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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: June 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 000-50725
NESTOR PARTNERS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2149317
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o MILLBURN RIDGEFIELD CORPORATION
411 West Putnam Avenue
Greenwich, Connecticut 06830
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 625-7554
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant Limited Partnership Interests
to Section 12(g) of the Act: (Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Nestor Partners
Financial statements
For the three and six months ended June 30, 2004 and 2003 (unaudited)
Statements of Financial Condition (a) 1
Condensed Schedules of Investments (a) 2
Statements of Operations (b) 6
Statements of Changes in Partners' Capital (c) 8
Statements of Financial Highlights (b) 10
Notes to the Financial Statements 12
Part II - Other information 13
(a) At June 30, 2004 (unaudited) and December 31, 2003
(b) For the three and six months ended June 30, 2004 and 2003
(c) For the six months ended June 30, 2004 and 2003
ITEM 1: FINANCIAL STATEMENTS
Nestor Partners
Statements of Financial Condition
UNAUDITED
June 30 December 31
2004 2003
-------------------------------
ASSETS
Equity in trading accounts:
Investments in U.S. Treasury
notes-at market value (amortized cost
$60,121,003 and $69,762,758) $ 60,024,816 $ 69,779,438
Net unrealized appreciation/(depreciation)
on open futures and forward
currency contracts (2,193,636) 9,750,763
Due from brokers 327,192 3,114,869
Cash denominated in foreign
currencies (cost $1,608,615
and $851,372) 1,608,201 885,274
-------------------------------
Total equity in trading accounts 59,766,573 83,530,344
-------------------------------
Investments in U.S. Treasury
notes-at market value
(amortized cost $123,225,958
and $109,375,528) 122,961,016 109,392,119
Cash and cash equivalents 13,093,715 19,727,500
Accrued interest receivable 845,095 1,836,774
-------------------------------
Total assets $ 196,666,399 $ 214,486,737
-------------------------------
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Capital contributions received
in advance 6,556,900 2,393,300
Due to brokers 701,665 631,451
Due to General Partner 1,667 --
Accrued brokerage fees 373,076 465,695
Accrued expenses 168,185 332,093
-------------------------------
Total liabilities 7,801,493 3,822,539
-------------------------------
PARTNERS' CAPITAL
General Partner 3,252,512 4,284,428
Special Limited Partners 33,059,114 47,828,770
Limited Partners 152,553,280 158,551,000
-------------------------------
Total partners' capital 188,864,906 210,664,198
-------------------------------
TOTAL LIABILITIES AND PARTNERS'
CAPITAL $ 196,666,399 $ 214,486,737
===============================
-1-
Nestor Partners
Condensed Schedule of Investments
June 30, 2004 (UNAUDITED)
Futures and Forward Net Unrealized % of
Currency Contracts Appreciation/ Partners'
(Depreciation) Capital
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
Long Futures Contracts
Energies $ 25,810 0.01 %
Metals (217,350) (0.12)%
Stock indices 890,879 0.48 %
-----------------------
Total long futures contracts 699,339 0.37 %
-----------------------
Short Futures Contracts
Energies (6,450) - %
Grains 105,638 0.06 %
Interest rates (2,386,169) (1.27)%
Softs 187,445 0.10 %
Stock indices (25,385) (0.01)%
-----------------------
Total short futures contracts (2,124,921) (1.12)%
-----------------------
TOTAL INVESTMENTS IN FUTURES
CONTRACTS (NET) (1,425,582) (0.75)%
-----------------------
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts (143,567) (0.08)%
Total short forward currency contracts (624,487) (0.33)%
-----------------------
TOTAL INVESTMENTS IN FORWARD
CURRENCY CONTRACTS (NET) (768,054) (0.41)%
-----------------------
TOTAL INVESTMENTS IN FUTURES
AND FORWARD CURRENCY CONTRACTS (NET) $(2,193,636) (1.16)%
=======================
-2-
Nestor Partners
Condensed Schedule of Investments (continued)
June 30, 2004 (UNAUDITED)
Face Amount Description Value % of Partners'
Capital
- -----------------------------------------------------------------------------------
INVESTMENTS IN U.S. TREASURY NOTES
$ 61,690,000 U.S. Treasury notes, 2.125%, 08/31/04 $ 61,747,834 32.69 %
