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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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Commission File number 0-16898
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ProFutures Diversified Fund, L.P.
---------------------------------
(Exact name of Partnership as specified in charter)
Delaware 75-2197831
- ----------------------- ------------------------------------
(State of organization) (I.R.S. Employer Identification No.)
ProFutures, Inc.
11612 Bee Cave Road
Suite 100
Austin, Texas 78738
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Address of principal executive offices)
Partnership's telephone number
(800) 348-3601
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Securities registered pursuant to Section 12(b) of the Act
Title of each class. Name of each exchange on which registered.
-------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act
Units of Limited Partnership Interest
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(Title of Class)
Indicate by check mark whether the Partnership (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Partnership was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X
No
State the aggregate market value of the voting stock held by non-affiliates
of the Partnership. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of
filing. (See definition of affiliate in Rule 405, 17 CFR 230.405.)
Not applicable
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Partnership's Prospectus dated July 31, 1994 and
Supplement dated January 31, 1995
Post-Effective Amendment No. 3 dated June 23, 1995
are incorporated by reference in
Part I, Part II, Part III and Part IV of this Form 10-K
PART I
Item 1. Business.
General
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ProFutures Diversified Fund, L.P. (the "Partnership") is a limited
partnership organized on March 10, 1987, under the laws of the State
of Delaware. The business of the Partnership is the speculative
trading of futures contracts on U.S. and non-U.S. exchanges, option
contracts, forward contracts on foreign currencies, and other commodity
interests. The Partnership commenced its business operation in
August 1987 under the name ATA Research/ProFutures Diversified Fund, L.P.
Effective June 1, 2000, the Partnership changed its name from ATA Research/
ProFutures Diversified Fund, L.P. to ProFutures Diversified Fund, L.P.
Effective October 1, 2000, ATA Research, Inc., the Partnership's co-general
partner, withdrew as co-general partner. ProFutures, Inc. remains as the
sole General Partner.
The office of the Partnership is located at 11612 Bee Cave Road, Suite 100,
Austin, Texas 78738; the telephone number is (800) 348-3601.
Trading Activity
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ProFutures, Inc., a Texas corporation, is the General Partner of the
Partnership which administers the business and affairs of the Partnership
(exclusive of its trading operations). Trading decisions are made by
independent Commodity Trading Advisors chosen by the General Partner. At
December 31, 2000, there are four Commodity Trading Advisors: Campbell &
Company, Inc., Crabel Capital Management, LLC, Gamma Capital Management, LLC
and Grinham Managed Funds Pty. Ltd. (collectively, the "Advisors"). All
advisory fees are paid by the Partnership. Advisors may be changed from
time to time by the General Partner.
ProFutures, Inc. is registered with the CFTC as a Commodity Trading Advisor
and Commodity Pool Operator and is a member of the NFA. Gary D. Halbert is
the Chairman and President, and principal stockholder, of ProFutures, Inc.,
which was incorporated and began operation in December, 1984, and specializes
in speculative managed futures accounts.
The objective of the Partnership is to achieve appreciation of its assets
through speculative trading in futures and option contracts and other
commodity interests. It ordinarily maintains open positions for a
relatively short period of time. The Partnership's ability to make a
profit depends largely on the success of the Advisors in identifying
market trends and price movements and buying or selling accordingly.
The Partnership's Trading Policies are set forth on Page 59 of the
Partnership's Prospectus dated July 31, 1994, which is incorporated herein
by reference.
Material changes in the Trading Policies described in the Prospectus must
be approved by a vote of a majority of the outstanding Units of Limited
Partnership Interest. A change in contracts traded, however, will not be
deemed to be a material change in the Trading Policies.
Trading Methods and Advisors
- ----------------------------
Futures traders basically rely on either or both of two types of analysis
for their trading decisions, "technical" or "fundamental". Technical
analysis uses the theory that a study of the markets will provide a means
of anticipating price changes. Technical analysis generally will include a
study of actual daily, weekly and monthly price fluctuations, volume
variations and changes in open interest, utilizing charts and/or computers
for analysis of these items. Fundamental analysis, on the other hand,
relies on a study and evaluation of external factors which affect the price
of a futures contract in order to predict prices. These include political
and economic events, weather, supply and demand and changes in interest
rates.
The respective Advisors' trading strategies attempt to detect trends in
price movements for the commodities monitored by them. They normally seek
to establish positions and maintain such positions while the particular
market moves in favor of the position and to exit the particular market
and/or establish reverse positions when the favorable trend either reverses
or does not materialize. These trading strategies are not normally
successful if a particular market is moving in an erratic and non-trending
manner.
Because of the nature of the commodities markets, prices frequently appear
to be trending when a particular market is, in fact, without a trend. In
addition, the trading strategies may identify a particular market as
trending favorably to a position even though actual market performance
thereafter is the reverse of the trend identified.
None of the Advisors or their respective principals own any Units of the
Partnership. The Partnership's Advisors are independent Commodity Trading
Advisors and are not affiliated with the General Partners; however, all are
also Advisors to other commodity pools with which the General Partner is
currently associated and may own an interest in those pools. Each Advisor
is registered with the CFTC and is a member in such capacity with the NFA.
Because of their confidential nature, proprietary trading records of the
Advisors and their respective principals are not available for inspection
by the Limited Partners of the Partnership.
Fees, Compensation and Expenses
- -------------------------------
The General Partner(s) receive monthly management fees paid by the
Partnership. ProFutures, Inc. receives 1/4 of 1% of month-end Net Asset
Value (approximately 3% annually). ATA Research, Inc. received 1/12 of 1%
of month-end Net Asset Value (approximately 1% annually) through May 31,
2000.
