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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
December 31, 2004 333-108397
For the fiscal year ended Commission file number
THE FRONTIER FUND
(a Delaware Statutory Trust)
(Exact name of registrant as specified in its charter)
Delaware 36-6815533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Equinox Fund Management, LLC
1660 Lincoln Street, Suite 100, Denver, Colorado 80264
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 837-0600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The Frontier Fund's units of beneficial interest are not traded on any
market and, accordingly, do not have an aggregate market value. As of March 31,
2005, there were 635,863 Units outstanding for Balanced Series, 12,051 for Beach
Series, 4,536 for C-View Currency Series, 25,032 for Campbell/Graham Series,
22,877 for Dunn Series, and 95,512 for Graham Series . The Campbell/Graham
Series broke escrow and commenced operations on February 11, 2005.
Documents Incorporated by Reference
Portions of the Prospectus filed by the registrant on February 7, 2005,
pursuant to Rule 424(b)(3) of the Securities Act (File No. 333-119596) are
incorporated by reference into Part I and Part II of this report.
Table of Contents
Page
----
PART I
Item 1. Business .........................................................3
Item 2. Properties .......................................................5
Item 3. Legal Proceedings ................................................6
Item 4. Submission of Matters to a Vote of Security Holders ..............6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters .........7
Item 6. Selected Financial Data ..........................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .....................................9
Item 7A. Quantitative and Qualitative Disclosure About Market Risk .......15
Item 8. Financial Statements and Supplementary Data .....................20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .....................................20
Item 9A. Controls and Procedures .........................................20
PART III
Item 10. Directors and Executive Officers of the Registrant ..............21
Item 11. Executive Compensation ..........................................23
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...............................................24
Item 13. Certain Relationships and Related Transactions ..................25
Item 14. Principal Accounting Fees and Services ..........................25
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .....................................................27
Unless expressly stated otherwise, all information in this report is
as of December 31, 2004, and the Managing Owner undertakes no obligation to
update this information.
Information contained herein includes forward-looking statements that
reflect the Managing Owner's current expectations about the future results,
performance, prospects and opportunities of the Trust. The Managing Owner has
tried to identify these forward-looking statements by using words such as "may,"
"will," "expect," "anticipate,"
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"believe," "intend," "should," "estimate" or the negative of those terms or
similar expressions. These forward-looking statements are based on information
currently available to the Managing Owner and are subject to a number of risks,
uncertainties and other factors, both known, such as those described in "Risk
Factors" (incorporated herein by reference to the section captioned "Risk
Factors" from a Prospectus filed by the Trust on February 7, 2005) and elsewhere
in this report, and unknown, that could cause the Trust's actual results,
performance, prospects or opportunities to differ materially from those
expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements.
Except as expressly required by the federal securities laws, the Managing Owner
undertakes no obligation to publicly update or revise any forward-looking
statements or the risks, uncertainties or other factors described herein, as a
result of new information, future events or changed circumstances or for any
other reason after the date of this report.
Part I
Item 1. BUSINESS.
Overview
The Frontier Fund, which is referred to in this report as the Trust,
was formed on August 8, 2003, as a Delaware statutory trust. The Trust is a
multi-advisor commodity pool, as described in Commodity Futures Trading
Commission, or CFTC, Regulation (S) 4.10(d)(2). The Trust has authority to issue
separate series, or each, a Series, of units of beneficial interest, or the
Units, in segregated pools of assets of the Trust, pursuant to the requirements
of the Delaware Statutory Trust Act, as amended, or the Trust Act. The assets of
each Series are segregated from the assets of other Series. The Trust is not and
will not be registered as an investment company under the Investment Company Act
of 1940, as amended. It is managed by its Managing Owner, Equinox Fund
Management, LLC.
Purchasers of Units are limited owners of the Trust, or Limited
Owners. The Trust Act provides that, except as otherwise provided in the amended
and restated declaration of trust and trust agreement of the Trust dated as of
August 8, 2003 by and among the Managing Owner, Wilmington Trust Company as
trustee and the unitholders from time to time, or the Trust Agreement,
unitholders in a Delaware statutory trust will have the same limitation of
liability as do stockholders of private corporations organized under the General
Corporation Law of the State of Delaware. The Trust Agreement confers
substantially the same limited liability, and contains the same limited
exceptions thereto, as would a limited partnership agreement for a Delaware
limited partnership engaged in like transactions as the Trust. In addition,
pursuant to the Trust Agreement, the Managing Owner of the Trust is liable for
obligations of a Series in excess of that Series' assets. Limited Owners do not
have any such liability.