60,605,000 U.S. Treasury notes, 2.000%, 11/30/04 60,680,756 32.13 %
60,690,000 U.S. Treasury notes, 1.500%, 02/28/05 60,557,242 32.06 %
-------------------------
TOTAL INVESTMENTS IN U.S. TREASURY NOTES
(AMORTIZED COST $183,346,961) $182,985,832 96.88 %
=========================
-3-
Nestor Partners
Condensed Schedule of Investments
December 31, 2003
Futures and Forward Net Unrealized % of
Currency Contracts Appreciation/ Partners'
(Depreciation) Capital
- ----------------------------------------------------------------------------------
FUTURES CONTRACTS
Long Futures Contracts
Energies $ (1,569,867) (0.75)%
Interest rates 77,990 0.04 %
Metals 1,966,898 0.93 %
Softs (111,075) (0.05)%
Stock indices 1,012,623 0.48 %
------------------------
Total long futures contracts 1,376,569 0.65 %
------------------------
Short Futures Contracts
Grains (300) - %
Interest rates (50,447) (0.02)%
------------------------
Total short futures contracts (50,747) (0.02)%
------------------------
TOTAL INVESTMENTS IN FUTURES
CONTRACTS (NET) 1,325,822 0.63 %
------------------------
Forward Currency Contracts
Long Forward Currency Contracts
Euro/U.S. Dollar, March 2004 6,801,020 3.23 %
Other long forward currency
contracts 5,092,453 2.42 %
------------------------
Total long forward currency
contracts 11,893,473 5.65 %
------------------------
Short Forward Currency Contracts
Korean Won/U.S. Dollar,
March 2004 (2,698,340) (1.28)%
Other short forward currency
contracts (770,192) (0.37)%
------------------------
Total short forward currency
contracts (3,468,532) (1.65)%
------------------------
TOTAL INVESTMENTS IN FORWARD
CURRENCY CONTRACTS (NET) 8,424,941 4.00 %
------------------------
TOTAL INVESTMENTS IN FUTURES
AND FORWARD CURRENCY
CONTRACTS (NET) $ 9,750,763 4.63 %
========================
-4-
Nestor Partners
Condensed Schedule of Investments (continued)
December 31, 2003
Face Amount Description Value % of Partners'
Capital
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
INVESTMENTS IN U.S. TREASURY NOTES
$ 60,080,000 U.S. Treasury notes, 4.750%, 02/15/04 $ 60,342,850 28.64 %
61,580,000 U.S. Treasury notes, 3.375%, 04/30/04 62,061,094 29.46 %
56,380,000 U.S. Treasury notes, 2.125%, 08/31/04 56,767,613 26.95 %
----------------------------
TOTAL INVESTMENTS IN U.S. TREASURY NOTES
(AMORTIZED COST $179,138,286) $ 179,171,557 85.05 %
============================
-5-
Nestor Partners
Statements of Operations (UNAUDITED)
For the three months ended
June 30 June 30
2004 2003
-----------------------------
INVESTMENT INCOME
Interest income $ 573,748 $ 511,318
EXPENSES
Brokerage fees 1,374,293 1,320,040
Administrative expenses 123,032 102,116
Custody fees 8,118 4,801
----------------------------
Total expenses 1,505,443 1,426,957
Net investment loss (931,695) (915,639)
----------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on closed
positions:
Futures and forward currency contracts (27,454,603) 2,149,004
Foreign exchange translation 145,781 (165,896)
Net change in unrealized appreciation:
Futures and forward currency contracts (6,405,552) 8,697,168
Foreign exchange translation (49,716) 143,044
Net gains (losses) from U.S. Treasury notes
Net change in unrealized depreciation (342,036) 22,965
----------------------------
Total net realized and unrealized gains (losses) (34,106,126) 10,846,285
----------------------------
Net income (loss) (35,037,821) 9,930,646
Less profit share to General Partner (949,589) 1,164,025
----------------------------
Net income (loss) after profit share to General Partner $(34,088,232) $ 8,766,621
============================
-6-
Nestor Partners
Statements of Operations (UNAUDITED)
For the six months ended
June 30 June 30
2004 2003
----------------------------
INVESTMENT INCOME
Interest income $ 1,129,004 $ 1,033,263
EXPENSES
Brokerage fees 2,827,125 2,445,035
Administrative expenses 265,695 192,473
Custody fees 14,955 9,281
----------------------------
Total expenses 3,107,775 2,646,789
Net investment loss (1,978,771) (1,613,526)
----------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on closed
positions:
Futures and forward currency contracts (11,644,179) 22,035,640
Foreign exchange translation 145,781 (165,896)
Net change in unrealized appreciation:
Futures and forward currency contracts (11,944,399) (9,094,872)
Foreign exchange translation (36,542) 57,896
