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: September 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 nine months ended September 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 September 30, 2004 (unaudited) and December 31, 2003
(b) For the three and nine months ended September 30, 2004 and 2003 (unaudited)
(c) For the nine months ended September 30, 2004 and 2003 (unaudited)
ITEM 1: FINANCIAL STATEMENTS
NESTOR PARTNERS
STATEMENTS OF FINANCIAL CONDITION
UNAUDITED
SEPTEMBER 30 DECEMBER 31
2004 2003
------------------------------
ASSETS
Equity in trading accounts:
Investments in U.S. Treasury notes-at market value
(amortized cost $46,240,914 and $69,762,758) $ 46,172,256 $ 69,779,438
Net unrealized appreciation on open futures and
forward currency contracts 5,332,953 9,750,763
Due from brokers 2,234,699 3,114,869
Cash denominated in foreign currencies (cost $1,019,104
and $851,372) 1,033,358 885,274
------------------------------
Total equity in trading accounts 54,773,266 83,530,344
------------------------------
Investments in U.S. Treasury notes-at market value
(amortized cost $109,762,932 and $109,375,528) 109,577,193 109,392,119
Cash and cash equivalents 8,350,032 19,727,500
Accrued interest receivable 633,174 1,836,774
------------------------------
Total assets $173,333,665 $214,486,737
==============================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Capital contributions received in advance $ 747,500 $ 2,393,300
Due to brokers 1,144,983 631,451
Due to General Partner 417 --
Accrued brokerage fees 358,909 465,695
Accrued expenses 278,753 332,093
------------------------------
Total liabilities 2,530,562 3,822,539
------------------------------
PARTNERS' CAPITAL
General Partner 3,096,109 4,284,428
Special Limited Partners 31,747,133 47,828,770
Limited Partners 135,959,861 158,551,000
------------------------------
Total partners' capital 170,803,103 210,664,198
------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $173,333,665 $214,486,737
==============================
NESTOR PARTNERS
CONDENSED SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2004 (UNAUDITED)
NET UNREALIZED
FUTURES AND FORWARD APPRECIATION/ % OF PARTNERS'
CURRENCY CONTRACTS (DEPRECIATION) CAPITAL
- -------------------------------------------------------------------------------------
FUTURES CONTRACTS
Long Futures Contracts
Energies $ 1,854,698 1.09 %
Interest rates 2,327,347 1.35 %
Metals 553,418 0.32 %
Stock indices 63,247 0.05 %
----------------------------------
Total long futures contracts 4,798,710 2.81 %
----------------------------------
Short Futures Contracts
Grains 527,600 0.31 %
Interest rates 62,798 0.03 %
Softs 45,305 0.03 %
Stock indices (5,451) -- %
----------------------------------
Total short futures contracts 630,252 0.37 %
----------------------------------
TOTAL INVESTMENTS IN FUTURES CONTRACTS (NET) 5,428,962 3.18 %
----------------------------------
FORWARD CURRENCY CONTRACTS
Total long forward currency contracts 1,123,941 0.66 %
Total short forward currency contracts (1,219,950) (0.72)%
----------------------------------
TOTAL INVESTMENTS IN FORWARD CURRENCY
CONTRACTS (NET) (96,009) (0.06)%
----------------------------------
TOTAL INVESTMENTS IN FUTURES AND FORWARD
CURRENCY CONTRACTS (NET) $ 5,332,953 3.12 %
==================================
NESTOR PARTNERS
CONDENSED SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2004 (UNAUDITED)
% OF PARTNERS'
FACE AMOUNT DESCRIPTION VALUE CAPITAL
- --------------------------------------------------------------------------------------------------------
INVESTMENTS IN U.S. TREASURY NOTES
$ 53,760,000 U.S. Treasury notes, 2.000%, 11/30/04 $ 53,776,800 31.48 %
54,190,000 U.S. Treasury notes, 1.500%, 02/28/05 54,088,394 31.67 %
48,140,000 U.S. Treasury notes, 1.250%, 05/31/05 47,884,255 28.03 %
-----------------------------------
TOTAL INVESTMENTS IN U.S. TREASURY NOTES
