FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 2004
Commission File Number 333-110076
CITIGROUP DIVERSIFIED FUTURES FUND L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-4224248
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Citigroup Managed Futures LLC
399 Park Avenue. - 7th Fl.
New York, New York 10022
- --------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
(212) 559-2011
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
CITIGROUP DIVERSIFIED FUTURES FUND L.P.
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statements of Financial Condition
at June 30, 2004 and December 31, 2003
(unaudited). 3
Condensed Schedules of Investments
at June 30, 2004 and December 31, 2003
(unaudited). 4 - 5
Statements of Income and Expenses and Partners'
Capital for the three and six months ended June
30, 2004 and the period from May 1, 2003 to
June 30, 2003 (unaudited). 6
Statements of Cash Flows for the three and six
months ended June 30, 2004 and the period from
May 1, 2003 to June 30, 2003 (unaudited). 7
Notes to Financial Statements
(unaudited). 8 - 13
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 14 - 16
Item 3. Quantitative and Qualitative
Disclosures about Market Risk. 17 - 18
Item 4. Controls and Procedures. 19
PART II - Other Information 20
2
PART I
Item 1. Financial Statements
Citigroup Diversified Futures Fund L.P.
Statements of Financial Condition
(Unaudited)
June 30, December 31,
2004 2003
---------------------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $70,292,782 and $51,477,101 in 2004
and 2003, respectively) $589,883,355 $257,578,919
Net unrealized appreciation on open future positions 2,000,084 17,800,021
Unrealized appreciation on open forward positions 7,324,966 30,377,162
------------ ------------
599,208,405 305,756,102
Interest receivable 408,830 156,623
------------ ------------
$599,617,235 $305,912,725
============ ============
Liabilities and Partners' Capital:
Liabilities:
Unrealized depreciation on open forward positions $ 14,710,793 $ 14,015,116
Accrued expenses:
Commissions 2,636,793 1,363,440
Management fees 912,544 492,603
Incentive fees -- 3,882,573
Other 106,594 518,678
Due to CGM 408,823 504,682
Redemptions payable 3,467,672 596,375
------------ ------------
22,243,219 21,373,467
------------ ------------
Partners' Capital:
General Partner, 6,432.4272 and 2,948.5938 Unit
equivalents outstanding in 2004 and 2003,
respectively 5,750,075 2,853,089
Limited Partners, 639,455.0364 and 291,114.1310
Redeemable Units of Limited Partnership Interest
outstanding in 2004 and 2003, respectively 571,623,941 281,686,169
------------ ------------
577,374,016 284,539,258
------------ ------------
$599,617,235 $305,912,725
============ ============
See Accompanying Notes to Unaudited Financial Statements.
3
Citigroup Diversified Futures Fund L.P.
Condensed Schedule of Investments
June 30, 2004
(Unaudited)
Sector Contract Fair Value
-------------------------------- ------------------------------------------------- --------------------
Currencies Futures contracts purchased 0.25% $ 1,436,372
Futures contracts sold (0.01)% (59,500)
--------------------
Total futures contracts 0.24% 1,376,872
Unrealized appreciation on forward contracts 0.20% 1,171,335
Unrealized depreciation on forward contracts (0.77)% (4,467,411)
--------------------
Total forward contracts (0.57)% (3,296,076)
--------------------
Total Currencies (0.33)% (1,919,204)
--------------------
Energy Futures contracts purchased 0.13% 725,776
Futures contracts sold 0.01% 79,445
--------------------
Total Energy 0.14% 805,221
--------------------
Grains
Futures contracts purchased (0.00)%* (24,890)
Futures contracts sold 0.30% 1,771,004
--------------------
Total Grains 0.30% 1,746,114
--------------------
Interest Rates U.S.
Futures contracts purchased 0.03% 196,331
Futures contracts sold (0.49)% (2,856,048)
--------------------
Total Interest Rates U.S. (0.46)% (2,659,717)
--------------------
Interest Rates Non-U.S.