Net losses from U.S.Treasury notes
Net change in unrealized depreciation (394,400) (5,136)
----------------------------
Total net realized and unrealized gains (losses) (23,873,739) 12,827,632
----------------------------
Net income (loss) (25,852,510) 11,214,106
Less profit share to General Partner 26,491 1,378,130
----------------------------
Net income (loss) after profit share to General Partner $(25,879,001) $ 9,835,976
============================
-7-
Nestor Partners
Statements of Changes in Partners' Capital (UNAUDITED)
For the six months ended June 30, 2004:
LIMITED SPECIAL LIMITED NEW PROFIT GENERAL
PARTNERS PARTNERS MEMO ACCOUNT PARTNER TOTAL
---------------------------------------------------------------------------------
Partners' capital at
December 31, 2003 $ 158,551,000 $ 47,828,770 $ -- $ 4,284,428 $ 210,664,198
Contributions 31,203,625 315,191 -- -- 31,518,816
Withdrawals (15,343,217) (11,464,981) -- (657,400) (27,465,598)
Net loss (21,831,637) (3,619,866) (4,140) (396,867) (25,852,510)
General Partner's allocation:
New Profit-Accrued (26,491) -- 26,491 -- --
Transfer of New Profit Memo
Account to General Partner -- -- -- -- --
---------------------------------------------------------------------------------
Partners' capital at
June 30, 2004 $ 152,553,280 $ 33,059,114 $ 22,351 $ 3,230,161 $ 188,864,906
=================================================================================
For the six months ended June 30, 2003:
LIMITED SPECIAL LIMITED NEW PROFIT GENERAL
PARTNERS PARTNERS MEMO ACCOUNT PARTNER TOTAL
---------------------------------------------------------------------------------
Partners' capital at
December 31, 2002 $ 83,293,288 $ 50,699,984 $ -- $ 6,963,561 $ 140,956,833
Contributions 33,942,635 261,278 -- -- 34,203,913
Withdrawals (6,642,200) (3,240,000) -- (3,559,436) (13,441,636)
Net income (loss) 6,143,221 4,738,397 (140) 332,628 11,214,106
General Partner's allocation:
New Profit-Accrued (1,378,130) -- 26,001 1,352,129 --
Transfer of New Profit Memo
Account to General Partner -- -- -- -- --
---------------------------------------------------------------------------------
Partners' capital at
June 30, 2003 $ 115,358,814 $ 52,459,659 $ 25,861 $ 5,088,882 $ 172,933,216
==================================================================================
-8-
Nestor Partners
Statements of Financial Highlights (UNAUDITED)
For the three months ended June 30, 2004 Limited Special Limited
Partners Partners
- --------------------------------------------------------------------------------
Ratios to average capital (a):
Net investment income (loss) (2.45) % 0.43 %
=====================
Total expenses 3.62 % 0.73 %
Profit share allocation (2.39) % -- %
---------------------
Total expenses and profit share allocation 1.23 % 0.73 %
=====================
Total return before profit share allocation (15.66) % (15.00) %
Profit share allocation 0.49 % -- %
---------------------
Total return after profit share allocation (15.17) % (15.00) %
=====================
For the three months ended June 30, 2003 Limited Special Limited
Partners Partners
- --------------------------------------------------------------------------------
Ratios to average capital (a):
Net investment income (loss) (3.70) % 0.51 %
=====================
Total expenses 4.96 % 0.74 %
Profit share allocation 4.36 % -- %
---------------------
Total expenses and profit share allocation 9.32 % 0.74 %
=====================
Total return before profit share allocation 6.32 % 7.44 %
Profit share allocation (1.14) % -- %
---------------------
Total return after profit share allocation 5.18 % 7.44 %
=====================
(a) Annualized
-9-
Nestor Partners
Statements of Financial Highlights (UNAUDITED)
For the six months ended June 30, 2004 Limited Special Limited
Partners Partners
- ----------------------------------------------------------------------------------
Ratios to average capital (a):
Net investment income (loss) (2.48) % 0.36 %
=====================
Total expenses 3.55 % 0.69 %
Profit share allocation 0.03 % -- %
---------------------
Total expenses and profit share allocation 3.58 % 0.69 %
=====================
Total return before profit share allocation (12.25) % (10.94) %
Profit share allocation 0.01 % -- %
---------------------
Total return after profit share allocation (12.24) % (10.94) %
=====================