(AMORTIZED COST $156,003,846) $ 155,749,449 91.18 %
===================================
NESTOR PARTNERS
CONDENSED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
NET UNREALIZED
FUTURES AND FORWARD APPRECIATION/ % OF PARTNERS'
CURRENCY CONTRACTS (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 %
===================================
NESTOR PARTNERS
CONDENSED SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2003
% OF PARTNERS'
FACE AMOUNT DESCRIPTION VALUE 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 %
===================================
NESTOR PARTNERS
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003
------------------------------------
INVESTMENT INCOME
Interest income $ 556,677 $ 511,434
EXPENSES
Brokerage fees 1,250,164 1,415,639
Administrative expenses 110,568 119,252
Custody fees 7,688 6,933
------------------------------------
Total expenses 1,368,420 1,541,824
Net investment loss (811,743) (1,030,390)
------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on closed positions:
Futures and forward currency contracts (17,492,534) (2,796,858)
Foreign exchange translation (4,365) --
Net change in unrealized appreciation:
Futures and forward currency contracts 7,526,589 10,271,979
Foreign exchange translation 16,894 161,872
Net gains (losses) from U.S. Treasury notes
Net change in unrealized depreciation 106,732 (95,926)
------------------------------------
Total net realized and unrealized gains (losses) (9,846,684) 7,541,067
------------------------------------
Net income (loss) (10,658,427) 6,510,677
Less profit share to General Partner 4,227 702,708
------------------------------------
Net income (loss) after profit share to General Partner $(10,662,654) $ 5,807,969
====================================
NESTOR PARTNERS
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003
------------------------------------
INVESTMENT INCOME
Interest income $ 1,685,681 $ 1,544,697
EXPENSES
Brokerage fees 4,077,289 3,860,674
Administrative expenses 376,263 311,725
Custody fees 22,643 16,214
------------------------------------
Total expenses 4,476,195 4,188,613
Net investment loss (2,790,514) (2,643,916)
------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on closed positions:
Futures and forward currency contracts (29,136,713) 19,238,782
Foreign exchange translation 141,416 (165,896)
Net change in unrealized appreciation:
Futures and forward currency contracts (4,417,810) 1,177,107
Foreign exchange translation (19,648) 219,768
Net losses from U.S.Treasury notes
Net change in unrealized depreciation (287,668) (101,062)
------------------------------------
Total net realized and unrealized gains (losses) (33,720,423) 20,368,699
------------------------------------
Net income (loss) (36,510,937) 17,724,783
Less profit share to General Partner 30,718 2,080,838
------------------------------------
Net income (loss) after profit share to General Partner $(36,541,655) $ 15,643,945
====================================
NESTOR PARTNERS
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004:
NEW PROFIT
LIMITED SPECIAL LIMITED MEMO GENERAL
PARTNERS PARTNER ACCOUNT PARTNER TOTAL
-------------------------------------------------------------------------------------------
Partners' capital at
December 31, 2003 $ 158,551,000 $ 47,828,770 $ -- $ 4,284,428 $ 210,664,198
Contributions 41,479,825 662,851 -- -- 42,142,676
Withdrawals (33,346,173) (11,489,261) -- (657,400) (45,492,834)
Net loss (30,694,073) (5,255,227) (5,244) (556,393) (36,510,937)
General Partner's allocation:
New Profit-Accrued (30,718) -- 26,491 4,227 --
Transfer of New Profit Memo
Account to General Partner -- -- -- -- --
Partners' capital at
-------------------------------------------------------------------------------------------
September 30, 2004 $ 135,959,861 $ 31,747,133 $ 21,247 $ 3,074,862 $ 170,803,103
===========================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003:
NEW PROFIT
LIMITED SPECIAL LIMITED MEMO GENERAL
PARTNERS PARTNER ACCOUNT PARTNER TOTAL
-------------------------------------------------------------------------------------------
Partners' capital at
December 31, 2002 $ 83,293,288 $ 50,699,984 $ -- $ 6,963,561 $ 140,956,833
Contributions 52,140,106 596,467 -- -- 52,736,573
Withdrawals (11,483,939) (3,972,160) -- (3,559,436) (19,015,535)
Net income 10,238,817 6,992,860 359 492,747 17,724,783
General Partner's allocation:
New Profit-Accrued (2,080,838) -- 135,193 1,945,645 --
Transfer of New Profit Memo
Account to General Partner -- -- -- -- --
Partners' capital at
-------------------------------------------------------------------------------------------
September 30, 2003 $ 132,107,434 $ 54,317,151 $ 135,552 $ 5,842,517 $ 192,402,654
===========================================================================================
NESTOR PARTNERS
STATEMENTS OF FINANCIAL HIGHLIGHTS (UNAUDITED)
SPECIAL
LIMITED LIMITED
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 PARTNERS PARTNERS
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE CAPITAL (a):
Net investment income (loss) (2.44) % 0.64 %
============================
Total expenses 3.71 % 0.62 %
Profit share allocation -- % -- %
----------------------------
TOTAL EXPENSES AND PROFIT SHARE ALLOCATION 3.71 % 0.62 %
============================
Total return before profit share allocation (5.67) % (4.94) %
Profit share allocation -- % -- %
----------------------------
TOTAL RETURN AFTER PROFIT SHARE ALLOCATION (5.67) % (4.94) %
============================
SPECIAL
LIMITED LIMITED
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 PARTNERS PARTNERS
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE CAPITAL (a):
Net investment income (loss) (3.35) % 0.46 %
============================
Total expenses 4.46 % 0.64 %
Profit share allocation 2.17 % - %
----------------------------
TOTAL EXPENSES AND PROFIT SHARE ALLOCATION 6.63 % 0.64 %
============================
Total return before profit share allocation 3.30 % 4.28 %
Profit share allocation (0.57) % -- %
----------------------------
TOTAL RETURN AFTER PROFIT SHARE ALLOCATION 2.73 % 4.28 %
============================
(a) Annualized
NESTOR PARTNERS
STATEMENTS OF FINANCIAL HIGHLIGHTS (UNAUDITED)
SPECIAL
LIMITED LIMITED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 PARTNERS PARTNERS
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE CAPITAL (a):
Net investment income (loss) (2.47) % 0.43 %
============================
Total expenses 3.59 % 0.67 %
Profit share allocation -- % -- %
----------------------------
TOTAL EXPENSES AND PROFIT SHARE ALLOCATION 3.59 % 0.67 %
============================
Total return before profit share allocation (17.22) % (15.34) %
Profit share allocation -- % -- %
----------------------------
TOTAL RETURN AFTER PROFIT SHARE ALLOCATION (17.22) % (15.34) %
============================
SPECIAL
LIMITED LIMITED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 PARTNERS PARTNERS
- -------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE CAPITAL (a):
Net investment income (loss) (3.52) % 0.58 %
============================
Total expenses 4.77 % 0.68 %
Profit share allocation 2.54 % -- %
----------------------------
TOTAL EXPENSES AND PROFIT SHARE ALLOCATION 7.31 % 0.68 %
============================
Total return before profit share allocation 11.01 % 14.47 %
Profit share allocation (2.06) % -- %
----------------------------
TOTAL RETURN AFTER PROFIT SHARE ALLOCATION 8.95 % 14.47 %
============================
(a) Annualized
NOTES TO FINANCIAL STATEMENTS
The accompanying unaudited financial statements of Nestor Partners (the
"Partnership"), 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 September 30, 2004
(unaudited) and December 31, 2003 and the results of its operations for the
three and nine month periods ended September 30, 2004 and 2003 (unaudited).