As of December 31, 2004, the Trust had five separate Series of Units
issued and outstanding: Balanced Series, Beach Series, C-View Currency Series,
Dunn Series and Graham Series. Each Series of Units have two separate
sub-classes issued and outstanding--Class 1 and Class 2. The Trust, with respect
to each Series:
. engages in the speculative trading of a diversified portfolio of
futures, forward (including interbank foreign currencies) and
options contracts and other derivative instruments and may, from
time to time, engage in cash and spot transactions;
. allocates funds to a subsidiary limited liability Trading Company
or Companies. Each Trading Company has one-year renewable
contracts with its own independent commodity trading advisor(s),
or each, a Trading Advisor, that will manage all or a portion of
such Trading Company's assets, make the trading decisions for the
assets of each Series vested in such Trading Company, segregate
its assets from any other Trading Company and maintain separate,
distinct records for each Series, and account for its assets
separately from the other Series and the other Trust assets;
. calculates the net assets, or the Net Asset Value, of its Units
separately from the other Series; and
. has an investment objective of increasing the value of the Units
over the long term (capital appreciation), while controlling risk
and volatility, and to offer exposure to the investment programs
of individual Trading Advisors and to specific instruments
(currencies).
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. aggregates all cash and equivalents for purposes of maximizing
returns at an equal rate for all Series. The assets of any
particular Series include only those funds and other assets that
are paid to, held by or distributed to the Trust on account of
and for the benefit of that Series. Under the "Inter-Series
Limitation on Liability" expressly provided for under Section
3804(a) of the Trust Act, strict segregation of the cash and
equivalents, though pooled for maximizing returns, is maintained
in the books and records of each Series.
Effective February 5, 2004, the Trust registered up to an aggregate of
$250 million of Units in all Series and all Sub-Classes for sale on a
Registration Statement on Form S-1 (File No. 333-108397). The Trust subsequently
registered up to an additional $46 million of Units in Balanced Series, Beach
Series, C-View Currency Series (Class 2 Units only), Dunn Series (Class 2 Units
only) and Graham Series on a Registration Statement on Form S-1MEF pursuant to
Rule 462(b) (File No. 333-116949). As of December 31, 2004, the Net Asset Value
of each Series of the Trust was $32,657,185 with respect to Balanced Series,
$667,421 with respect to Beach Series, $458,655 with respect to C-View Currency
Series,$2,393,669 with respect to Dunn Series, and $6,850,787 with respect to
Graham Series.
As of December 31, 2004, substantially all of the assets of Beach
Series, C-View Currency Series Dunn Series and Graham Series had been invested
in the Trading Company for such Series, and the assets of the Balanced Series
had been invested in several different Trading Companies. Each Trading Company
(except the Trading Company for the Balanced Series) has its own Trading Advisor
that will manage 100% of the assets invested in such Trading Company and make
that Trading Company's trading decisions. Between 10% and 40% of each Series'
assets are normally committed as margin for commodities trading, although these
percentages may substantially vary from time to time.
The Trading Advisors were selected based upon the Managing Owner's
evaluation of each Trading Advisor's past performance, trading portfolios and
strategies, as well as how each Trading Advisor's performance, portfolio and
strategies complement and differ from those of the other Trading Advisors. As of
December 31, 2004, none of the Trading Advisors nor any of their principals had
any beneficial interest in the Trust, except Dunn Capital Management Inc., or
Dunn, its principals and/or its affiliates, held 20,000 Units in the Dunn
Series, Class 1, valued at $2,115,476. For every $1.00 that is invested in the
Dunn Series by investors not affiliated with Dunn during each quarter, however,
Dunn, such principals, and/or such affiliates, have the right to withdraw $0.75
of its initial investment as of the end of such quarter. As of December 31,
2004, no other Trading Advisors or any principal of a Trading Advisor owned any
beneficial interest in the Trust, but any of them is free to do so.
Equinox Fund Management, LLC, a Delaware limited liability company
formed in June 2003, is the managing owner of the Trust. The Managing Owner
became registered with the CFTC as a commodity pool operator, or a CPO, as of
August 6, 2003, and has been a member of the National Futures Association, or
the NFA, in such capacity since that date. The Managing Owner's main business
office is located at 1660 Lincoln Street, Suite 100, Denver, Colorado 80264,
telephone (303) 837-0600. A description of the Managing Owner's responsibilities
to the Trust is contained in a Prospectus filed by the Trust on February 7, 2005
pursuant to Rule 424(b)(3) of the Securities Act (File No. 333-119596), which is
referred to herein as the "Prospectus," under the section captioned "Duties of
the Managing Owner," and such description is incorporated herein by reference
from the Prospectus.
Regulation
Under the Commodity Exchange Act, as amended, commodity exchanges and
commodity futures trading are subject to regulation by the CFTC. The NFA, a
registered futures association under the Commodity Exchange Act, is the only
non-exchange self-regulatory organization for commodity industry professionals.
The CFTC has delegated to the NFA responsibility for the registration of
"commodity trading advisors," "commodity pool operators," "futures commission
merchants," "introducing brokers" and their respective associated persons and
"floor brokers." The Commodity Exchange Act requires "commodity pool operators"
such as the Managing Owner "commodity trading advisors" and commodity brokers or
"futures commission merchants" such as the Trust's commodity brokers to be
registered and to comply with various reporting and recordkeeping requirements.