For the six months ended June 30, 2003 Limited Special Limited
Partners Partners
- ----------------------------------------------------------------------------------
Ratios to average capital (a):
Net investment income (loss) (3.63) % 0.63 %
=====================
Total expenses 4.97 % 0.70 %
Profit share allocation 2.79 % -- %
---------------------
Total expenses and profit share allocation 7.76 % 0.70 %
=====================
Total return before profit share allocation 7.47 % 9.77 %
Profit share allocation (1.42) % -- %
---------------------
Total return after profit share allocation 6.05 % 9.77 %
=====================
(a) Annualized
-10-
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Partnership's financial condition at
June 30, 2004 (unaudited) and December 31, 2003 and the results of its
operations for the three and six month periods ended June 30, 2004 and 2003.
These financial statements present the results of interim periods and do not
include all disclosures normally provided in annual financial statements. It is
suggested that these financial statements be read in conjunction with the
Partnership's audited financial statements for the year ended December 31, 2003,
included in the Partnership's registration statement on Form 10 filed with the
Securities and Exchange Commission.
The Partnership pays administrative expenses for legal, audit and accounting
services, up to 0.25 of 1% per annum of the Partnership's average month-end net
assets. A portion of such expenses are paid to and retained by an affiliate of
the General Partner, The Millburn Corporation ("TMC") for providing legal and
accounting services to the Partnership. The Partnership incurred administrative
expenses of $123,032 and $265,695 during the three and six month periods ended
June 30, 2004, respectively, of which $64,256 and $112,791, respectively,
relates to legal and accounting services provided to the Partnership by TMC. The
General Partner pays all administrative expenses in excess of 0.25 of 1% per
annum of the Partnership's average month-end net assets.
Interests sold through Selling Agents engaged by the General Partner are
generally subject to a 2.5% redemption charge for redemptions made prior to the
end of the twelfth month following their sale. All redemption charges will be
paid to the General Partner. At June 30, 2004, $1,667 of redemption charges was
owed to the General Partner (and is included in "Due to General Partner" in the
statements of financial condition).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to Item 1, "Financial Statements". The information contained
therein is essential to, and should be read in connection with, the following
analysis.
OPERATIONAL OVERVIEW
Due to the nature of the Partnership's business, its results of operations
depend on the General Partner's ability to recognize and capitalize on trends
and other profit opportunities in different sectors of the global capital and
commodity markets. The General Partner's trading methods are confidential, so
that substantially the only information that can be furnished regarding the
Partnership's results of operations is contained in the performance record of
its trading. Unlike operating businesses, general economic or seasonal
conditions do not directly affect the profit potential of the Partnership, and
its past performance is not necessarily indicative of future results. The
General Partner believes, however, that there are certain market conditions, for
example, markets with strong price trends, in which the Partnership has a better
likelihood of being profitable than in others.
-11-
LIQUIDITY AND CAPITAL RESOURCES
The Partnership raises additional capital only through the sale of its limited
partnership interests ("Interests"). Partnership capital may also be increased
by trading profits, if any. The Partnership does not engage in borrowing.
Interests may be offered for sale as of the beginning of each month.
The Partnership trades futures, options and forward contracts on interest rates,
commodities, currencies, metals, energy and stock indices. Due to the nature of
the Partnership's business, substantially all its assets are represented by cash
and United States government obligations, while the Partnership maintains its
market exposure through open futures and forward contract positions.