Effective June 1, 2000, Kenmar Global Strategies Inc. (Kenmar) serves as a
consultant and performs similar functions as those previously performed by
ATA. Kenmar assists the General Partner in making decisions about which
commodity trading advisors to hire, the allocations among the advisors and
the day-to-day monitoring and risk management of the Partnership's trading
activities. Kenmar receives a monthly management fee of 1/12 of 1% of
month-end Net Asset Value (approximately 1% annually).
The current Advisors receive management fees ranging from 1% to 2% annually
of Allocated Net Asset Value (as defined in the trading advisory contracts).
Each of the four Advisors receives a quarterly incentive fee ranging from
20% to 23% of Trading Profits (as defined). The quarterly incentive fees
are payable only on cumulative profits achieved by each Advisor. For
example, if one of the Advisors to the Partnership experiences a loss after
an incentive fee payment is made, that Advisor retains such payments but
receives no further incentive fees until such Advisor has recovered the loss
and then generated subsequent Trading Profits since the last incentive fee
was paid such Advisor. An incentive fee may be paid to one Advisor but the
Partnership may experience no change or a decline in its Net Asset Value
because of the performance of another Advisor. The General Partner may
allocate or reallocate the Partnership's assets at any time among the
current Advisors or any others that may be selected. Upon termination of
an Advisor's contract, or at any other time in the discretion of the
General Partner, the Partnership may employ other advisors whose
compensation may be calculated without regard to the losses which may
be incurred by the present Advisors. Similarly, the Partnership may renew
its relationship with each Advisor on the same or different terms.
Notional Funding Note: As of December 31, 2000, the Partnership has
allocated notional funds to Advisors equal to approximately 20.1% of the
Partnership's cash and/or other margin - qualified assets. Of course, this
percentage may be higher or lower over any given 12 month period. The
management fees paid to an Advisor, if any, are a percentage of the nominal
account size of the account if an account had been notionally funded. The
nominal account size is equal to a specific amount of funds initially
allocated to an Advisor which increases by profits and decreases by losses
in the account, but not by additions to or withdrawals of actual funds from
the account. Some, but not all, Advisors are expected to be allocated
notional funds, and not all of the Advisors allocated notional funds are
expected to be paid management fees. Further, the amount of cash and/or
other margin-qualified assets in an account managed by an Advisor will vary
greatly at various times in the course of the Partnership's business,
depending on the General Partner's general allocation strategy and
pertinent margin requirements for the trading strategies undertaken by an
Advisor.
The Partnership is obligated to pay its periodic operating expenses,
consisting substantially of preparation of the limited partners' tax return
information, filing and recording charges, legal, printing, accounting and
auditing fees plus non-recurring expenses. Those periodic recurring
expenses are estimated at approximately .5% of the Partnership's average
annual Net Asset Value. Non-recurring expenses, not included within these
estimates, include expenses associated with significant litigation
including, but not limited to, class action suits, suits involving the
indemnification provisions of the Agreement of the Limited Partnership or
any other agreement to which the Partnership is a party; by their nature,
the dollar amount of non-recurring expenses cannot be estimated.
Additional descriptions and definitions are set forth in "Fees,
Compensation and Expenses" on Pages 30-35 of the Partnership's Prospectus,
dated July 31, 1994, which is incorporated herein by reference.
Brokerage Arrangements
- ----------------------
The General Partner has selected ING (U.S.) Securities, Futures & Options
Inc. (ING) as the Partnership's primary clearing broker. The Partnership's
brokerage arrangements with ING are set forth in "Brokerage Arrangements" on
Page 60 of the Partnership's Prospectus dated July 31, 1994, which is
incorporated herein by reference.
Regulation
- ----------
The U.S. futures markets are regulated under the Commodity Exchange Act
(CEA), which is administered by the Commodity Futures Trading Commission
(CFTC), a federal agency created in 1974. The CFTC licenses and regulates
commodity exchanges, commodity brokerage firms (referred to in the industry
as "Futures Commission Merchants"), Commodity Pool Operators, Commodity
Trading Advisors and others. The General Partner is registered with the
CFTC as a Commodity Pool Operator and each Advisor is registered as a
Commodity Trading Advisor.
Futures professionals such as the General Partner and the Advisors are
also regulated by the National Futures Association (NFA), a self-regulatory
organization for the futures industry that supervises the dealings between
futures professionals and their customers. If the pertinent CFTC
registrations or NFA memberships were to lapse, be suspended or be revoked,
the General Partner would be unable to act as the Partnership's Commodity
Pool Operator, and the respective Advisors as Commodity Trading Advisors,
to the Partnership.
The CFTC has adopted disclosure, reporting and recordkeeping requirements
for Commodity Pool Operators (such as the General Partner) and disclosure
and recordkeeping requirements for Commodity Trading Advisors. The
reporting rules require pool operators to furnish to the participants in
their pools a monthly statement of account, showing the pool's income or
loss and change in Net Asset Value and an annual financial report, audited
by an independent certified public accountant.
The CFTC and the exchanges have pervasive powers over the futures markets,
including the emergency power to suspend trading and order trading for
liquidation only (i.e., traders may liquidate existing positions but not
establish new positions). The exercise of such powers could adversely
affect the Partnership's trading.
Competition
- -----------
The Partnership may experience increased competition for the same futures or
option contracts. The Advisors may recommend similar or identical trades
to other accounts which they may manage; thus, the Partnership may be in
competition with such accounts for the same or similar positions. Such
competition may also increase due to the widespread utilization of
computerized trend-based trading methods similar to the methods used by
some of the Advisors. This Partnership may also compete with other funds
organized by the General Partner.
Item 2. Properties.
The Partnership does not own or lease any real property. The General
Partner currently provides all necessary office space at no additional
charge to the Partnership.
Item 3. Legal Proceedings.
The Partnership is not aware of any material pending legal proceedings to
which it is a party or to which any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fiscal year ended December 31, 2000, no matters were submitted
to a vote of the holders of Units of Limited Partnership Interest ("Units")
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Securities and Related Security Holder
Matters.