Futures contracts purchased 0.08% 491,642
Futures contracts sold (0.63)% (3,653,912)
--------------------
Total Interest Rates Non-U.S. (0.55)% (3,162,270)
--------------------
Total Livestock (0.06)% Futures contracts purchased (0.06)% (349,420)
--------------------
Metals
Futures contracts sold (0.00)%* (16,063)
--------------------
Unrealized appreciation on forward contracts 1.06% 6,153,631
Unrealized depreciation on forward contracts(1.77)% (10,243,382)
--------------------
Total forward contracts (0.71)% (4,089,751)
--------------------
Total Metals (0.71)% (4,105,814)
--------------------
Softs
Futures contracts purchased (0.10)% (595,601)
Futures contracts sold 0.58% 3,347,438
--------------------
Total Softs 0.48% 2,751,837
--------------------
Indices
Futures contracts purchased 0.27% 1,571,023
Futures contracts sold (0.01)% (63,513)
--------------------
Total Indices 0.26% 1,507,510
--------------------
Total Fair Value (0.93)% $(5,385,743)
====================
% of Investments
Country Composition Investments at Fair Value at Fair Value
-------------------------------- ------------------------------------------------- --------------------
Australia $ 195,541 3.63%
Canada (5,332) (0.10)
Germany (379,912) (7.06)
France (20,813) (0.39)
Hong Kong (21,059) (0.39)
Italy 12,557 0.23
Japan (712,041) (13.22)
Spain (8,134) (0.15)
United Kingdom (4,745,153) (88.11)
United States 298,603 5.54
------------------------------------------------- --------------------
$ (5,385,743) 100.00%
================================================= ====================
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See Accompanying Notes to Unaudited Financial Statements.
4
Citigroup Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2003
(Unaudited)
Sector Contract Fair Value
- ------------------------------------- ------------------------------------------------------ ---------------------
Currencies Futures contracts purchased 2.51% $7,150,913
Unrealized appreciation on forward contracts 3.53% 10,050,285
Unrealized depreciation on forward contracts (1.18)% (3,361,363)
----------
Total forward contracts 2.35% 6,688,922
----------
Total Currencies 4.86% 13,839,835
----------
Total Energy 0.32% Futures contracts purchased 0.32% 918,336
----------
Grains
Futures contracts purchased 1.48% 4,215,187
Futures contracts sold (0.04)% (121,489)
----------
Total Grains 1.44% 4,093,698
----------
Total Interest Rates U.S. (0.28)% Futures contracts purchased (0.28)% (804,802)
----------
Total Interest Rates Non-U.S. 0.04% Futures contracts purchased 0.04% 112,457
----------
Total Livestock 0.02% Futures contracts sold 0.02% 63,740
----------
Metals Futures contracts purchased 1.16% 3,300,370
Unrealized appreciation on forward contracts 7.14% 20,326,877
Unrealized depreciation on forward contracts (3.74)% (10,653,753)
-----------
Total forward contracts 3.40% 9,673,124
----------
Total Metals 4.56% 12,973,494
----------
Softs Futures contracts purchased (0.17)% (496,910)
Futures contracts sold (0.03)% (99,097)
----------
Total Softs (0.20)% (596,007)
----------
Indices Futures contracts purchased 1.31% 3,720,687
Futures contracts sold (0.06)% (159,371)
----------
Total Indices 1.25% 3,561,316
----------
Total Fair Value 12.01% $34,162,067
===========
Investments % of Investments
Country Composition at Fair Value at Fair Value
- -------------------------- -------------------------- --------------------------
Australia $ 50,709 0.15%
France 57,661 0.17
Germany 822,316 2.41
Hong Kong 7,677 0.02
Japan 29,424 0.09
Spain 124,523 0.36
United Kingdom 10,395,703 30.43
United States 22,674,054 66.37
-------------------------- --------------------------
$34,162,067 100.00%
========================== ==========================
Percentages are based on Partners' capital unless otherwise indicated
See accompanying notes to unaudited financial statements.
5
Citigroup Diversified Futures Fund L.P.
