximately 12.74% was due to trading gains and approximately .91%
was due to interest income offset by approximately 5.47% due to brokerage fees,
performance fees, operating fees and administrative costs. An analysis of the
12.74% trading gains by sector is as follows:
SECTOR % GAIN (LOSS)
Interest Rates 8.29
Energies (2.25)
Currencies 6.70
Metals (0.90)
Grains 0.90
-------
12.74%
=======
OFF-BALANCE SHEET RISK
The term "off-balance" sheet risk refers to an unrecorded potential liability
that, even though it does not appear on the balance sheet, may result in future
obligation or loss. The Fund trades in futures contracts and is therefore a
party to financial instruments with elements of off-balance sheet market and
credit risk. In entering into these contracts there exists a risk to the Fund,
market risk, that such contracts may be significantly influenced by market
conditions, such as interest rate volatility, resulting in such contracts being
less valuable. If the markets should move against all of the futures interests
positions of the Fund at the same time, and if the Fund's trading advisor was
unable to offset futures interests positions of the Fund, the Fund could lose
all of its assets and the Limited Partners would realize a 100% loss. Shaffer
Asset, the General Partner (who also acts as trading advisor), minimizes market
risk through real-time monitoring of open positions, diversification of the
portfolio and maintenance of a margin-to-equity ratio that rarely exceeds 30%.
In addition to market risk, in entering into futures contracts there is a credit
risk that a counterparty will not be able to meet its obligations to the Fund.
The counterparty for futures contracts traded in the United States and on most
foreign exchanges is the clearinghouse associated with such exchange. In
general, clearinghouses are backed by the corporate members of the clearinghouse
who are required to share any financial burden resulting from the
non-performance by one of their members and, as such, should significantly
reduce this credit risk. In cases where the clearinghouse is not backed by the
clearing members, like some foreign exchanges, it is normally backed by a
consortium of banks or other financial institutions. Shaffer Asset trades for
the Fund only with those counterparties, which it believes to be creditworthy.
All positions of the Fund are valued each day on a mark-to-market basis. There
can be no assurance that any clearing member, clearinghouse or other
counterparty will be able to meet its obligations to the Fund.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Past Results Not Necessarily Indicative of Future Performance
The Fund is a commodity pool involved in the speculative trading of futures. The
Fund commenced trading activities on February 14, 2002. The market sensitive
instruments held by the Fund are acquired for speculative trading purposes only
and, as a result, all or substantially all of the Fund's assets are at risk of
trading loss. Unlike an operating company, the risk of market sensitive
instruments is central, not incidental, to the Fund's main business activities.
The futures traded by the Fund involve varying degrees of 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 Fund's open positions, and, consequently, in its
earnings and cash flow.
The Fund's total market risk is influenced by a wide variety of factors,
including the diversification among the Fund'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 Fund.
Any attempt to numerically quantify a Fund's market risk is limited by the
uncertainty of its speculative trading. The Fund's speculative trading may cause
future losses and volatility (i.e. "risk of ruin") that far exceed any
reasonable expectations based upon historical changes in market value.
Market movements result in frequent changes in the fair market value of the
Fund's open positions and, consequently, in its earnings and cash flow. The
Fund's market risk is influenced by a wide variety of factors, including the
level and volatility of exchange rates, interest rates, equity price levels, the
market value of financial instruments and contracts, the diversification effects
among the Fund's open positions and the liquidity of the markets in which it
trades.
The Fund rapidly acquires and liquidates both long and short positions in a wide
range of different markets. Consequently, it is not possible to predict how a
particular future market scenario will affect performance, and the Fund's past
performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could reasonably
be expected to lose in a given market sector. However, the inherent uncertainty
of the Fund's speculative trading and the recurrence in the markets traded by
the Fund of market movements far exceeding expectations could result in actual
trading or non-trading losses far beyond the indicated Value at Risk or the
Fund's experience to date (i.e., "risk of ruin"). In light of the foregoing as
well as the risks and uncertainties intrinsic to all future projections, the
inclusion of the quantification included in this section should not be
considered to constitute any assurance or representation that the Fund's losses
in any market sector will be limited to Value at Risk or by the Fund's attempts
to manage its market risk.