The Partnership has filed a registration statement with the Securities and
Exchange Commission for the sale of up to $38,547,364 in Units of Limited
Partnership Interest. Such registration statement became effective as of
July 31, 1994. This offering was extended on January 31, 1995 and
continued through April 30, 1995. On June 23, 1995, Post-Effective
Amendment No. 3 was filed to deregister $20,721,920 of Units of Limited
Partnership Interest. As of December 31, 2000, a total of 19,974 Units
are outstanding and held by 1,515 Unit holders, including 225 Units of
General Partnership interest. During the calendar year 2000 a total of
8,026 Units were redeemed.
The General Partner has sole discretion in determining what distributions,
if any, the Partnership will make to its Unit holders. The General Partner
made no distributions as of December 31, 2000, or as of the date hereof. A
Limited Partner may request and receive redemption of Units subject to
restrictions in the limited partnership agreement.
Item 6. Selected Financial Data.
Following is a summary of certain financial information for the Partnership
for the calendar years 2000, 1999, 1998, 1997 and 1996.
2000
----
Realized Gains (Losses) $ (8,292,461)
Change in Unrealized
Gains (Losses) on
Open Contracts (2,089,239)
Interest Income 3,045,014
Management Fees 2,906,733
Incentive Fees 1,049,494
Net Income (loss) (13,427,731)
General Partner Capital 455,817
Limited Partner Capital 40,014,820
Partnership Capital 40,470,637
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,026.18
Net Income (loss) per Unit* (548.00)
1999
----
Realized Gains $ 1,352,473
Change in Unrealized
Gains (Losses) on
Open Contracts 2,464,741
Interest Income 3,582,696
Management Fees 4,167,022
Incentive Fees 1,765,210
Net Income (loss) (1,300,309)
General Partner Capital 1,075,348
Limited Partner Capital 69,348,028
Partnership Capital 70,423,376
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,515.07
Net Income (loss) per Unit* (41.89)
1998
----
Realized Gains $ 19,109,408
Change in Unrealized
Gains (Losses) on
Open Contracts (3,138,069)
Interest Income 4,335,995
Management Fees 4,309,041
Incentive Fees 4,355,728
Net Income (loss) 8,077,921
General Partner Capital 1,111,029
Limited Partner Capital 84,445,470
Partnership Capital 85,556,499
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,559.49
Net Income (loss) per Unit* 224.08
1997
----
Realized Gains $ 12,910,062
Change in Unrealized
Gains (Losses) on
Open Contracts 2,218,892
Interest Income 4,917,717
Management Fees 4,544,748
Incentive Fees 3,224,784
Net Income (loss) 8,533,713
General Partner Capital 1,328,151
Limited Partner Capital 87,741,893
Partnership Capital 89,070,044
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,313.44
Net Income (loss) per Unit* 208.27
1996
----
Realized Gains $ 19,859,370
Change in Unrealized
Gains (Losses) on
Open Contracts (4,280,980)
Interest Income 4,780,472
Management Fees 4,483,854
Incentive Fees 3,508,326
Net Income (loss) 9,128,038
General Partner Capital 1,208,324
Limited Partner Capital 88,652,837
Partnership Capital 89,861,161
Net Asset Value per General
and Limited Partner Unit
at End of Year 2,104.72
Net Income (loss) per Unit* 197.64
- ---------------
* based on weighted average units outstanding during the year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Partnership commenced trading on August 3, 1987. The success of the
Partnership is dependent on the ability of the Advisors to generate profits
through speculative trading sufficient to produce substantial capital
appreciation after payment of all fees and expenses. Future results will
depend in large part upon the futures markets in general, the performance
of the Advisors for the Partnership and the amount of redemptions and
changes in interest rates. Due to the highly leveraged nature of futures
trading, small price movements may result in substantial losses. Because
of the nature of these factors and their interaction, it is impossible to
predict future operating results.
(a) Liquidity. Substantially all of the Partnership's assets are held
in cash or cash equivalents. There are no restrictions on the liquidity
of these assets except for amounts on deposit with the broker needed to
meet margin requirements on open futures contracts.
Most United States exchanges (but generally not foreign exchanges, or banks
or broker-dealer firms in the case of foreign currency forward contracts)
limit by regulation the amount of fluctuation limits. The daily limits
establish the maximum amount the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of
the trading session. Once the "daily limit" has been reached in a
particular commodity, no trades may be made at a price beyond the limit.
Positions in the commodity can then be taken or liquidated only if traders
are willing to effect trades at or within the limit during the period for
trading on such day. Because the "daily limit" rule only governs price
movement for a particular trading day, it does not limit losses. The rule
may, in fact, substantially increase losses because it may prevent the
liquidation of unfavorable positions. Futures prices have occasionally
moved the daily limit for several consecutive trading days, and thereby
prevented prompt liquidation of futures positions on one side of the
market, subjecting those futures traders involved to substantial losses.
Liquidity will be of concern to the Partnership primarily in that the futures
markets in which the Advisors take positions may have periods in which
illiquidity makes it impossible or economically undesirable to execute
trades which its respective trading strategy would otherwise suggest.
Other than in respect of the functioning of the markets in which it trades,
liquidity will be of little relevance to the operation of the Partnership
except insofar as the General Partner is relatively thinly capitalized.
Nonetheless, the General Partner believes it has sufficient funding to
meet both its capital contribution and net worth requirements based on
capital contributions from the principals of the General Partner, or
alternative funding sources, including the stock subscription from the
Clearing Broker to ProFutures, Inc.