Statement of Income and Expenses and Partners' Capital
(Unaudited)
Period From
May 1, 2003
Three Months (Commencement of Six Months
Ended Trading Operations) Ended
June 30, 2004 To June 30, 2003 June 30, 2004
--------------------------------------------------
Income:
Net losses on trading of commodity futures:
Realized gains (losses) on closed positions $ (35,628,927) $ (1,905,306) $ 5,803,009
Change in unrealized losses on open
positions (48,078,157) (3,107,544) (39,547,810)
------------- ------------- -------------
(83,707,084) (33,744,801) (5,012,850)
Interest income 1,064,482 84,276 1,779,251
------------- ------------- -------------
(82,642,602) (4,928,574) (31,965,550)
------------- ------------- -------------
Expenses:
Brokerage commissions and including clearing fees
of $356,690, $20,316 and $671,052, respectively 8,695,357 606,034 15,212,142
Management fees 2,614,225 196,657 4,601,003
Incentive fees -- -- 6,625,747
Organizational costs -- 35,000 --
Other 92,361 53,052 128,981
------------- ------------- -------------
11,401,943 890,743 26,567,873
------------- ------------- -------------
Net loss (94,044,545) (58,533,423) (5,819,317)
Additions - Limited Partners 203,195,000 46,308,000 362,982,000
- General Partner 1,910,000 466,000 3,480,000
Redemptions - Limited Partners (9,559,850) -- (15,093,819)
------------- ------------- -------------
Net increase in Partners' capital 101,500,605 292,834,758 40,954,683
Proceeds from offering - Limited Partners -- 36,616,000 --
- General Partner -- 366,000 --
Offering costs -- (615,000) --
Partners' capital, beginning of period 475,873,411 -- 284,539,258
------------- ------------- -------------
Partners' capital, end of period $ 577,374,016 $ 77,321,683 $ 577,374,016
============= ============= =============
Net asset value per Unit
(645,887.4636 and 80,748.7843 Units outstanding at
June 30, 2004 and 2003, respectively) $ 893.92 $ 957.56 $ 893.92
============= ============= =============
Net loss per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (163.93) $ (25.81) $ (73.69)
============= ============= =============
Redemption Net asset value per Unit $ 894.53 $ 965.22 $ 894.53
============= ============= =============
See Accompanying Notes to Unaudited Financial Statements
6
Citigroup Diversified Futures Fund L.P.
Statement of Cash Flows
(Unaudited)
For the period from
May 1, 2003
(commencement of
Three months trading operations) Six months
ended June 30, to June 30, ended June 30,
-------------------------------------------------
2004 2003 2004
-------------------------------------------------
Cash flows from operating activities:
Net loss $ (94,044,545) $ (5,819,317) $ (58,533,423)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Changes in operating assets and liabilities:
Net unrealized appreciation on open futures positions 39,069,854 2,155,668 15,799,937
Unrealized appreciation on open forward contracts 9,429,390 (477,296) 23,052,196
Increase in interest receivable (100,388) (56,164) (252,207)
Liabilities:
Unrealized appreciation (depreciation) on open forward
contracts (421,087) 1,429,172 695,677
Accrued expenses:
Increase in commissions 358,976 354,734 1,273,353
Increase in management fees 121,193 128,332 419,941
Decrease in incentive fees (6,625,747) -- (3,882,573)
Increase (decrease) in due to CGM (48,411) 631,956 (95,859)
Increase (decrease) in other (413,076) 52,976 (412,084)
Increase in redemptions payable 1,032,681 -- 2,871,297
------------- ------------- -------------
Net cash used in operating activities (51,641,160) (1,599,939) (19,063,745)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from additions Limited Partners 203,195,000 46,308,000 362,982,000
Proceeds from additions General Partners 1,910,000 466,000 3,480,000
Payments for redemptions (9,559,850) -- (15,093,819)
Payments for offering costs -- (615,000) --
------------- ------------- -------------
Net cash provided by (used in) financing activities 195,545,150 46,159,000 351,368,181
------------- ------------- -------------
Net change in cash 143,903,990 44,559,061 332,304,436
Cash, at beginning of period 445,979,365 36,982,000 257,578,919
------------- ------------- -------------
Cash, at end of period $ 589,883,355 $ 81,541,061 $ 589,883,355
============= ============= =============
See Accompanying Notes to the Unaudited Financial Statements.
7
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
1. General:
Citigroup Diversified Futures Fund L.P. (the "Partnership") is a limited
partnership organized under the laws of the State of New York on December 3,
2002 to engage in the speculative trading of a diversified portfolio of
commodity interests including futures contracts, options and forward contracts.
The commodity interests that are traded by the Partnership are volatile and
involve a high degree of market risk.