The Partnership's assets are generally held as cash, cash equivalents or U.S.
Government obligations which are used to margin or collateralize the
Partnership's futures and forward positions and are withdrawn, as necessary, to
pay redemptions and expenses. Other than potential market-imposed limitations on
liquidity, due, for example, to daily price fluctuation limits, which are
inherent in the Partnership's futures and forward trading, the Partnership's
assets are highly liquid and are expected to remain so.
PROFIT SHARE
The following table indicates the profit share earned by the General Partner
from Limited Partners' withdrawals during the three and six month periods ended
June 30, 2004 and 2003. Profit share earned is credited to the New Profit memo
account as defined in the Partnership's Partnership Agreement.
Six months ended: Jun 30, 2004 Jun 30, 2003
------------ ------------
Profit share earned $ 26,491 $ 26,001
Profit share accrued -- 1,352,129
Profit share reversal n/a n/a
------------ ------------
Total profit share $ 26,491 $ 1,378,130
============ ============
Three months ended: Jun 30, 2004 Jun 30, 2003
------------ ------------
Profit share earned $ 9,361 $ 13,517
Profit share accrued (1) -- 1,352,129
Profit share reversal (2) (958,950) (201,621)
------------ ------------
Total profit share $ (949,589) $ 1,164,025
============ ============
(1) At June 30
(2) Accrued at March 31, reversed on April 1
There have been no material changes with respect to the Partnership's critical
accounting policies, off-balance sheet arrangements or disclosure of contractual
obligations as reported in the Partnership's registration statement on Form 10
filed with the Securities and Exchange Commission filed on April 29, 2004.
-12-
RESULTS OF OPERATIONS
During its operations through the three and six month periods ending June 30,
2004, the Partnership experienced no meaningful periods of illiquidity in any of
the numerous markets traded by the General Partner.
Jun 30, 2004 Mar 31, 2004
------------- -------------
Ending Equity $188,864,906 $233,530,893
Due to the nature of commodity trading, the results of operations for the
interim period presented should not be considered indicative of the results that
may be expected for the entire year.
The Partnership's net assets decreased 19.13% in the second quarter of 2004.
This decrease was attributable to redemptions of $23,645,166, a net loss of
$34,088,232, and a reversal of accrued profit share to the General Partner
during the first quarter of $958,950, which was partially offset by
subscriptions of $14,017,000 and an allocation to the New Profit memo account of
$9,361.
Brokerage fees are calculated on the net asset value on the last day of each
month and are affected by trading performance, subscriptions and redemptions.
Brokerage fees for the three months ended June 30, 2004 increased $54,253,
relative to the corresponding period in 2003.
The Partnership pays administrative expenses for legal, audit and accounting
services, up to 0.25 of 1% per annum of the Partnership's average month-end net
assets. Administrative expenses for the three months ended June 30, 2004
increased $20,916, relative to the corresponding period in 2003. The increase
was attributable to an increase in the Partnership's net assets.
Interest income is derived from cash and U.S. Treasury instruments held at the
Partnership's brokers. Interest income for the three months ended June 30, 2004
increased $62,430, relative to the corresponding period in 2003. This increase
was attributable to an increase in the Partnership's net assets, which was
partially offset by a decrease in short-term Treasury yields.
During the three months ended June 30, 2004, the Partnership reversed accrued
incentive fee at March 31, 2004 of $958,950. In addition, the Partnership
experienced net realized and unrealized losses of $34,106,126 from its trading
operations (including foreign exchange translations and Treasury obligations).
Brokerage fees of $1,374,293, administrative expenses of $123,032, custody fees
of $8,118 and accrued profit share to the New Profit Memo account of $9,361 were
incurred. Interest income of $573,748 partially offset the Partnership's
expenses resulting in a net loss of $34,088,232. An analysis of the trading gain
(loss) by sector is as follows:
-13-
Sector % Gain (Loss)
- -------- -------------
Currencies (4.64)%
Energies 0.78%
Grains (0.40)%
Interest rates (5.88)%
Metals (1.65)%
Softs 0.13%
Stock indices (3.34)%
-------------
Total (15.00)%
APRIL 1, 2004 TO JUNE 30, 2004
The Partnership's net asset value fell sharply during the quarter. Trend
reversals followed by non-directional and volatile range-trading characterized a
broad spread of markets during the period. As a result sizable losses were
sustained in five of the six sectors in the portfolio: interest rates,
currencies, stock indices, and agricultural commodities. Energy was moderately
profitable for the quarter, but even there an uptrend seemed to peter out near
the end of the quarter.