(b) Capital Resources. The Partnership's initial offering and sale of Units
of Limited Partnership Interest commenced on May 27, 1987 and ended on
July 31, 1987 after having sold $6,130,568 of units at the initial
offering price of $1,000. The Partnership commenced trading August 3,
1987. The Partnership continued offering Units through February 29,
1988. Thereafter additional offerings of the Partnership's Units of
Limited Partnership Interest occurred on April 15, 1988, August 24,
1991, May 14, 1992, November 30, 1992, August 30, 1993 and July 31,
1994. The offering effective July 31, 1994 was extended on January 31,
1995 and continued through April 30, 1995. In June 1995, Post-Effective
Amendment No. 3 was filed to deregister the Partnership's remaining
$20,721,920 of Units of Limited Partnership Interest.
Since the Partnership's business is the purchase and sale of various
commodity interests, it will make few, if any, capital expenditures.
(c) Results of Operations. Due to the speculative nature of trading
commodity interests, the Partnership's income or loss from operations
may vary widely from period to period. Management cannot predict
whether the Partnership's future Net Asset Value per Unit will increase
or experience a decline. Except as it impacts commodity markets,
inflation is not a significant factor in the Partnership's operations.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Year Ended December 31, 2000
----------------------------
2000 had a net loss of $(13,427,731) or $(488.89) per Unit. At
December 31, 2000, partners' capital totaled $40,470,637, a net decrease
of $29,952,739 from December 31, 1999. Net Asset Value per Unit at
December 31, 2000 amounted to $2,026.18, as compared to $2,515.07 at
December 31, 1999, a decrease of 19.44%.
The net loss for 2000 resulted primarily from trading losses in all market
sectors except the energy markets. The interest rates and metals market
sectors incurred the largest trading losses. Partners' capital was
further reduced by the large number of redemptions during 2000.
Year Ended December 31, 1999
----------------------------
1999 had a net loss of $(1,300,309) or $(41.89) per Unit. At December 31,
1999, partners' capital totaled $70,423,376, a net decrease of $15,133,123
from December 31, 1998. Net Asset Value per Unit at December 31, 1999
amounted to $2,515.07, as compared to $2,559.49 at December 31, 1998, a
decrease of 1.74%.
The net loss for 1999 resulted primarily from losses in the foreign
currencies and agricultural commodities markets and were only slightly
offset by gains in the energy, equities and metals markets. Partners'
capital was further reduced due to the high volume of redemptions during
1999.
Year Ended December 31, 1998
----------------------------
Net income for 1998 amounted to $8,077,921 or $224.08 per Unit. At
December 31, 1998, partners' capital totaled $85,556,499, a net decrease
of $3,513,545 from December 31, 1997. Net Asset Value per Unit at
December 31, 1998 amounted to $2,559.49, as compared to $2,313.44 at
December 31, 1997, an increase of 10.64%.
Net income for 1998 resulted primarily from gains in the interest rate
and equity markets, partially offset by losses in agricultural
commodities and metals markets. Net income was offset by redemptions
of Units, resulting in a net decrease in partners' capital.
(d) Possible Changes. The General Partner reserves the right to terminate
current Advisors and/or engage additional Advisors in the future.
Furthermore, the General Partner reserves the right to change any of
the Partnership's clearing arrangements to accommodate any new Advisors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a commodity investment pool engaged in the trading of U.S.
and foreign futures contracts, options on U.S. and foreign futures contracts
and other commodity interests, including forward contracts on currencies
(collectively, "commodity interests"). These market sensitive derivative
instruments are acquired for speculative trading purposes. All, or
substantially all, of the Partnership's assets are, accordingly, subject to
the risk of trading loss. Unlike an operating company, the risk involved in
trading market sensitive derivative instruments is integral, not incidental,
to the Partnership's business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including commodity price levels, the level and volatility of interest rates,
foreign currency exchange rates, equity price levels, the market value of
financial instruments and contracts, the diversification effects among the
Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership acquires and liquidates, generally on a short-term basis, both
long and short positions in a wide range of commodities markets.
Consequently, it is not possible to predict how a particular market scenario
projected into the future will affect performance, and the Partnership's past
performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could
reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the
recurrence in the markets traded by the Partnership of market movements far
exceeding expectations could result in actual trading or non-trading losses
far beyond the indicated Value at Risk or the Partnership's experience to
date. In light of the foregoing, as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantitative
disclosure included in this section should not be considered to constitute
any assurance or representation that the Partnership's losses in any market
sector will be limited to the Value at Risk or by the Partnership's attempts
to manage its market risk.
Materiality, as used in this section, is based on an assessment of reasonably
possible market movements and the potential losses caused by such movements,
taking into account the leverage, optionality and multiplier features of the
Partnership's market sensitive commodity interests.
Quantitative Disclosures About Trading Risk
The following quantitative disclosures regarding the Partnership's market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor, except for
statements of historical fact (such as the terms and amounts related to
particular contracts and commodity interests held during or at the end of
the reporting period).
Risk exposure in the various market sectors traded by the Partnership's
Advisors is quantified below in terms of Value at Risk. Commodity interests
are recorded in the financial statements at fair market value; therefore, any
loss in the fair value of the Partnership's open positions is directly
reflected in the Partnership's earnings (realized or unrealized) and cash
flow.
The Partnership has used commodity exchange maintenance margin requirements as
the measure of its Value at Risk in a given market sector. Maintenance margin
requirements are set by exchanges to equal or exceed the maximum losses
reasonably expected to be incurred in the fair value of any given contract in
95% - 99% of any one-day intervals. The maintenance margin levels are
established by brokers and exchanges using historical price studies as well
as an assessment of current market volatility (including the implied
volatility of the options on a given futures contract) and economic
fundamentals to provide a probabilistic estimate of the maximum expected
near-term one-day price fluctuation. Maintenance margin has been used rather
than the more generally available initial margin, because initial margin
includes a credit risk component which is not relevant to Value at Risk.
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 2000 and
1999. All open position trading risk exposures of the Partnership have
been included in calculating the figures set forth below. As of December 31,
2000 and 1999, the Partnership's total capitalization was approximately
$40.5 million and $70.4 million, respectively.