STANDARD OF MATERIALITY
Materiality as used in this section, "Qualitative and Quantitative Disclosures
About Market Risk," is based on an assessment of reasonably possible market
movements and the potential losses caused by such movements, taking into account
the leverage, and multiplier features of the Fund's market sensitive
instruments.
QUANTIFYING THE FUND'S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund'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 dollar amount of maintenance margin required for market risk
sensitive instruments held at the end of the reporting period).
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The Fund's risk exposure in the various market sectors traded by Shaffer Asset
is quantified below in terms of Value at Risk. Due to the Fund's mark-to-market
accounting, any loss in the fair value of the Fund's open positions is directly
reflected in the Fund's earnings (realized or unrealized).
Exchange maintenance requirements have been used by the Fund as the measure of
its Value at Risk. Maintenance 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. Dealers and exchanges
use historical price studies, as well as an assessment of current market
volatility and economic fundamentals, to estimate the maximum expected near-term
one-day price fluctuation for establishing maintenance levels. Maintenance 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.
In the case of market sensitive instruments, which are not exchange-traded
(which includes currencies and some energy products and metals in the case of
the Fund), the margin requirements for the equivalent futures positions have
been used as Value at Risk. In those cases in which a futures-equivalent margin
is not available, dealers' margins have been used.
In quantifying the Fund's Value at Risk, 100% positive correlation in the
different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been aggregated to determine each trading category's aggregate Value at
Risk. The diversification effects resulting from the fact that the Fund's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
THE FUND'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following tables indicate the trading Value at Risk associated with the
Fund's open positions by market category as of September 30, 2002 and the
trading gains/losses by market category for the nine months ended September 30,
2002. All open position-trading risk exposures of the Fund have been included in
calculating the figures set forth below. As of September 30, 2002 the Fund's
total capitalization was approximately $1,143,479.
% OF TOTAL TRADING
MARKET SECTOR VALUE AT RISK CAPITALIZATION GAIN/(LOSS)*
- ------------- ------------- -------------- ------------
Currencies $ 6,480 0.57% 6.70%
Interest Rates $ 25,920 2.27% 8.29%
Grains $ -0- -0- % 0.90%
Energies $ 40,500 3.54% (2.25%)
Metals $ 39,150 3.42% (0.90%)
-------- -------- ---------
Total $112,050 9.80% 12.74%
======== ======== =========
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Fund is typically
many times the applicable maintenance margin requirement (maintenance margin
requirements generally ranging between approximately 1% and 10% of contract face
value) as well as many times the capitalization of the Fund. The magnitude of
the Fund's open positions creates a "risk of ruin" not typically found in most
other investment vehicles. Because of the size of its positions, certain market
conditions -- unusual, but historically recurring from time to time -- could
cause the Fund to incur severe losses over a short period of time. The foregoing
Value at Risk tables -- as well as the past performance of the Fund -- gives no
indication of this "risk of ruin."
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NON-TRADING RISK
The Fund has non-trading market risk as a result of investing a substantial
portion of its available assets in U.S. Treasury Bills. The market risk
represented by these investments is immaterial.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Fund's market risk exposures
- -- except for (i) those disclosures that are statements of historical fact and
(ii) the descriptions of how the Fund 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 Fund's
primary market risk exposures as well as the strategies used and to be used by
Shaffer Asset for managing such exposures are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual results of the
Fund's risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political upheavals,
changes in historical price relationships, an influx of new market participants,
increased regulation and many other factors could result in material losses as
well as in material changes to the risk exposures and the risk management
strategies of the Fund. There can be no assurance that the Fund's current market
exposure and/or risk management strategies will not change materially or that
any such strategies will be effective in either the short- or long-term.