The Managing Owner and the Trust's commodity brokers are members of the NFA. The
CFTC may suspend a commodity pool operator's or a commodity trading advisor's
registration if it finds that its trading practices tend to disrupt orderly
market conditions, or as the result of violations of the Commodity Exchange Act
or rules and regulations promulgated thereunder. In the event that the Managing
Owner's registration as a commodity pool operator were terminated or suspended,
the Managing Owner
4
would be unable to continue to manage the business of the Trust. Should the
Managing Owner's registration be suspended, termination of the Trust may result.
In addition to such registration requirements, the CFTC and certain
commodity exchanges have established limits on the maximum net long and net
short positions which any person, including the Trust, may hold or control in
particular commodities. Most exchanges also limit the maximum changes in futures
contract prices that may occur during a single trading day. The Trust also
trades in dealer markets for forward and swap contracts, which are not regulated
by the CFTC. Federal and state banking authorities also do not regulate forward
trading or forward dealers. In addition, the Trust trades on foreign commodity
exchanges, which are not subject to regulation by any United States government
agency.
Operations
A description of the business of the Trust, including trading
approaches for each Series of Units, rights and obligations of the limited
owners, compensation arrangements and fees and expenses is contained in the
Prospectus, under the sections captioned "Risk Disclosure Statement," "Summary
of the Prospectus," "Risk Factors," "Structure of the Trust," "Trading
Limitation and Policies," "Description of the Trust, Trustee, Managing Owner and
Affiliates," "Actual and Potential Conflicts of Interest," "Fees and Expenses"
and the appendix attached to the Prospectus for each Series of Units, and such
description is incorporated herein by reference from the Prospectus.
The Trading Companies for each Series of Units engage in the
speculative trading of a diversified portfolio of futures, forward (including
interbank foreign currencies) and options contracts and other derivative
instruments and may, from time to time, engage in cash and spot transactions. A
brief description of the Trust's main types of investments is set forth below:
. A futures contract is a standardized contract traded on an
exchange that calls for the future delivery of a specified
quantity of a commodity at a specified time and place.
. A forward contract is an individually negotiated contract between
principals, not traded on an exchange, to buy or sell a specified
quantity of a commodity at or before a specified date at a
specified price.
. An option on a futures contract, forward contract or a commodity
gives the buyer of the option the right, but not the obligation,
to buy or sell a futures contract, forward contract or a
commodity, as applicable, at a specified price on or before a
specified date. Options on futures contracts are standardized
contracts traded on an exchange, while options on forward
contracts and commodities, referred to collectively in this
prospectus as over-the-counter options, generally are
individually negotiated, principal-to-principal contracts not
traded on an exchange.
. A swap contract generally involves an exchange of a stream of
payments between the contracting parties. Swap contracts
generally are not uniform and not exchange-traded.
. A spot contract is a cash market transaction in which the buyer
and seller agree to the immediate purchase and sale of a
commodity, usually with a two-day settlement. Spot contracts are
not uniform and not exchange-traded.
Item 2. PROPERTIES.
The Trust does not own or use any physical properties in the conduct
of its business. Its assets currently consist of cash items such as money market
funds, certificates of deposit (under nine months) and time deposits, and,
through each Trading Company, U.S. and international futures and forward
contracts and other interests in derivative instruments, including options
contracts on futures, forwards, swap contracts and spot contracts. The Trust's
main office is located at 1660 Lincoln Street, Suite 100, Denver, Colorado
80264.
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Item 3. LEGAL PROCEEDINGS.
The Trust is presently not involved in any legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
6
Part II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
No Units in any Series are publicly traded. The Units in each Series
may be redeemed, in whole or in part, on a daily basis, subject to the
conditions and restrictions provided in the Trust Agreement. In particular, if a
unitholder redeems all or a portion of its Class 1 Units of any Series on or
before the end of 12 full months following the effective date of the purchase of
the Units being redeemed, such unitholder is charged a redemption fee of up to
3.0% of the Net Asset Value at which the Units are redeemed. The Trust Agreement
also contains restrictions on the transfer or assignment of the Units.
The Managing Owner has the sole discretion in determining what
distributions, if any, the Trust will make to the unitholders. The Trust has not
effected distributions on the Units in any Series as of the date hereof and the
Managing Owner does not intend to effect any distributions in the foreseeable
future.
The following table shows the number of unitholders and the number of
Units outstanding in each Sub-Class of each Series as of March 31, 2005:
Number of Unitholders Number of Units Outstanding
--------------------- ---------------------------
Balanced Series (Class 1) 1,873 385,790
Balanced Series (Class 2) 283 250,073
Beach Series (Class 1) 62 10,280
Beach Series (Class 2) 16 1,771
C-View Currency Series (Class 1) 8 264
C-View Currency Series (Class 2) 2 4,272
Campbell/Graham Series (Class 1) 144 24,351
Campbell/Graham Series (Class 2) 7 681
Dunn Series (Class 1) 12 1,382
Dunn Series (Class 2) 9 21,494
Graham Series (Class 1) 256 45,534
Graham Series (Class 2) 23 49,978
No Units are authorized for issuance by the Trust under equity
compensation plans. During the year ended December 31, 2004, no unregistered
Units were sold by the Trust. In addition, the Trust did not repurchase any
Units during the fourth quarter of fiscal year 2004.