December 31, December 31,
2000 1999
------------------- -------------------
Average
2000
Quarterly % of % of
Gain (Loss) Total Total
from Value at Capital- Value at Capital-
Market Sector Trading Risk ization Risk ization
------------- ------------ ---------- ------- ---------- -------
Agriculture $ (283,000) $ 59,000 0.1% $ 855,000 1.2%
Currency and
currency indices (391,000) 282,000 0.7% 836,000 1.2%
Energy and other 758,000 549,000 1.4% 0 0.0%
Equity Indices (644,000) 499,000 1.2% 2,363,000 3.4%
Interest rates (1,172,000) 737,000 1.8% 0 0.0%
Metals (864,000) 100,000 0.2% 2,151,000 3.0%
----------- ---------- ----- ---------- -----
Total $(2,596,000) $2,226,000 5.4% $6,205,000 8.8%
=========== ========== ===== ========== =====
The face value of the market sector instruments held by the Partnership is
typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally range between approximately 1%
and 10% of contract face value) as well as many times the capitalization of
the Partnership. The magnitude of the Partnership's open positions creates
a risk of loss not typically found in most other financial instruments.
Because of the size of its positions, certain market conditions - unusual,
but historically recurring from time to time - could cause the Partnership to
incur severe losses over a short period of time. The foregoing Value at Risk
table - as well as the past performance of the Partnership - give no
indication of the magnitude of this risk of loss.
Qualitative Disclosures About Trading Risk
The following qualitative disclosures regarding the Partnership's market risk
exposures - except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Partnership manages its primary
market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies
and risks, any one of which could cause the actual results of the
Partnership's risk controls to differ materially from the objectives of such
strategies. Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political upheavals,
changes in historical price relationships, an influx of new market
participants, increased regulation and many other factors could result in
material losses as well as in material changes to the risk exposures and the
risk management strategies of the Partnership. There can be no assurance that
the Partnership's current market exposure and/or risk management strategies
will not change materially or that any such strategies will be effective in
either the short- or long-term. Investors must be prepared to lose all or
substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as
of and during the year ended December 31, 2000, by market sector.
Equity Indices.
- ---------------
The Partnership's primary equity exposure is to fluctuations in equity prices.
The stock index futures traded by the Partnership are by law limited to
futures on broadly based indices. As of December 31, 2000, the Partnership's
primary exposure was to the S&P 500 stock index. The General Partner
anticipates that the Partnership will primarily be exposed to the risk of
adverse price trends or static markets in the major U.S., European and
Japanese indices.
Metals.
- -------
The Partnership's primary metals market exposure is to fluctuations in the
price of both precious and base metals. As of December 31, 2000, the
Partnership's primary exposures were to copper, aluminum, gold and silver.
The General Partner anticipates that the Partnership will continue to be
exposed to the metals markets.
Agriculture.
- ------------
The Partnership's primary agriculture commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. The Partnership's agriculture commodities exposure was
primarily to coffee and soy bean oil as of December 31, 2000. The General
Partner anticipates that agriculture commodities such as grains, meats and
fibers will be a potential market exposure.
Currency and Currency Indices.
- ------------------------------
The Partnership's currency exposure is to exchange rate fluctuations,
primarily fluctuations which disrupt the historical pricing relationships
between different currencies and currency pairs. These fluctuations are
influenced by interest rate changes as well as political and general economic
conditions. The Partnership trades long and short positions in a large number
of currencies, including cross-currency positions between two currencies other
than the U.S. dollar. As of December 31, 2000, the Partnership's primary
exposures were in Eurodollars and Swiss francs. The General Partner
anticipates that the risk profile of the Partnership's currency sector will
predominantly relate to the U.S. and major European and Asian countries.
The currency trading Value at Risk figure includes foreign margin amounts
converted into U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
Interest Rates
- --------------
Interest rate movements directly affect the value of commodity interests
related to U.S. and foreign bonds and bond indices, and indirectly affect the
value of its equity index and currency positions. Interest rate movements in
on country, as well as relative interest rate movements between countries, can
materially impact the Partnership's profitability. The Partnership's primary
interest rate exposure is to interest rate fluctuations in the United States
and the major European and Asian countries. However, the Partnership may also
take positions affected by interest rates on the government debt of smaller
nations, such as Australia. The General Partner anticipates that interest
rates in such major countries will be a primary market exposure of the
Partnership for the foreseeable future. The changes in interest rates which
would likely have the most effect on the Partnership are changes in long-term,
as opposed to short-term, rates. Most of the financial instruments underlying
the commodity interests held be the Partnership during the year were medium- to
long-term instruments. Consequently, even a material change in short-term
rates might have little effect on the Partnership were medium- to long-term
rates to remain steady.
Energy
- ------
The Partnership's energy market exposure is to gas and oil price movements,
often resulting from political developments in the Middle East.
Disclosures About Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not
needed to maintain margin requirements. However, these balances (as well as
the market risk they represent) are immaterial.
The Partnership also has non-trading cash flow risk as a result of investing
a substantial portion of its assets in interest-bearing deposits with brokers.
If short-term interest rates decline, then cash flow from interest income
related to broker deposits will also decline.
Qualitative Disclosures About Managing Risk Exposure
The means by which the General Partner and the Advisors attempt to manage
the risk of the Partnership's open positions is essentially the same in all
market categories traded. The General Partner attempts to manage market
exposure by (i) diversifying the Partnership's assets among different
Advisors whose strategies focus on different market sectors and trading
approaches, and (ii) monitoring the Partnership's actual market exposures on
a daily basis and reallocating assets away from Advisors, as necessary, if an
over-concentration develops and persists in any one market sector or market
sensitive commodity interest. Each Advisor applies its own risk management
policies to its trading. These Advisor policies generally limit the total
exposure that may be taken per "risk unit" of assets under management. In
addition, many Advisors follow diversification guidelines (often formulated
in terms of the maximum margin which they will commit to positions in any one
contract or group of related contracts), as well as imposing "stop-loss"
points at which open positions must be closed out. Certain Advisors treat
their risk control policies as strict rules; others only as general
guidelines for controlling risk.