Surprisingly strong U.S. employment reports beginning in April, and official
moves in China to slow its booming economy caused abrupt price trend reversals
in most of the markets comprising the Partnership's portfolio. For example, as
the quarter began, the Partnership held long positions across a broad range of
US and European interest rate futures. These positions had been quite profitable
in prior weeks and reflected declining interest rate trends that were in large
measure a response to the so-called "jobless recovery" in the U.S. However, in
the wake of strong employment data, interest rates rose sharply worldwide and
bond market sentiment seemed to turn negative on a dime. As a result, the
Partnership sustained sizable losses on its long bond futures positions.
Thereafter, interest rates vacillated and failed to sustain a trend.
At the start of the period, the Partnership also held long positions in a number
of Asian currencies including, the yen, Korean won and Singapore dollar. Long
commodity currency positions (Australian dollar, New Zealand dollar, and South
African rand) were also held by the Partnership. Market participants, intuiting
that any slowdown in Chinese growth would be negative for Asia and for
industrial commodities, sold the Asian and commodity currencies, producing
declines. Once again, subsequent trading in the quarter was largely
non-directional. Gold and copper prices, which were trending upward early in the
year, fell markedly due to the altered growth prospects in China and a
strengthening US currency, resulting in losses from long positions.
Stock markets were also unsettled by the changing prospects for growth, interest
rates and monetary policies throughout the world. Hence, trading in German,
U.S., and Hong Kong index futures resulted in losses.
An upward trend in energy prices led to gains from long positions in unleaded
gasoline, London gas oil, crude oil, and heating oil. Natural gas, on the other
hand, was quite volatile and produced a loss for the quarter.
Finally, with volatility in corn prices, losses were registered on both long and
short positions in corn.
-14-
JANUARY 1, 2004 TO MARCH 31, 2004
A large profit derived from trading interest rate futures combined with small
gains from stock index, energy, metals and agricultural commodity futures
trading more than outweighed a sizable loss that was produced trading in foreign
exchange markets.
Long positions in U.S., European and Japanese interest rate futures were
profitable as questions about the strength and sustainability of U.S. growth,
given the lack of employment expansion, speculation about a possible European
Central Bank rate cut to spur lagging economic activity, and persistent
purchases of U.S. treasuries by Asian Central Banks following massive foreign
exchange intervention pushed rates lower across the maturity spectrum.
Low interest rates and an improving economic environment provided some lift to
Japanese stock markets, and long positions in the NIKKEI and TOPIX index futures
were profitable. On the other hand, political uncertainties in Hong Kong and
growth concerns in Germany produced marginal losses on stock futures trades for
those two countries.
In the energy sector, a long position in unleaded gasoline and a long position
in crude oil were marginally profitable, while long heating oil, London gas oil
and natural gas positions generated small losses.
A long copper position, benefiting from the China inspired global demand for
base metals, was profitable, while a long gold position lost marginally.
Increased worldwide demand for grains led to rising corn prices and a gain on a
long corn position.
On the other hand, trading of foreign exchange rates, which were volatile but
non-directional for much of the period, generated sizable losses. Hence, aside
from modest gains from long positions in commodity currencies (Australian and
New Zealand dollars), a long sterling position relative to the Euro, and a long
Euro trade against the Norwegian Krone, losses on the Partnership's currency
positions were widespread.
APRIL 1, 2003 TO JUNE 30, 2003
Trading of interest rate futures, currency forwards and equity futures was
profitable, while trading of non-financial futures (energy, metals, and
agricultural commodities) produced modest losses.
-15-
Medium-term and long-term interest rates in Europe, the U.S. and Japan resumed
their decline during April and May. Hence, long positions in 5-year, 10-year and
30-year interest rate futures contracts for U.S., European and Japanese
instruments were very profitable. By mid-June, however, amid signs of nascent
growth, interest rates started to rise significantly and there were some losses
sustained on these same positions, which were subsequently reversed to short
futures contract positions.