Between March 27, 2003 (commencement of the offering period) and April 30,
2003, 36,616 redeemable Units of limited partnership interest ("Redeemable
Units") were sold at $1,000 per Redeemable Unit. The proceeds of the offering
were held in an escrow account until May 1, 2003, at which time they were turned
over to the Partnership for trading. The Partnership was authorized to sell
300,000 Redeemable Units of Limited Partnership Interest during the initial
offering period. As of December 4, 2003, the Partnership was authorized to sell
an additional 700,000 Redeemable Units of Limited Partnership Interest. The
Partnership continues to offer Redeemable Units.
On April 7, 2003, Smith Barney Futures Management LLC changed its name to
Citigroup Managed Futures LLC. Citigroup Managed Futures LLC acts as the general
partner (the "General Partner") of the Partnership. The Partnership's commodity
broker is Citigroup Global Markets Inc. ("CGM"), formerly Salomon Smith Barney
Inc. CGM is an affiliate of the General Partner. The General Partner is wholly
owned by Citigroup Global Markets Holdings Inc. ("CGMHI"), formerly Salomon
Smith Barney Holdings Inc., which is the sole owner of CGM. CGMHI is a wholly
owned subsidiary of Citigroup Inc. ("Citigroup"). As of June 30, 2004, all
trading decisions are made for the Partnership by Drury Capital Inc., ("Drury"),
Graham Capital Management, L.P., ("Graham"), John W. Henry & Company, Inc.,
("JWH"), Willowbridge Associates Inc. ("Willowbridge"), Aspect Capital Limited
("Aspect") and Capital Fund Management S.A. ("CFM") (each an Advisor and
collectively, the "Advisors").
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Partnership's financial
condition at June 30, 2004 and December 31, 2003, and the results of operations
and cash flows for the three and six months ended June 30, 2004 and the period
May 1, 2003 to June 30, 2003. These financial statements present the results of
interim periods and do not include all disclosures normally provided in annual
financial statements and notes included in the Partnership's annual report on
Form 10-K with the Securities and Exchange Commission for the year ended
December 31, 2003.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
8
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
2. Financial Highlights:
Changes in Net Asset Value per Redeemable Unit of Limited Partnership
Interest for the three and six months ended June 30, 2004 and the period May 1,
2003 (commencement of trading operations) to June 30, 2003 were as follows:
May 1, 2003
Three Months (commencement of Six Months
Ended june 30, trading operations) Ended June 30,
2004 to June 30, 2003 2004
---------------------------------------------------
Net realized and unrealized gains (losses) * $ (161.13) $ (12.92) $ (50.95)
Interest Income
1.80 1.46 3.58
Expenses **
(4.60) (14.35) (26.32)
--------- --------- -------
Decrease for the period (163.93) (25.81) (73.69)
Net Asset Value per Redeemable Unit,
beginning of period 1,057.85 1,000.00 967.61
Offering cost adjustment -- (16.63) --
--------- --------- -------
Net Asset Value per Redeemable Unit,
end of period $ 893.92 $ 957.56 $ 893.92
========= ========= =======
Redemption/subscription value per
Redeemable Unit versus
Net Asset Value per Redeemable Unit 0.61 7.66 0.61
--------- --------- -------
Redemption/subscription value per
Redeemable Unit,
end of period *** $ 894.53 $ 965.22 $ 894.53
========= ========= =======
* Includes brokerage commissions
** Excludes brokerage commissions
*** For the purpose of a redemption/subscription, any remaining deferred
liability for reimbursementof offering costs will not reduce
redemption/subscription net asset value.
9
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
May 1, 2003
(commencement of
Three Months trading operations) Six Months
Ended June 30, to June 30, Ended June 30,
2004 2004 2004
--------------- --------- ----------
Ratios to average net assets:****
Net investment loss before
incentive fees ***** (7.9)% (9.4)% (8.1)%
==== ==== ====
Operating expense 8.7% 10.4% 8.9%
Incentive fees - % - % 1.5%
---- ---- ----
Total expenses 8.7% 10.4% 10.4%
==== ==== ====
Total return:
Total return before incentive fees (15.5)% (2.6)% (6.6)%
Incentive fee - % - % (1.1)%
---- ---- ----
Total return after incentive fees (15.5)% (2.6)% (7.6)%
==== ==== ====
**** Annualized (other than incentive fees)
***** Interest income less total expenses (exclusive of incentive fees)
The above ratios may vary for individual investors based on the timing of
capital transactions during the period. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share
of income, expenses and average net assets.