Item 8. Financial Statements and Supplementary Data.
Financial statements meeting the requirements of Regulation S-X are listed
on page F-1 of this report. The Supplementary Financial information
specified by Item 302 of Regulation S-K is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Partnership.
The Partnership is a limited partnership and therefore does not have any
directors or officers. The Partnership's General Partner, ProFutures, Inc.,
administers and manages the affairs of the Partnership.
Item 11. Executive Compensation.
As discussed above, the Partnership does not have any officers, directors or
employees. The General Partner and the Partnership's former co-general
partner (see disclosure in item 1. Business) received monthly management
fees which aggregated $1,784,222 for 2000, or approximately 4% of the
Partnership's Net Asset Value.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) As of December 31, 2000, a total of 19,974 Units are issued and
outstanding, representing 1 General Partner and 1,514 Limited
Partners. The Partnership knows of no one person who owns
beneficially more than 5% of the Limited Partners' Units.
(b) The General Partner and its principals owned 225 General Partnership
Units as of December 31, 2000, having an aggregate value of $455,817,
which is approximately 1% of the Net Asset Value of the Partnership.
(c) Changes in control. None have occurred and none are expected.
Item 13. Certain Relationships and Related Transactions.
The Partnership's Prospectus, dated July 31, 1994, Pages 16-18, which is
incorporated herein by reference, contains information concerning the
relationships and transactions between the General Partners, the Clearing
Broker and the Partnership.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a)(1) Financial Statements.
See Index to Financial Statements on page F-1.
The financial statements begin on page F-3.
(a)(2) Schedules are omitted for the reason that all required information
is contained in the financial statements included in (a)(1) above
or are not applicable.
(a)(3) Exhibits as required by Item 601 of Regulation S-K.
*1.1 Form of Selling Agreement between the Partnership and
ProFutures Financial Group, Inc.
*1.2 Form of Additional Selling Agents Agreement between
ProFutures Financial Group, Inc. and certain
Additional Selling Agents.
*3.1 Agreement of Limited Partnership (attached to the
Prospectus as Exhibit A).
*3.2 Subscription Agreement and Power of Attorney (attached
to the Prospectus as Exhibit B).
*3.3 Request for Redemption Form (attached to the
Prospectus as Exhibit C).
*5.1 Opinion of Counsel as to the legality of the Units.
*8.1 Tax Opinion of Counsel
*10.2 Form of Brokerage Agreement between the Partnership and
Quantum Financial Services, Inc.
*10.3 Form of Stock Subscription Agreement by and between
ING (U.S.) Securities, Futures & Options Inc. and
ProFutures, Inc.
- -----------------------
* The foregoing forms of exhibits were filed in the April 6, 1987
Registration Statement No. 33-13008 and/or Post-Effective Amendment No. 1
thereto filed March 11, 1988, and/or the June 5, 1991 Registration
Statement No. 33-41073, and/or Pre-Effective Amendment No. 1 thereto filed
August 8, 1991, and/or Post-Effective Amendment No. 1 thereto filed
March 26, 1992; and/or the October 14, 1992 Registration Statement
No. 33-53324, and/or the November 17, 1992 Pre-effective Amendment No. 1
thereto and/or the July 2, 1993 Registration Statement No. 33-65596, and/
or the Pre-Effective Amendment No. 1 thereto filed August 16, 1993, and
Supplement dated December 3, 1993, Post-Effective Amendment No. 2 thereto
filed June 30, 1994 and Supplement dated January 31, 1995, and/or Post-
Effective Amendment No. 3 dated June 23, 1995. Exhibit 10.3 was filed
with the 1998 Form 10-K. Accordingly, such exhibits are incorporated
herein by reference and notified herewith.
(b) Reports on Form 8-K.
On June 19, 2000, the Partnership filed a Current Report on Form 8-K
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
(c) Exhibits.
None.
(d) Financial Statement Schedules.
Not Applicable or information included in the financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROFUTURES DIVERSIFIED FUND, L.P.
(Partnership)
By /s/ GARY D. HALBERT
- -------------------------- ----------------------------------
Date Gary D. Halbert, President
ProFutures, Inc., General Partner
ProFutures Diversified Fund, L.P.
PROFUTURES DIVERSIFIED FUND, L.P.
-----------------
TABLE OF CONTENTS
-----------------
PAGES
-----
Independent Auditors' Reports F-2
Financial Statements
Statements of Financial Condition
December 31, 2000 and 1999 F-3
Statements of Operations For the Years
Ended December 31, 2000, 1999 and 1998 F-4
Statements of Changes in Partners' Capital (Net Asset Value)
For the Years Ended December 31, 2000, 1999 and 1998 F-5
Notes to Financial Statements F-6 - F-9
F-1
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Partners
ProFutures Diversified Fund, L.P.