A similar pattern of profits in April and May followed by losses in June was
exhibited in the currency sector. Short U.S. dollar positions against the euro,
other European currencies, the Australian, New Zealand and Singapore dollars,
and the South African rand produced sizable gains early in the quarter. Later,
however, as the U.S. dollar rebounded against the European bloc of currencies,
there were losses on many of these short foreign dollar positions, although the
short dollar positions versus the Aussie, New Zealand, South African and
Singapore currencies were still fractionally profitable. Meanwhile, the U.S.
dollar/yen exchange rate was quite volatile and losses were registered on both
long and short dollar positions throughout the quarter. Finally, long euro
positions vis-a-vis the yen, Norwegian krone, and pound sterling, and a long
sterling position relative to the yen were profitable.
Trading of stock index futures was fractionally positive. Long positions in
German, Japanese, and the Nasdaq stock indices were profitable, while a short
S&P index trade was somewhat unprofitable.
An up-trend in natural gas prices reversed and spiked sharply downward in June,
resulting in a marked loss on a long position. Trading elsewhere in the energy
sector had a slight negative impact on performance.
In the agricultural sector, corn futures prices were quite volatile and, hence,
losses were experienced on both long and short positions. Trading of other soft
and agricultural commodities was slightly negative for performance.
Long gold and copper positions generated a small quarterly loss.
JANUARY 1, 2003 TO MARCH 31, 2003
A number of well-defined trends, especially in the energy and interest rate
sectors, persisted during the first two months of the year and generated
profits. However, as war with Iraq approached in early March, these trends
halted and reversed abruptly, producing losses that offset the quarter's earlier
gains. On balance for the period, profits from trading energy and interest rate
futures were offset by the losses sustained from trading currency and stock
index futures, and to a lesser extent by losses from metal and agricultural
commodities trading.
For example, crude oil prices, which climbed from $24 a barrel in early November
2002 to nearly $40 per barrel early in 2003, plunged back to under $28 a barrel
in only a few days. Consequently, long crude oil positions were profitable in
January and February, but lost money in March. Similar results were experienced
in trading other energy contracts.
Interest rates, which had been declining broadly for over a year, spiked higher
in a flurry of pre-war activity. As a result, long German and U.S. interest rate
futures positions produced losses in March after having been profitable in the
first two months of the quarter.
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A weakening U.S. dollar trend that had been evident since late October 2002 also
reversed abruptly during the quarter and was followed by non-directional whipsaw
price activity, especially for the Japanese yen. Hence, losses from trading the
Asian currencies outweighed gains from long positions in the European currencies
and non-dollar cross rate trading.
Stock markets were unsettled and trading of U.S., Japanese and Hong Kong equity
futures resulted in a loss. Trading of metal and agricultural commodity futures
was unprofitable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 occurrence in the
markets traded by the Partnership of market movements far exceeding expectations
could result in actual trading or non-trading losses far beyond that indicated
or the Partnership'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 quantifications 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 Value at Risk or by
the Partnership's attempts to manage its market risk.
Materiality, as used in this section "Quantitative and Qualitative Disclosures
About Market Risk," is based on an assessment of reasonably possible market
movements and the potential losses caused by such movements, taking into account
the leverage, optionality and multiplier features of the Partnership's market
sensitive instruments.
Quantifying the Partnership's Trading Value at Risk
Quantitative Forward-Looking Statements
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 and Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of historical
fact.
The Partnership's risk exposure in the various market sectors traded by the
General Partner is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, 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 (at least in the case of exchange-traded
contracts in which profits and losses on open positions are settled daily
through variation margin).
Exchange maintenance margin requirements have been used by the Partnership as
the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed 95-99% of the maximum one-day losses in the fair
value of any given contract incurred during the time period over which
historical price fluctuations are researched for purposes of establishing margin
levels. The maintenance margin levels are established by dealers and exchanges
using historical price studies as well as an assessment of current market
volatility (including the implied volatility of the options on a given futures
contract) and economic fundamentals to provide a probabilistic estimate of the
maximum expected near-term one-day price fluctuation.