During the year ended December 31, 2004, the Trust conducted an
offering of Balanced Series, C-View Currency Series, Dunn Series and Graham
Series, in each case Class 1 and Class 2 Units, pursuant to a Registration
Statement on Form S-1 (File No. 333-108397), which was declared effective on
February 5, 2004. A total of 2,500,000 Units were registered, including
1,375,000 Units in Balanced Series, 375,000 Units in Beach Series, 125,000 Units
in C-View Currency Series, 125,000 Units in Dunn Series, and 500,000 Units in
Graham Series. The estimated aggregate offering price was $250,000,000,
representing a price of $100 per Unit in each Series prior to the commencement
of trading.
The Trust subsequently registered additional Units for an offering in
Balanced Series, Beach Series, C-View Currency Series (Class 2 Units only), Dunn
Series (Class 2 Units only) and Graham Series on a Registration Statement on
Form S-1MEF pursuant to Rule 462(b) (File No. 333-116949), which was declared
effective on June 29, 2004. A
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total of 2,960,000 additional Units were registered, including 1,650,000 Units
in Balanced Series, 450,000 Units in Beach Series, 130,000 Units in C-View
Currency Series, 130,000 Units in Dunn Series and 600,000 Units on Graham
Series. The estimated aggregate offering price was $296,000,000, representing a
price of $100 per Unit in each Series prior to the commencement of trading.
On October 7, 2004, the Trust filed a registration statement on Form
S-1 (File No. 333-119596), which was declared effective on February 7, 2005. The
Trust registered a total of 11,000,000 Units in such registration statement,
including 8,750,000 Units in Balanced Series, 650,000 Units in Beach Series,
230,000 Units in C-View Currency Series, 3,000,000 Units in Campbell/Graham
Series (which was a newly created Series registered for the first time), 230,000
Units in Dunn Series, and 1,100,000 Units in Graham Series. The estimated
aggregate offering price was $1,093,833,000, which amount was calculated
assuming that all Units in the Balanced Series, Beach Series, C-View Currency
Series and Dunn Series of Units were sold at the Net Asset Value per Unit as of
October 1, 2004 and assuming that all Units in the Campbell/Graham Series and
Graham Series of Units were sold at the price of $100 per Unit.
The offering of Units in each Series of the Trust commenced on June
29, 2004.
As of December 31, 2004, the Trust had received subscriptions for
Balanced Series Units, Beach Series Units, C-View Currency Series Units, Dunn
Series Units and Graham Series Units. The aggregate proceeds received were
$35,623,122 for Balanced Series, $655,666 for Beach Series, $458,543 for C-View
Currency Series, $2,267,503 for Dunn Series, and $6,653,094 for Graham Series.
The Trust did not incur any expenses in connection with the offerings. Except
for that portion of each Trading Company's assets used as margin to maintain
that Trading Company's forward currency contract positions, the proceeds of the
offering for each Series are be deposited in cash in segregated accounts in the
name of each Trading Company maintained for each Trading Company at the clearing
brokers in accordance with CFTC segregation requirements.
The clearing brokers credit each Trading Company with 80%-100% of the
interest earned on its average net assets (other than those assets held in the
form of U.S. government securities) on deposit with the clearing brokers each
week. During the year ended December 31, 2004, this amount was approximately
95%. In an attempt to increase interest income earned, the Managing Owner also
may invest non-margin assets in U.S. government securities which include any
security issued or guaranteed as to principal or interest by the United States,
or by a person controlled by or supervised by and acting as an instrumentality
of the government of the United States pursuant to authority granted by Congress
of the United States or any certificate of deposit for any of the foregoing,
including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the
United States government, and certain cash items such as money market funds,
certificates of deposit (under nine months) and time deposits. Interest income
up to 2.0% will be paid to the Managing Owner.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information for the years ended December 31,
2004, and 2003, is taken from the financial statements of The Frontier Fund
included on pages F-1 through F-14 of this filing, audited by Deloitte & Touche
LLP.
You should read this information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the related notes included therewith. Results from
past periods are not necessarily indicative of results that may be expected for
any future period.