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 an affiliate of the General
Partner, The Millburn Corporation ("TMC"), for providing accounting services to
the Partnership. The Partnership incurred administrative expenses of $110,568
and $376,263 during the three and nine month periods ended September 30, 2004,
respectively, of which $30,956 and $183,859, 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 September 30, 2004, $417 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.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership raises additional capital only through the sale of 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 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. During its operations
through the three and nine month periods ended September 30, 2004, the
Partnership experienced no meaningful periods of illiquidity in any of the
numerous markets traded by the General Partner.
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 Annual Report on Form 10 for fiscal
year 2003.
RESULTS OF OPERATIONS
During its operations through the three and nine month periods ending September
30, 2004, the Partnership experienced no meaningful periods of illiquidity in
any of the numerous markets traded by the General Partner.
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.
PROFIT SHARE
The following table indicates the total profit share earned and accrued during
the three and nine month periods ended September 30, 2004 and 2003. Profit share
earned (from Limited Partners' redemptions) is credited to the New Profit memo
account as defined in the Partnership's Partnership Agreement.
Three months ended: Sep 30, 2004 Sep 30, 2003
------------ ------------
Profit share earned $ -- $ 109,192
Profit share accrued (1) 4,227 1,945,645
Profit share reversal (2) -- (1,352,129)
------------ ------------
Total profit share $ 4,227 $ 702,708
============ ============
Nine months ended: Sep 30, 2004 Sep 30, 2003
------------ ------------
Profit share earned $ 26,491 $ 135,193
Profit share accrued (1) 4,227 1,945,645
Profit share reversal n/a n/a
------------ ------------
Total profit share $ 30,718 $ 2,080,838
============ ============
(1) At September 30
(2) Accrued at June 30, reversed on July 1
TOTAL PARTNERS'
MONTH ENDING: CAPITAL
- ------------------------------------------------------
September 30, 2004 $ 170,803,103
June 30, 2004 188,864,906
December 31, 2003 210,664,198
- --------------------------------------------------------------------
Period ended September 30, 2004
- --------------------------------------------------------------------
THREE MONTHS NINE MONTHS
----------------------------------
Change in Partners' Capital $ (18,061,803) (39,861,095)
Percent Change -9.56% -18.92%
THREE MONTHS ENDED SEPTEMBER 30, 2004
The decrease in the Partnership's net assets of $18,061,803 was attributable to
withdrawals of $18,027,235 and a net loss from operations of $10,662,654, which
was partially offset by contributions of $10,623,859 and a profit share
allocation to the General Partner of $4,227.
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 September 30, 2004 decreased $165,475,
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 September 30, 2004
decreased $8,684, relative to the corresponding period in 2003. The decrease was
attributable to a decrease 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 September 30,
2004 increased $45,243, relative to the corresponding period in 2003. This
increase was attributable to an increase in short-term Treasury yields, which
was partially offset by a decrease in the Partnership's net assets.
During the three months ended September 30, 2004, the Partnership experienced
net realized and unrealized losses of $9,846,684 from its trading operations
(including foreign exchange translations and Treasury obligations). Brokerage
fees of $1,250,164, administrative expenses of $110,568, custody fees of $7,688
and accrued profit share allocation to the General Partner of $4,227 were
incurred. Interest income of $556,677 partially offset the Partnership's
expenses resulting in a net loss of $10,662,654. An analysis of the trading gain
(loss) by sector is as follows:
Sector % Gain (Loss)
- -------- -------------
Currencies (5.59)%
Energies 1.93 %
Grains 0.44 %
Interest rates (0.85)%
Metals 0.09 %
Softs 0.08 %
Stock indices (1.52)%
-------------
Total (5.42)%
NINE MONTHS ENDED SEPTEMBER 30, 2004
The decrease in the Partnership's net assets of $39,861,095 was attributable to
redemptions of $45,492,834 and net loss from operations of $36,541,655, which
was partially offset by subscriptions of $42,142,676 and a profit share
allocation to the General Partner of $30,718.