10
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
3. Offering Costs:
Offering and organization costs of $650,000 relating to the issuance and
marketing of the partnership's Redeemable Units offered were initially paid by
CGM. These costs have been recorded as due to CGM in the statement of financial
condition. These costs are being reimbursed to CGM by the Partnership in 36
equal monthly installments (together with interest at the prime rate quoted by
the JP Morgan Chase & Co.).
As of June 30, 2004, $241,177 of these costs have been reimbursed to CGM by
the Partnership.
In addition, the Partnership has recorded interest expense of $25,926
through June 30, 2004 which is included in other expenses.
The remaining deferred liability for these costs due to CGM of $408,823
(exclusive of interest charges) will not reduce Net Asset Value per Redeemable
Unit for any purpose (other than financial reporting), including calculation of
advisory and brokerage fees and the redemption value of Redeemable Units.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activities are shown in the statements of income and expenses and partners'
capital.
The Customer Agreement between the Partnership and CGM gives the
Partnership the legal right to net unrealized gains and losses on open futures
positions.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair value of these interests during the six
months ended June 30, 2004 and during the period from May 1, 2003 through
December 31, 2003 based on a monthly calculation, were $20,144,173 and
$15,744,707, respectively. The fair value of these commodity interests,
including options thereon, if applicable, at June 30, 2004 and December 31, 2003
were $(5,385,743) and $34,162,067, respectively. Fair values for exchange traded
commodity futures and options are based on quoted market prices for those
futures and options.
11
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
5. Financial Instrument Risk:
In the normal course of its business the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
may include forwards, futures and options, whose values are based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, to purchase or sell other
financial instruments at specific terms at specified future dates, or, in the
case of derivative commodity instruments, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties and
include forwards and certain options.
Each of these instruments is subject to various risks similar to those
related to the underlying financial instruments including market and credit
risk. In general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of
a counterparty to perform according to the terms of a contract. Credit risk with
respect to exchange traded instruments is reduced to the extent that an exchange
or clearing organization acts as a counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized as unrealized appreciation in the statements
of financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has credit risk and concentration risk
because the sole counterparty or broker with respect to the Partnership's assets
is CGM.
12
Citigroup Diversified Futures Fund L.P.
Notes to Financial Statements
June 30, 2004
(Unaudited)
(Continued)
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk-adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of June 30, 2004.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash, net unrealized appreciation (depreciation) on open futures and forward
contracts, commodity options, if applicable, and interest receivable. Because of
the low margin deposits normally required in commodity futures trading,
relatively small price movements may result in substantial losses to the
Partnership. While substantial losses could lead to a decrease in liquidity, no
such losses occurred during the second quarter of 2004.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by realized and/or unrealized gains or losses
on commodity futures trading, expenses, interest income, additions and
redemptions of Redeemable Units and distributions of profits, if any.
For the six months ended June 30, 2004, Partnership capital increased
102.9% from $284,539,258 to $577,374,016. This increase was attributable to
additional sales of 364,002.7689 Redeemable Units of limited partnership
totaling $362,982,000 and 3,483.8334 General Partner Unit equivalents totaling
$3,480,000, which was partially offset by a net loss from operations of
$58,533,423 coupled with the redemption of 15,661.8635 Redeemable Units of
Limited Partnership totaling $15,093,819. Future redemptions could impact the
amount of funds available for investment in commodity contract positions in
subsequent months.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The commodity
interests are recorded on trade date and open contracts are recorded in the
statements of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
and foreign currencies for which market quotations are not readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the period. Realized gains (losses) and changes in unrealized
values on open positions are recognized in the period in which the contract is
closed or the changes occur and are included in net gains (losses) on trading of
commodity interests.
Foreign currency contracts are those contracts where the Partnership agrees
14
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the date of entry into the contracts and the forward rates at the
reporting dates, is included in the statement of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statements of income and expenses and partners'
capital.
Results of Operations
During the three months ended June 30, 2004, the Partnership Net Asset
Value per Redeemable Unit decreased 15.5% from $1,057.85 to $893.92. The
Partnership experienced a net trading loss before brokerage commissions and
related fees during the three months ended June 30, 2004 of $83,707,084. Losses
were primarily attributable to the trading of commodity contracts in currencies,
grains, U.S. and non-U.S. interest rates, indices and metals and were partially
offset by gains in energy and softs.