We have audited the accompanying statements of financial condition of
ProFutures Diversified Fund, L.P. as of December 31, 2000 and 1999, and the
related statements of operations and changes in partners' capital (net asset
value) for the years ended December 31, 2000, 1999 and 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ProFutures Diversified
Fund, L.P. as of December 31, 2000 and 1999, and the results of its operations
and the changes in its net asset values for the years ended December 31, 2000,
1999 and 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
Hunt Valley, Maryland
January 25, 2001
F-2
PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
-------------
2000 1999
---- ----
ASSETS
Equity in broker trading accounts
Cash $41,325,905 $69,288,791
Net option premiums paid 0 177,987
Unrealized gain on open contracts 1,308,633 3,397,872
----------- -----------
Deposits with brokers 42,634,538 72,864,650
Cash 2,643 0
----------- -----------
Total assets $42,637,181 $72,864,650
=========== ===========
LIABILITIES
Cash overdraft $ 0 $ 12,509
Accounts payable 21,133 3,226
Commissions and other trading fees
on open contracts 17,533 45,053
Incentive fees payable 365,030 529,684
Management fees payable 350,217 491,897
Redemptions payable 1,412,631 1,358,905
----------- -----------
Total liabilities 2,166,544 2,441,274
----------- -----------
PARTNERS' CAPITAL (Net Asset Value)
General Partner - 225 and 427 units
outstanding at December 31, 2000 and 1999 455,817 1,075,348
Limited Partners - 19,749 and 27,573 units
outstanding at December 31, 2000 and 1999 40,014,820 69,348,028
----------- -----------
Total partners' capital
(Net Asset Value) 40,470,637 70,423,376
----------- -----------
$42,637,181 $72,864,650
=========== ===========
See accompanying notes.
F-3
PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
-------------
2000 1999 1998
---- ---- ----
INCOME
Trading gains (losses)
Realized $ (8,292,461) $ 1,352,473 $ 19,109,408
Change in unrealized (2,089,239) 2,464,741 (3,138,069)
------------ ------------ ------------
Gain (loss) from trading (10,381,700) 3,817,214 15,971,339
Interest income 3,045,014 3,582,696 4,335,995
------------ ------------ ------------
Total income (loss) (7,336,686) 7,399,910 20,307,334
------------ ------------ ------------
EXPENSES
Brokerage commissions 1,924,222 2,572,880 3,224,156
Incentive fees 1,049,494 1,765,210 4,355,728
Management fees 2,906,733 4,167,022 4,309,041
Operating expenses 210,596 195,107 340,488
------------ ------------ ------------
Total expenses 6,091,045 8,700,219 12,229,413
------------ ------------ ------------
NET INCOME (LOSS) $(13,427,731) $ (1,300,309) $ 8,077,921
============ ============ ============
NET INCOME (LOSS) PER GENERAL
AND LIMITED PARTNER UNIT
(based on weighted average
number of units outstanding
during the period of 31,041,
36,050 and 40,974,
respectively) $ (548.00) $ (41.89) $ 224.08
============ ============ ============
INCREASE (DECREASE) IN NET ASSET
VALUE PER GENERAL AND LIMITED
PARTNER UNIT $ (488.89) $ (44.42) $ 246.05
============ ============ ============
See accompanying notes.
F-4
PROFUTURES DIVERSIFIED FUND, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1999, 1998 and 1997
-------------
Total Partners' Capital
Number of ----------------------------------------
Units General Limited Total
--------- ---------- ------------ ------------
Balances at
December 31, 1997 38,501 $1,328,151 $ 87,741,893 $ 89,070,044
Net income for
the year ended
December 31, 1998 112,878 7,965,043 8,077,921
Redemptions (5,074) (330,000) (11,261,466) (11,591,466)
------ ---------- ------------ ------------
Balances at
December 31, 1998 33,427 1,111,029 84,445,470 85,556,499
Net (loss) for
the year ended
December 31, 1999 (19,570) (1,280,739) (1,300,309)
Redemptions (5,427) (16,111) (13,816,703) (13,832,814)
------ ---------- ------------ ------------
Balances at
December 31, 1999 28,000 $1,075,348 $ 69,348,028 $ 70,423,376
Net (loss) for
the year ended
December 31, 2000 (202,864) (13,224,867) (13,427,731)
Redemptions (8,026) (416,667) (16,108,341) (16,525,008)
------ ---------- ------------ ------------
Balances at
December 31, 2000 19,974 $ 455,817 $ 40,014,820 $ 40,470,637
====== ========== ============ ============
Net Asset Value Per Unit
---------------------------------
December 31,
2000 1999 1998
---- ---- ----
$2,026.18 $2,515.07 $2,559.49
========= ========= =========
See accompanying notes.
F-5
PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
-------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
A. General Description of the Partnership
ProFutures Diversified Fund, L.P. (the Partnership) is a Delaware
limited partnership which operates as a commodity investment pool.
The Partnership engages in the speculative trading of futures
contracts and other financial instruments.
Effective June 1, 2000, the Partnership changed its name from ATA
Research/ProFutures Diversified Fund, L.P. to ProFutures
Diversified Fund, L.P.
B. Regulation
As a registrant with the Securities and Exchange Commission, the
Partnership is subject to the regulatory requirements under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
As a commodity investment pool, the Partnership is subject to the
regulations of the Commodity Futures Trading Commission, an agency
of the United States (U.S.) government which regulates most
aspects of the commodity futures industry; rules of the National
Futures Association, an industry self-regulatory organization; and
the requirements of commodity exchanges and Futures Commission
Merchants (brokers) through which the Partnership trades.
C. Method of Reporting
The Partnership's financial statements are presented in
accordance with generally accepted accounting principles, which
require the use of certain estimates made by the Partnership's
management. Transactions are accounted for on the trade date.
Gains or losses are realized when contracts are liquidated.
Unrealized gains or losses on open contracts (the difference
between contract purchase price and quoted market price) are
reflected in the statement of financial condition 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.
For purposes of both financial reporting and calculation of
redemption value, Net Asset Value per Unit is calculated by
dividing Net Asset Value by the number of outstanding Units.
D. Brokerage Commissions
Brokerage commissions include other trading fees and are charged
to expense when contracts are opened.
F-6
PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
-----------------------------------------------------------
E. Income Taxes
The Partnership prepares calendar year U.S. and state information
tax returns and reports to the partners their allocable shares of
the Partnership's income, expenses and trading gains or losses.