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 nine months ended September 30, 2004 increased $216,615,
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 nine months ended September 30, 2004
increased $64,538, relative to the corresponding period in 2003. The increase
was attributable to an increase in the Partnership's average net assets during
the period ended September 30, 2004, relative to the corresponding period in
2003.
Interest income is derived from cash and U.S. Treasury instruments held at the
Partnership's brokers. Interest income for the nine months ended September 30,
2004 increased $140,984, relative to the corresponding period in 2003. This
increase was attributable to an increase in short-term Treasury yields and an
increase in the Partnership's average net assets during the nine months ended
September 30, 2004.
The Partnership experienced net realized and unrealized losses of $33,720,423
from its trading operations (including foreign exchange translations and
Treasury obligations). Brokerage fees of $4,077,289, administrative expenses of
$376,263, custody fees of $22,643 and accrued profit share allocation to the
General Partner of $30,718 were incurred. Interest income of $1,685,681
partially offset the Partnership's expenses resulting in a net loss of
$36,541,655. An analysis of the trading gain (loss) by sector is as follows:
Sector % Gain (Loss)
- -------- -------------
Currencies (16.06)%
Energies 3.60 %
Grains 0.53 %
Interest rates 0.39 %
Metals (0.82)%
Softs 0.21 %
Stock indices (3.68)%
-------------
Total (15.83)%
MANAGEMENT DISCUSSION - 2004
July 1, 2004 to September 30, 2004
Trading of financial futures--currencies, interest rates and stock indices--was
broadly unprofitable, and gains from non-financial futures trading--energy,
metals, and agricultural--offset only a portion of those losses.
Trading of financial markets was treacherous during the quarter, particularly in
July and August. Most of the financial markets in the program were mired in
broad ranges with unhelpful volatility and little net direction. These
conditions reflected uncertainty concerning developments in Iraq, the outcome of
the U.S. elections, the strength of the U. S. economy, and China's ability to
slow its economy without damage to the world economy. Market expectations about
the U.S. dollar vacillated from weak to strong to neutral to weak during the
three months under review. As a result, currency trading was broadly
unprofitable, with the largest losses registered in dollar/yen and dollar/euro.
With this much uncertainty roiling equity markets, losses were produced on long
and short positions for German, U.S. and Japanese stock index futures. The
exception in this sector was a long position in the Hong Kong Hang Seng index
which was profitable.
Interest rate futures were also buffeted by the aforementioned uncertainties,
resulting in overall losses for the sector. Long positions in U.S. notes and
German bonds were profitable, however.
In contrast to the financial markets, energy markets displayed rather persistent
and strong trends over the summer. Growing worldwide demand, spurred on
especially by China, coupled with worries about supplies from Venezuela,
Nigeria, and Iraq, and hurricane disruptions near the U.S., kept petroleum and
petroleum product prices on the upswing. As a result, long positions in crude
oil, heating oil and London gasoil were profitable. A short natural gas position
was slightly profitable as well.
Elsewhere, a long copper position, and short corn and cotton positions were
profitable, and outweighed losses from a long gold position and trading of
coffee.
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 our portfolio. For example, as the quarter
began, the portfolio 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 portfolio
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 portfolio 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 in the portfolio. 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 in the wake
of 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.
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. Treasurys 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.
MANAGEMENT DISCUSSION - 2003
July 1, 2003 to September 30, 2003
Profits in July and August outweighed losses in September. Trading in currency
forwards, equity and metal futures were profitable, while trading in interest
rate, energy and agricultural futures produced losses.