During the six months ended June 30, 2004, the Partnership Net Asset Value
per Redeemable Unit decreased 7.6% from $967.61 to $893.92. The Partnership
experienced a net trading loss before brokerage commissions and related fees
during the six months ended June 30, 2004 of $33,744,801. Losses were primarily
attributable to currencies, U.S. and non-U.S. interest rates, metals, softs and
indices and were partially offset by gains in energy, grains and livestock.
The lack of persistent trends resulted in a difficult environment for the
Advisors, which began precisely as the second quarter got underway. Trends in
both financial and commodity futures markets had been clear for the previous
three quarters. In the second quarter of 2004, however, substantially opposing
fundamental considerations along with benign short-term volatility greatly
reduced the opportunities for Advisors resulting in a particularly difficult
trading environment.
The directionless behavior of so many markets can be explained in terms of
a perception that a significant change may be underway in the global economic
cycle. Some of the primary drivers of these conditions have been: softer than
expected US economic data creating confusion with regard to forecasting the pace
of Federal Reserve tightening; U.S. and international bonds, equity and currency
markets coping with indications of rising inflation, but at the same time, an
apparent pause in growth; and a fragile Eurozone recovery keeping European
Central Bank monetary intervention on hold.
Trading in nearly all market sectors was unprofitable for the Partnership
except in the energy sector, base metals, and longer-term European interest
rates. The Asian interest rate and currency markets, global stock indices and
precious metals were the primary contributors to the losses while trading in
crude oil, cotton, soybeans and copper provided some profits for the Partnership
as prices continued in upward trends.
Commodity futures markets are highly volatile. The potential for broad and
15
rapid price fluctuations increases the risks involved in commodity trading, but
also increases the possibility of profit. The profitability of the Partnership
depends on the existence of major price trends and the ability of the Advisors
to correctly identify those price trends. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations.
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned at the monthly average 30-day U.S. Treasury bill yield. CGM may
continue to maintain the Partnership's assets in cash and/or place all of the
Partnership's assets in 90-day Treasury bills and pay the Partnership 80% of the
interest earned on the Treasury bills purchased. CGM will retain 20% of any
interest earned on Treasury bills. Interest income for the three and six months
ended June 30, 2004 totaled $1,064,482 and $1,779,251 respectively.
Brokerage commissions are calculated as a percentage of the Partnership's
adjusted net asset value on the last day of each month and are affected by
trading performance, additions and redemptions. Accordingly, they must be
compared in relation to the fluctuations in the monthly net asset values.
Commissions and fees for the three and six months ended June 30, 2004 totaled
$8,695,357 and $15,212,142, respectively.
Management fees are calculated as a percentage of the Partnership's net
asset value as of the end of each month and are affected by trading performance,
additions and redemptions. Management fees for the three and six months ended
June 30, 2004 totaled $2,614,225 and $4,601,003, respectively.
Incentive fees paid quarterly are based on the new trading profits
generated by each Advisor as defined in the management agreements between the
Partnership, the General Partner and each Advisor. Trading performance for the
three and six months ended June 30, 2004 resulted in incentive fees of $0 and
$6,625,747, respectively.
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair 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 the level and volatility of interest rates, exchange rates, equity
price levels, the value of financial instruments and contracts, the
diversification effects of the Partnership's open positions and the liquidity of
the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the 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 (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 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.
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 the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
interval. 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.
17
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of June 30, 2004 and the
highest, lowest and average value, during the three months ended June 30, 2004.
All open position trading risk exposures of the Partnership have been included
in calculating the figures set forth below. As of June 30, 2004, the
Partnership's total capitalization was $577,374,016. There has been no material
changes in the trading Value at Risk information previously disclosed in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 2003.