F. Foreign Currency Transactions
The Partnership's functional currency is the U.S. dollar; however,
it transacts business in currencies other than the U.S. dollar.
Assets and liabilities denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in
effect at the date of the statement of financial condition.
Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in
effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in income currently.
Note 2. GENERAL PARTNER(S)
------------------
The General Partner of the Partnership is ProFutures, Inc., which
conducts and manages the business of the Partnership. ATA Research,
Inc. (ATA) was Co-General Partner until its withdrawal effective
October 1, 2000. The Agreement of Limited Partnership requires the
General Partner(s) to contribute to the Partnership an amount in the
aggregate equal to at least the greater of (i) 3% of the aggregate
initial capital contributions of all partners or $100,000, whichever
is less, or (ii) 1% of the aggregate initial capital contributions of
all partners.
The Agreement of Limited Partnership also requires that the General
Partner(s) maintain in the aggregate a net worth at least equal to
(i) the lesser of $250,000 or 15% of the aggregate initial capital
contributions of any limited partnerships for which they act as
general partner and which are capitalized at less than $2,500,000;
and (ii) 10% of the aggregate initial capital contributions of any
limited partnerships for which they act as general partner and which
are capitalized at greater than $2,500,000.
ProFutures, Inc. has callable subscription agreements with ING (U.S.)
Securities, Futures & Options, Inc. (ING), the Partnership's primary
broker, whereby ING has subscribed to purchase (up to $14,000,000) the
number of shares of common stock of ProFutures, Inc. necessary to
maintain the General Partners' net worth requirements.
A monthly management fee is paid by the Partnership to each General
Partner. ATA received 1/12 of 1% of month-end Net Asset Value
(approximately 1% annually) through May 31, 2000, and ProFutures, Inc.
receives 1/4 of 1% of month-end Net Asset Value (approximately 3%
annually).
F-7
PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 2. GENERAL PARTNERS (CONTINUED)
----------------------------
Total management fees earned by ProFutures, Inc. for the years ended
December 31, 2000, 1999 and 1998 were $1,538,392, $2,385,225 and
$2,538,261, respectively. Management fees payable to ProFutures,
Inc. as of December 31, 2000 and 1999 were $105,563 and $181,545,
respectively. Total management fees earned by ATA for the years
ended December 31, 2000, 1999 and 1998 were $245,830, $795,075 and
$846,087, respectively. The management fee payable to ATA as of
December 31, 1999 was $60,515.
Note 3. CONSULTANT
----------
Effective June 1, 2000, Kenmar Global Strategies Inc. (Kenmar) serves
as a consultant and performs similar functions as those previously
performed by ATA. Kenmar assists the General Partner in making
decisions about which commodity trading advisors to hire, the
allocations among the advisors and the day-to-day monitoring and risk
management of the Partnership's trading activities. Kenmar receives
a monthly management fee of 1/12 of 1% of month-end Net Asset Value
(approximately 1% annually).
Note 4. COMMODITY TRADING ADVISORS
--------------------------
The Partnership has trading advisory contracts with several commodity
trading advisors to furnish investment management services to the
Partnership. Certain advisors receive management fees ranging from 1%
to 2% annually of Allocated Net Asset Value (as defined in each
respective trading advisory contract). In addition, the trading
advisors receive quarterly incentive fees ranging from 20% to 27.5%
of Trading Profits (as defined).
Note 5. DEPOSITS WITH BROKERS
---------------------
The Partnership deposits funds with brokers subject to Commodity
Futures Trading Commission regulations and various exchange and broker
requirements. Margin requirements are satisfied by the deposit of
cash with such brokers. The Partnership earns interest income on its
assets deposited with the brokers.
Note 6. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
--------------------------------------------
Investments in the Partnership were made by subscription agreement,
subject to acceptance by the General Partner. The Partnership's most
recent offering of Units of Limited Partnership Interest terminated
on April 30, 1995.
The Partnership is not required to make distributions, but may do so
at the sole discretion of the General Partner. A Limited Partner may
request and receive redemption of units owned, subject to restrictions
in the Agreement of Limited Partnership.
F-8
PROFUTURES DIVERSIFIED FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------
Note 7. TRADING ACTIVITIES AND RELATED RISKS
------------------------------------
The Partnership engages in the speculative trading of U.S. and foreign
futures contracts and options on U.S. and foreign futures contracts
(collectively, "derivatives"). The Partnership 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 according to the terms of a contract.
Purchase and sale of futures and options on futures contracts requires
margin deposits with the brokers. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act
requires a broker to segregate all customer transactions and assets
from such broker's proprietary activities. A customer's cash and
other property (for example, U.S. Treasury bills) deposited with a
broker are considered commingled with all other customer funds subject
to the broker's segregation requirements. In the event of a broker's
insolvency, recovery may be limited to a pro rata share of segregated
funds available. It is possible that the recovered amount could be
less than total cash and other property deposited.
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Partnership is exposed to a market risk
equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short. As both a buyer and seller of
options, the Partnership pays or receives a premium at the outset and
then bears the risk of unfavorable changes in the price of the
contract underlying the option. Written options expose the
Partnership to potentially unlimited liability, and purchased options
expose the Partnership to a risk of loss limited to the premiums paid.
The Partnership has a portion of its assets on deposit with a
financial institution in connection with its cash management
activities. In the event of a financial institution's insolvency,
recovery of Partnership assets on deposit may be limited to account
insurance or other protection afforded such deposits.
The General Partner has established procedures to actively monitor
market risk and minimize credit risk, although there can be no
assurance that it will, in fact, succeed in doing so. The General
Partner's basic market risk control procedures consist of continuously
monitoring the trading activity of the various trading advisors, with
the actual market risk controls being applied by the advisors
themselves. The General Partner seeks to minimize credit risk
primarily by depositing and maintaining the Partnership's assets at
financial institutions and brokers which the General Partner 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.
F-9