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In the case of market sensitive instruments which are not exchange traded
(almost exclusively currencies in the case of the Partnership), dealers' margins
have been used as Value at Risk.
The fair value of the Partnership's futures and forward positions does not have
any optionality component. However, the General Partner may also trade commodity
options on behalf of the Partnership. The Value at Risk associated with options
would be reflected in the margin requirement attributable to the instrument
underlying each option.
In quantifying the Partnership'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 Partnership's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
In the case of contracts denominated in foreign currencies, the Value at Risk
figures include foreign margin amounts converted into U.S. Dollars.
THE PARTNERSHIP'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the average, highest and lowest amounts of trading
Value at Risk associated with the Partnership's open positions by market
category for each quarter-end during the period ended June 30, 2004. During the
six months ended June 30, 2004, the Partnership's average total capitalization
was approximately $212,121,383.
Average % of Highest Lowest
Value Average Value Value
Market Sector at Risk Capitalization at Risk at Risk
- --------------------------------------------------------------------------------
Interest rates $ 6.8 3.2% $ 8.4 $ 5.2
currencies 33.0 15.6% 37.3 28.7
Stock indices 5.6 2.6% 6.4 4.8
Metals 1.0 0.5% 1.0 1.0
Softs 0.4 0.2% 0.4 0.3
Energies 1.7 0.8% 2.5 0.9
Total $48.5 22.9%
Average, highest and lowest Value at Risk amounts relate to the quarter-end
amounts for the six months ended June 30, 2004. Average capitalization is the
average of the Partnership's capitalization at the end of each of the six months
ended June 30, 2004. Dollar amounts represent million of dollars.
-18-
ITEM 4. CONTROLS AND PROCEDURES
Millburn Ridgefield Corporation, the General Partner of the Partnership, with
the participation of the General Partner's Co-Chief Executive Officers and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures with respect to the Partnership as of
the end of the period covered by this quarterly report, and, based on their
evaluation, have concluded that these disclosure controls and procedures are
effective. There were no significant changes in the General Partner's internal
controls with respect to the Partnership or in other factors applicable to the
Partnership that could materially affect these controls subsequent to the date
of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities and Use of Proceeds
(e) Pursuant to the Partnership's Amended and Restated Agreement of
Limited Partnership, investors may withdraw their capital at the end of each
calendar month at the then current month-end Net Asset Value. The redemption of
Interests has no impact on the value of Interests that remain outstanding, and
Interests are not reissued once redeemed.
AMOUNT REDEEMED
April 30, 2004 $ (1,822,022) $(10,781.948)
May 31, 2004 (6,464,525) (273,190)
June 30, 2004 (3,937,228) (366,252)
------------------------------------
TOTAL $(12,223,775) $(11,421,390)
====================================
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. (a) Exhibits -
The following exhibits are incorporated by reference from the exhibit of the
same number and description filed with the Partnership's Registration Statement
(file # 000-50725) filed on April 29, 2004 on Form 10 under the Securities Act
of 1934 which became effective June 28, 2004.
3.01 Amended and Restated Certificate of Limited Partnership of Nestor
Partners
3.02 Amended and Restated Agreement of Limited Partnership of Nestor
Partners
10.01 Acknowledgement of Separate Risk Disclosure Statements and Customer
Agreement between Merrill Lynch Futures Inc. and Nestor Partners
10.02 Customer Agreement between Warburg Dillon Reed LLC and Nestor Partners
10.03 Futures and Options Agreement for Institutional Customers between
Deutsche Morgan Grenfell Inc. and Nestor Partners
10.04 Form of Selling Agreement
The following exhibits are included herewith:
31.01 Rule 13(a)-14(a)/15(d)-14(a) Certification of Co-Chief Executive
Officer
31.02 Rule 13(a)-14(a)/15(d)-14(a) Certification of Co-Chief Executive
Officer
31.03 Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Financial Officer
32.01 Section 1350 Certification of Co-Chief Executive Officer
32.02 Section 1350 Certification of Co-Chief Executive Officer
32.03 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K - None
-19-
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.
By: Millburn Ridgefield Corporation,
General Partner
Date: August 12, 2004
/s/Tod A. Tanis
---------------
Tod A. Tanis
Vice-President
(principal accounting officer)
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