June 30, 2004
(Unaudited)
Three months ended
June 30, 2004
--------------------------------------------
% of Total High Low Average
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Value at Risk
- ---------------------------------------------------------------------------------------------------------------------------
Currencies:
-Exchange Traded Contracts $ 2,907,854 0.50% $ 6,776,046 $ 2,342,467 $ 3,035,811
-OTC Contracts 4,263,968 0.74% 7,106,220 1,193,312 4,839,661
Energy 8,748,004 1.52% 15,596,737 8,285,920 11,578,321
Grains 2,573,352 0.45% 6,367,828 1,736,123 2,802,448
Interest Rates U.S. 5,261,280 0.91% 10,822,975 3,967,650 6,130,460
Interest Rates Non -U.S. 14,461,000 2.50% 20,680,782 7,961,913 11,592,918
Livestock 716,000 0.12% 716,000 532,800 600,467
Metals
-Exchange Traded Contracts 1,287,000 0.22% 4,937,100 1,189,000 1,831,667
-OTC Contracts 3,459,390 0.60% 3,459,390 502,700 2,283,821
Softs 4,021,698 0.70% 4,976,250 2,752,406 3,455,400
Indices 12,970,991 2.25% 15,380,796 3,953,380 8,156,682
---------------------------------
Total $ 60,670,537 10.51%
=================================
18
Item 4. Controls and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of June 30, 2004, the Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures are effective.
During the Partnership's last fiscal quarter, no changes occurred in the
Partnership's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Partnership's
internal control over financial reporting.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following information supplements and amends our discussion set forth
under Part I, Item 3 "Legal Proceedings" in the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 and under Part II, Item 1,
"Legal Proceedings" in the Partnership's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004.
WorldCom, Inc.
On May 10, 2004, Citigroup announced that it had agreed to pay $2.65
billion to settle the WorldCom class action suits.
20
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
For the three months ended June 30, 2004, there were additional sales of
204,398.9529 Redeemable Units of Limited Partnership totaling $203,195,000
and contributions by the General Partner representing 1,916.9333 Units
equivalents totaling $1,910,000.
Proceeds from the sale of additional Redeemable Units are used in the
trading of commodity interests including futures contracts, options and
forward contracts.
The following chart sets forth the purchases of Redeemable Units by the
Partnership.
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number
Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate
Purchased* Unit)** Purchased as Part of Dollar Value) of
Publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
April 1, 2004 - 2,226.0168 965.65 N/A N/A
April 30, 2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
May 1, 2004 - 4,177.0527 943.96 N/A N/A
May 31, 2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
June 1, 2004 - 3,876.1876 894.53 N/A N/A
June 30, 2004
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Total 10,279.2571 $934.71 N/A N/A
- ------------------------------- ----------------------- ----------------------- ---------------------- -----------------------
* Generally, Limited Partners are permitted to redeem their Redeemable Units as
of the end of each month on 10 days' notice to the General Partner. Under
certain circumstances, the General Partner can compel redemption but to date the
General Partner has not exercised this right. Purchases of Redeemable Units by
the Partnership reflected in the chart above were made in the ordinary course of
the Partnership's business in connection with effecting redemptions for Limited
Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month
at the Net Asset Value per Redeemable Unit as of that day.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -None
21
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed by Item 601 of Regulation S-1 are
incorporated herein by reference to the exhibit index of the
Partnership's Annual Report on Form 10-K for the period ended December
31, 2003.
Exhibit - 31.1 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of President and Director)
Exhibit - 31.2 - Rule 13a-14(a)/15d-14(a) Certification (Certification
of Chief Financial Officer and Director)
Exhibit - 32.1 - Section 1350 Certification (Certification of
President and Director).
Exhibit - 32.2 - Section 1350 Certification (Certification of Chief
Financial Officer and Director).
(b) Reports on Form 8-K - None
22
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: Citigroup Managed Futures LLC
(General Partner)
By: /s/ David J. Vogel
---------------------
David J. Vogel
President and Director
Date: 8/06/04
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Date: 8/06/04
23
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citigroup Diversified
Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 6, 2004
/s/ David J. Vogel
-------------------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
24
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Citigroup Diversified
Futures Fund L.P. (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 6, 2004
/s/ Daniel R. McAuliffe, Jr.
---------------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
25
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Citigroup Diversified Futures
Fund L.P. (the "Partnership") on Form 10-Q for the period ending June 30, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David J. Vogel, President and Director of Citigroup Managed
Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
Date: August 6, 2004
---------------
/s/ David J. Vogel
---------------
David J. Vogel
Citigroup Managed Futures LLC
President and Director
26
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Citigroup Diversified Futures
Fund L.P. (the "Partnership") on Form 10-Q for the period ending June 30, 2004
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Daniel R. McAuliffe, Jr., Chief Financial Officer and Director of
Citigroup Managed Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
Date: August 6, 2004
---------------
/s/ Daniel R. McAuliffe, Jr.
- -----------------------
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
27