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FOR THE YEAR ENDED DECEMBER 31, 2004
Balanced C-View
Series Beach Series Currency Series Dunn Series Graham Series
---------- ------------ --------------- ----------- -------------
Interest income - net ................ 5,876 116 2 -- --
Total expenses ....................... 687,681 5,661 44 78,214 74,509
Net gain on investments .............. 2,396,442 17,300 154 204,380 272,202
Net income ........................... 1,492,801 11,755 112 126,166 197,693
Net income per unit - Class 1 ........ 6.03 6.01 2.67 4.96 3.57
Net income per unit - Class 2 ........ 6.85 6.84 3.47 5.77 3.92
Total Assets ......................... 33,661,231 671,300 458,730 2,406,748 6,981,627
Total owners' capital - Class 1 ...... 11,772,262 488,932 16,586 117,047 1,961,583
Total owners' capital - Class 2 ...... 20,884,923 178,489 442,069 2,276,622 4,889,204
Net Asset Value per Unit - Class 1 ... 106.03 106.01 102.67 104.96 103.57
Net Asset Value per Unit - Class 2 ... 106.85 106.84 103.47 105.77 103.92
FOR THE YEAR ENDED DECEMBER 31, 2003
Balanced C-View
Series Beach Series Currency Series Dunn Series Graham Series
---------- ------------ --------------- ----------- -------------
Total Assets ......................... 2,000 1,000 1,000 1,000 1,000
Total owners' capital - Class 1 ...... 0 0 0 0 0
Total owners' capital - Class 2 ...... 1,000 1,000 1,000 1,000 1,000
Net Asset Value per Unit - Class 1 ... N/A N/A N/A N/A N/A
Net Asset Value per Unit - Class 2 ... 100.00 100.00 100.00 100.00 100.00
As of September 24, 2004, the Trust broke escrow and commenced
operations for each Series except the Graham Series. The Graham Series broke
escrow and commenced operations as of November 19, 2004.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Frontier Fund, or the Trust, is a Delaware statutory trust formed
in August 8, 2003. The Trust is a multi-advisor commodity pool, as described in
CFTC Regulation (S) 4.10(d)(2). The Trust is authorized to issue multiple Series
of Units in segregated pools of assets of the Trust, pursuant to the
requirements of the Trust Act. The assets of each Series are segregated from the
assets of other Series. The Trust is managed by the Managing Owner, and its term
will expire on December 31, 2053 (unless terminated earlier in certain
circumstances).
The Trust, with respect to each Series of Units, engages in the
speculative trading of a diversified portfolio of futures, forward (including
interbank foreign currencies) and options contracts and other derivative
instruments and may, from time to time, engage in cash and spot transactions.
The Trust allocates funds to the Trading Companies each of which has one-year
renewable contracts with its own independent Trading Advisor(s) that will (i)
manage all or a portion of the applicable Trading Company's assets, (ii) make
the trading decisions for the assets of each Series vested in such Trading
Company, (iii) segregate its assets from any other Trading Company and maintain
separate, distinct records for each Series, and (iv) account for its assets
separately from the other Series and the other Trust assets. The Trust has an
investment objective of increasing the value of the Units over the long term
(capital appreciation), while controlling risk and volatility; further, to offer
exposure to the investment programs of individual Trading Advisors and to
specific instruments (currencies).
As of December 31, 2004, the Trust had five separate Series of Units
issued and outstanding: Balanced Series, Beach Series, C-View Currency Series,
Dunn Series and Graham Series. Each Series of Units have two separate
sub-classes issued and outstanding--Class 1 and Class 2.
For additional overview of the Trust's structure and business
activities, see Item 1 "BUSINESS".
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Liquidity and Capital Resources
The Trust will raise additional capital only through the sale of Units
offered pursuant to the continuing offering, and does not intend to raise any
capital through borrowing. Due to the nature of the Trust's business, it makes
no capital expenditures and has no capital assets which are not operating
capital or assets.
The Managing Owner is responsible for the payment of all of the
ordinary expenses associated with the organization of the Trust and the offering
of each Series of Units, except for the initial and ongoing service fee, if any,
and no Series will be required to reimburse these expenses. As a result, 100% of
each Series' offering proceeds are initially available for that Series' trading
activities.
A portion of each Trading Company's assets is used as margin to
maintain that Trading Company's forward currency contract positions, and another
portion is deposited in cash in segregated accounts in the name of each Trading
Company maintained for each Trading Company at the clearing brokers in
accordance with CFTC segregation requirements. At December 31, 2004, cash
deposited at the clearing brokers was $5,518,100 for the Balanced Series, and
$2,553,921 for the Graham Series. The clearing brokers are expected to credit
each Trading Company with approximately 80%-100% of the interest earned on its
average net assets on deposit with the clearing brokers each week. Currently,
this amount is estimated to be 2.54%. In an attempt to increase interest income
earned, the Managing Owner also may invest the non-margin assets in U.S.
government securities which include any security issued or guaranteed as to
principal or interest by the United States, or by a person controlled by or
supervised by and acting as an instrumentality of the government of the United
States pursuant to authority granted by Congress of the United States or any
certificate of deposit for any of the foregoing, including U.S. treasury bonds,
U.S. treasury bills and issues of agencies of the United States government, and
certain cash items such as money market funds, certificates of deposit (under
nine months) and time deposits. Interest income up to 2.0% is paid to the
Managing Owner.
Approximately 10% to 20% of the Trust's assets are expected to be
committed as required margin for futures contracts and forward and options
trading and held by the respective broker, although the amount committed may
vary significantly. Such assets are maintained in the form of cash or U.S.