Investors must be prepared to lose all or substantially all of their investment
in the Fund.
The following were the primary trading risk exposures of the Fund as of
September 30, 2002, by market sector.
Currencies
The Fund's currency futures contracts exposure fluctuates due to interest rate
changes along with political and economic changes. The Fund trades currency
futures on United States Futures Exchanges. Shaffer Asset does not anticipate
that the risk profile of the Fund's currency sector will change significantly in
the future.
Interest Rates
The Fund's interest rate futures contracts exposure fluctuates due to interest
rate movements in the United States. Shaffer Asset anticipates that changes in
interest rates which have the most effect on the Fund are changes in medium- to
long-term, as opposed to short-term rates. Most of the speculative positions
held by the Fund are in medium- to long-term instruments. Consequently, even a
material change in short-term rates would have little effect on the Fund were
the medium- to long-term rates to remain steady.
Energies
The Fund's energy futures contracts exposure is influenced by market supply and
demand, political instability and seasonality. Shaffer Asset anticipates
substantial profits and losses due to the current volatile conditions and these
conditions are expected to continue in these markets.
Metals
The Fund's metal futures contracts exposure is influenced by supply and demand
in Gold, Silver and Copper. Currently, market volatility in Gold and Silver has
been extremely low compared to periods prior to commencement of the fund. Metals
have been in a slow declining period, which can limit trading opportunities
until major trend changes begin to develop.
Grains
The Fund's grain futures contracts exposure is influenced by supply and demand
along with weather related conditions around the world. Currently, market
volatility in the grains sector has been continually low, as these markets have
been making slow declines in prices. Limited trading opportunities are present
and may continue until a major weather related event transpires which can cause
an imbalance in supply and demand.
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QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the Fund as of
September 30, 2002.
Treasury Bill Positions
The Fund's only market exposure in instruments held other than for trading is in
its Treasury Bill portfolio. The Fund holds Treasury Bills (interest bearing and
credit risk-free) with durations no longer than six months. Violent fluctuations
in prevailing interest rates could cause immaterial mark-to-market losses on the
Fund's Treasury Bills, although substantially all of these short-term
investments are held to maturity.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
The means by which the Fund and Shaffer Asset, severally, attempt to manage the
risk of the Fund's open positions is essentially the same in all market
categories traded. Shaffer Asset applies risk management policies to its trading
which generally limit the total exposure that may be taken per "risk unit" of
assets under management. In addition, Shaffer Asset follows diversification
guidelines (often formulated in terms of the balanced volatility between markets
and correlated groups), as well as imposing "stop-loss" points at which open
positions must be closed out.
Shaffer Asset controls the risk of the Fund's non-trading instruments (Treasury
Bills held for cash management purposes) by limiting the duration of such
instruments to no more than six months.
GENERAL
The Fund is unaware of any (i) anticipated known demands, commitments or capital
expenditures; (ii) material trends, favorable or unfavorable, in its capital
resources; or (iii) trends or uncertainties that will have a material effect on
operations. From time to time, certain regulatory agencies have proposed
increased margin requirements on commodity futures contracts. Because the Fund
generally will use a small percentage of assets as margin, the Fund does not
believe that any increase in margin requirements, as proposed, will have a
material effect on the Fund's operations.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code - Daniel S. Shaffer
Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code - Bruce I. Greenberg
B. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Shaffer Diversified Fund, LP
By: Shaffer Asset Management, Inc.
General Partner
Date: October 25, 2002
By:
/s/ Bruce Ira Greenberg
-----------------------------------
Bruce I Greenberg
Chief Financial Officer
VP/Treasurer/Director
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EXHIBIT INDEX
Exhibit
Index Exhibit
- ------- -------
99.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code - Daniel S. Shaffer
99.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code - Bruce I. Greenberg
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