The most significant currency event of the quarter was the September statement
from the Group of Seven (G-7) finance chiefs that "more flexibility in exchange
rates is desirable". The market took this as a rebuke of Asian central bank
interventions designed to weaken their currencies in order to aid their exports
and economic growth. The result was a sharp appreciation of Asian currencies,
producing gains on long positions in the Japanese yen and Korean won. Long
positions in the Australian dollar, New Zealand dollar and South African rand
were also profitable for the quarter. Meanwhile, trading of the European
currencies vis-a-vis the U.S. dollar was volatile and marginally unprofitable.
On the other hand, non-dollar cross rate trading was characterized by
non-directional volatility. Hence, losses, though small by individual position,
were broadly based in euro and yen cross rate trading.
Global stock prices rose during July, August and in early September. As a
result, long positions in the Hong Kong Hang Seng, Japanese Nikkei and Topix,
German Dax and Nasdaq 100 indices were quite profitable. Following the G-7
statement, however, market participants were concerned that a weak dollar might
derail European and Asian recoveries. Hence, some of the earlier gains were
given back.
Long gold and copper positions netted to a quarterly gain.
Interest rate futures' trading was very volatile in the third quarter. Signs of
accelerating growth in the US, and a lessening of the fear of worldwide
deflation encouraged higher interest rates in July and much of August.
Thereafter, however, concerns that positive economic prospects may have been
overstated and that dollar weakness could adversely affect stocks, exports and
growth worldwide caused rates to plunge sharply. Overall, interest rate trading
was fractionally unprofitable during the July-September quarter, with short
positions in US, European and Japanese interest rate futures profitable in July
and August, and these same positions unprofitable in September. By the end of
the quarter, the Partnership had covered most of its short positions in interest
rates and initiated partial long positions.
Energy prices were also volatile in the third quarter as concerns about OPEC
output cuts, Iraqi production and inventory adjustments unsettled traders.
Losses were experienced in trading crude oil, heating oil, London gas oil, and
natural gas, while a long position in unleaded gasoline was slightly profitable.
Trading of soft and agricultural markets generated a fractional loss during the
quarter.
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.
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.
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 the
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 quantification 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.
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 September 30, 2004. During
the nine months ended September 30, 2004, the Partnership's average total
capitalization was approximately $200,250,000.
Average Highest Lowest
Value % of Average Value Value
Market Sector at Risk Capitalization at Risk at Risk
- --------------------------------------------------------------------------------
Interest rates $ 6.7 3.3% $ 8.4 $ 5.2
Currencies 29.4 14.7% 37.3 22.3
Stock indices 4.5 2.2% 6.4 2.2
Metals 1.0 0.5% 1.0 0.9
Softs 0.5 0.2% 0.7 0.3
Energies 1.6 0.8% 2.5 0.9
Total $ 43.7 21.7%
Average, highest and lowest Value at Risk amounts relate to the quarter-end
amounts for the nine months ended September 30, 2004. Average capitalization is
the average of the Partnership's capitalization at the end of each of the nine
months ended September 30, 2004. Dollar amounts represent millions of dollars.
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. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Pursuant to the Partnership's Declaration of Partnership and
Partnership Agreement, investors may redeem their Interests 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.
The following table summarizes Interests redeemed
during the three months ended September 30, 2004:
Limited Special Limited
Month Partners Partners
- --------------------------------------------------------------
July 31, 2004 $ (2,931,594) $(15,000)
August 31, 2004 (6,834,251) (9,280)
September 30, 2004 (8,237,111) --
--------------------------------------
$(18,002,956) (24,280)
======================================
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 and declared 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
The following exhibits are incorporated by reference filed on Form 8-K pursuant
to The Securities Act of 1934
i. Item 3.02 Unregistered Sales of Equity Securities, filed on August
26, 2004 (amendment filed on September 2, 2004)
ii. Item 4.01 Changes in Registrant's Certifying Accountant, filed on
September 2, 2004
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: November 12, 2004
/s/ Tod A. Tanis
Tod A. Tanis
Vice-President
(principal accounting officer)