Treasury bills in segregated accounts with the futures broker pursuant to the
Commodity Exchange Act and regulations thereunder. Approximately 2% to 6% of the
Trust's assets are expected to be deposited with over-the-counter counterparties
in order to initiate and maintain forward and swap contracts. Such assets are
not held in segregation or otherwise regulated under the Commodity Exchange Act,
unless such over-the-counter counterparty is registered as a futures commission
merchant. These assets are held either in U.S. government securities or
short-term time deposits with U.S.-regulated bank affiliates of the
over-the-counter counterparties. The remaining approximately 74% to 88% of the
Trust's assets will normally be invested in cash equivalents and short term
investments, such as money market funds, certificates of deposit (under nine
months) and time deposits and held by the clearing broker, the over-the-counter
counterparties and by U.S. Federally chartered banks. As of December 31, 2004,
such cash equivalents and short term investments included time deposits at
Merrill Lynch Bank USA, and money market funds held at Merrill Lynch Investment
Managers. Including cash held at US Bank, total cash and cash equivalents and
short term investments held at these institutions were $27,363,143 for the
Balanced Series, $646,272 for the Beach Series, $458,575 for the C-View Currency
Series, $2,276,864 for the Dunn Series, and $4,357,738 for the Graham Series.
Results of Operations
Balanced Series
The Balanced Series commenced operations on September 24, 2004. The
Balanced Series - Class 1 returned 6.0% for the period since commencement of
operations, and 6.2% for the three month period ended December 31, 2004, net of
fees and expenses; and the Balanced Series - Class 2 returned 6.8% for the
period since commencement of operations, and 7.0% for the three month period
ended December 31, 2004, net of fees and expenses.
For the period from commencement of operations through December 31,
2004, the Balanced Series recorded net gain on investments of $2,396,442, net
interest of $5,876, and total expenses of $687,681, resulting in a net increase
in Owners' capital from operations of $1,492,801. The Net Asset Value per Unit
increased from $100.00 at September 24, 2004, to $106.03 for Class 1 and $106.85
for Class 2 as of December 31, 2004. Total Class 1 subscriptions and
10
redemptions for the period were $11,653,988 and $8,738, respectively. Total
Class 2 subscriptions and redemptions for the period were $23,968,134 and
$4,450,000, respectively. Ending capital at December 31, 2004, was $11,772,262
for Class 1 and $20,884,923 for Class 2. At December 31, 2003, ending capital
was nil for Class 1 and $1,000 for Class 2.
As of December 31, 2004, the Balanced Series invested in four Trading
Companies. Three of the Trading Companies held trading accounts advised by one
Trading Advisor for each Trading Company. One Trading Company is comprised of
five trading accounts each advised by a different Trading Advisor. These Trading
Advisors have varying trading methodologies, strategically allocated to
capitalize upon varying market environments. During the fourth quarter of 2004,
all eight Trading Advisors were profitable, although the trend-based managers
achieved the highest returns. From a market standpoint, the fourth quarter
experienced newly emerging trends, with substantial profits in currencies,
equities and fixed income, especially for the trend-based managers. The market
sectors that provided losses were in the energy, commodity and metal markets.
Across the unprofitable market sectors, the energy complex accounted for the
majority of loss. The intermittent periods of trending and non-trending market
activity turned out to be most difficult.
Beach Series
The Beach Series commenced operations on September 24, 2004. The Beach
Series - Class 1 returned 6.0% for the period since commencement of operations,
ended December 31, 2004, net of fees and expenses; and the Beach Series - Class
2 returned 6.8% for the period since commencement of operations, ended December
31, 2004, net of fees and expenses.
For the period from commencement of operations through December 31,
2004, the Beach Series recorded net gain on investments of $17,300, net interest
of $116, and total expenses of $5,661, resulting in a net increase in Owners'
capital from operations of $11,755. The Net Asset Value per Unit increased from
$100.00 at September 24, 2004, to $106.01 for Class 1 and $106.84 for Class 2 as
of December 31, 2004. Total Class 1 subscriptions for the period were $481,793,
and there were not redemptions. Total Class 2 subscriptions for the period were
$172,873, and there were no redemptions. Ending capital at December 31, 2004,
was $488,932 for Class 1 and $178,489 for Class 2. At December 31, 2003, ending
capital was nil for Class 1 and $1,000 for Class 2.
Trading during the fourth quarter of 2004 proved to be very
profitable. The trading program performed very well in October and November,
although December proved to be a difficult end to a difficult year. Currencies
were the main profit driver with gains coming from our Euro, Canadian dollar and
U.S. Index positions. Base Metals were disappointing with Copper and Nickel
losing on the back of long liquidation. 18 positions were closed, 15 added and 6
reversed direction. November profits were substantial, whereby currencies were
the main profit driver with our Euro and Swiss Franc positions benefiting from
the weak U.S. dollar. Metals performed well on the back of their Gold and Copper
positions. The Energy sector lost on positions in Gas Oil and Heating Oil. 8
positions were closed, 11 added and 6 reversed direction. December was the only
unprofitable month of the fourth quarter. Good performance came from positions
in the IBEX and S&P indices. The positive performance by the long Euro positions
was offset by Canadian dollar positions. Heating Oil was the main contributor to
the loss in the Energy sector. During the month 9 positions were closed, 8 added
and 8 reversed direction.
C-View Currency Series
The C-View Currency Series commenced operations on September 24, 2004.
The C-View Currency Series - Class 1 returned 2.6% for the period since
commencement of operations, ended December 31, 2004, net of fees and expenses;
and the C-View Currency Series - Class 2 returned 3.4% for the period since
commencement of operations, ended December 31, 2004, net of fees and expenses.
For the period from commencement of operations through December 31,
2004, the C-View Currency Series recorded net gain on investments of $154, net
interest of $2, and total expenses of $44, resulting in a net increase in
Owners' capital from operations of $112. The Net Asset Value per Unit increased
from $100.00 at September 24, 2004, to $102.67 for Class 1 and $103.47 for Class
2 as of December 31, 2004. Total Class 1 subscriptions for the period were
$16,543, and there were no redemptions. Total Class 2 subscriptions for the
period were $441,000, and there were no redemptions. Ending capital at December
31, 2004, was $16,586 for Class 1 and $442,069 for Class 2. At December 31,
2003, ending capital was nil for Class 1 and $1,000 for Class 2.
11
The entire fourth quarter of 2004 was profitable for C-View. October
was a month in which the U.S. dollar declined, due to weaker economic numbers,
and also by a lack of confidence in the ability of either of the U.S.
presidential candidates to address effectively the issue of the U.S. trade and
current account deficit. From a portfolio perspective, we made gains in
exposures short of U.S. dollar versus Euro, Indian Rupee, Korean Won, Philippine
Peso, Taiwan Dollar, Mexican Peso, Norwegian Krone, Swedish Krone and Singapore
Dollar. Positions long of Brazilian Real versus Argentine Peso were successful,
but we experienced a small loss in being long Chinese Yuan versus Hong Kong
Dollar, and Australian Dollar versus New Zealand Dollar. November was also
profitable. The outcome of the U.S. election caused the currency market to
conclude that the policy pursued by the Bush administration is a weak U.S.
dollar policy in all but name. In the absence of any particular initiatives to
contain them the assumption is that the U.S. trade and current account deficits
will continue to grow and only a weaker U.S. dollar is the preferred route to
eventually reducing them. A number of our key strategies involving anticipated
U.S. dollar weakness, noticeably against Asian currencies, made gains. Yield
positions also made gains albeit that we are slightly more wary of these
exposures in a rising interest rate environment. Our short term trading made
some reasonable gains also. In short term trading strategies we made solid gains
in U.S. dollar versus the Yen, Sterling, Swiss Franc and in Sterling versus
Japanese Yen and Euro versus Sterling, but experienced small losses in the Euro
against the U.S. dollar and Swiss Franc. December was profitable to a lesser
degree then the two previous months. In general December saw a recovery in the
U.S. dollar and the advent of more seasonally choppy currency markets after the
steady dollar declines of the previous two months. As frequently happens at this
time of year liquidity became an issue in some currencies and markets generally
were more volatile. From a portfolio perspective, they made gains in exposures
short of U.S. dollar versus Indian Rupee, Korean Won, Mexican Peso and Taiwan $;
a position long of Brazilian Real versus Argentine Peso was also profitable. A
position long of Chinese Yuan against the U.S. dollar, anticipating some
progress toward Chinese market liberalization generated a loss on carry. Our
perception that the South African Rand was too strong proved incorrect and we
generated losses in position short of Rand both against the U.S. dollar and GB
Pound. In Euro crosses we made gains in the Czech Koruna, Polish Zloty,
Slovakian Koruna versus the Euro but experienced offsetting losses as the Euro
rose versus the Norwegian and Swedish Krone. In short term trading strategies we
made solid gains in Euro versus the Japanese Yen, and GB Pound but losses in GP
Pound against U.S. dollar and Japanese Yen. Our U.S. dollar trading was
successful against the Swiss Franc but not against the Japanese Yen and Euro.
Dunn Series
The Dunn Series commenced operations on September 24, 2004. The Dunn
Series - Class 1 returned 5.0% for the period since commencement of operations,
ended December 31, 2004, net of fees and expenses; and the Dunn Series - Class 2
returned 5.8% for the period since commencement of operations, ended December
31, 2004, net of fees and expenses.
For the period from commencement of operations through December 31,
2004, the Dunn Series recorded net gain on investments of $204,380 and total
expenses of $78,214, resulting in a net increase in Owners' capital from
operations of $126,166. The Net Asset Value per Unit increased from $100.00 at
September 24, 2004, to $104.96 for Class 1 and $105.77 for Class 2 as of
December 31, 2004. Total Class 1 subscriptions for the period were $121,000, and
there were no redemptions. Total Class 2 subscriptions for the period were
$2,145,503, and there were no redemptions. Ending capital at December 31, 2004,
was $117,047 for Class 1 and $2,276,622. At December 31, 2003, ending capital
was nil for Class 1 and $1,000 for Class 2.
As demonstrated above, Dunn had a very profitable fourth quarter of
2004. October and November displayed large profits, with a minor loss in
December. October was volatile and rising energy prices were the backdrop for
the positive performance, producing significant gains in both the long energy
and bond positions as high energy and commodity prices continued to put a damper
on economies worldwide. November profits were achieved from long positions in
non-U.S. interest rates, foreign currencies and stock indices; that continued to
benefit from a historically weak dollar. The roller coaster known as U.S. job
growth continues to play havoc with U.S. interest rates and stock indices.
Energy prices backed off from historic highs (not accounting for inflation).
December concluded the quarter with a loss. The market with the largest
magnitude move, the Euro Bund, was a profitable one for the portfolio. The
Bund's gains, accompanied by some small profitable gains in several other
markets were overcome by losses across the remainder of the portfolio. In a way
December's results are a microcosm of the entire year, as markets with the
largest
12
magnitude moves, the Euro Bund and the Euro Bobl were profitable but their gains
were overcome by numerous markets that experienced losses of lesser magnitudes.
Graham Series
The Graham Series commenced operations on November 19, 2004. The
Graham Series - Class 1 returned 3.6% for the period through December 31, 2004,
net of fees and expenses; and the Graham Series - Class 2 returned 3.9% for the
period since commencement of operations, ended December 31, 2004, net of fees
and expenses.
For the period from commencement of operations through December 31,
2004, the Graham Series recorded net gain on investments of $272,202 and total
expenses of $74,509, resulting in a net increase in Owners' capital from
operations of $197,693. The Net Asset Value per Unit increased from $100.00 at
September 24, 2004, to $103.57 for Class 1 and $103.92 for Class 2 as of
December 31, 2004. Total Class 1 subscriptions for the period were $1,939,594,
and there were no redemptions. Total Class 2 subscriptions for the period were
$4,712,500, and there were no redemptions. Ending capital at December 31, 2004,
was $1,961,583 for Class 1 and $4,889,204 for Class 2. At December 31, 2003,
ending capital was nil for Class 1 and $1,000 for Class 2.
Trading began on November 19, 2004; therefore there were only
approximately 6 weeks of trading that existed within the fourth quarter of 2004
for the Graham Series. Over this time period, the Graham portfolio had two solid
monthly gains. Bullish price movements in the global equity index and global
fixed income markets particularly contributed. Short-term volatility in the
Japanese yen and Canadian dollar led to some offsetting losses.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
the Managing Owner to adopt accounting policies and make estimates and
assumptions that affect amounts reported in the Trust's financial statements.
The Trust's critical accounting policies and related estimates and judgments
underlying the financial statements are as identified below.
Investment Transactions and Valuation--The Trust records investment
transactions on trade date and all investments are recorded at fair value in its
financial statements, with changes in fair value reported as a component of
Trading Profits (Losses) in the Statements of Operations. Generally, fair values
are based on quoted market prices; however, in certain circumstances,
significant judgments and estimates may be required in determining fair value in
the absence of an active market closing price.
Allocation of Trading Profits or Losses--- Each Series of the Trust
offers two sub-classes of Units - Class 1 and Class 2. All classes have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except that Class 1 Units of each Series bear certain expenses
related to the servicing of such Units. Revenues, expenses (other than expenses
attributable to a specific class), and realized and unrealized trading profits
and losses of each Series are allocated daily to Class 1 and Class 2 Units based
on each Class' relative owners' capital balance.
Each Series allocates funds to a subsidiary Trading Company, or
Trading Companies, of the Trust. Each Trading Company allocates all of its daily
trading profits or losses to the Series in proportion to each Series' funds
allocated to the Trading Company, adjusted on a daily basis. As of December 31,
2004, the value of all open contracts and cash held at clearing brokers is
similarly allocated to the Series in proportion to each Series' funds allocated
to the Trading Company, or Companies.
Interest Income--Interest income from all sources, including assets
held at clearing brokers and cash and cash equivalents held at banks, is
aggregated and allocated across all Series in proportion to their daily Net
Asset Value.
In applying these policies, the Managing Owner may make judgments that
can frequently require estimates about matters that are inherently uncertain.
13
Off-Balance Sheet Risk
The term "off-balance sheet risk" refers to an unrecorded potential
liability that, even though it does not appear on the balance sheet, may result
in future obligation or loss. Each Trading Company trades in futures, forward
and swap contracts and is therefore a party to financial instruments with
elements of off-balance sheet market and credit risk. In entering into these
contracts there exists a market risk that such contracts may be significantly
influenced by market conditions, such as interest rate volatility, resulting in
such contracts being less valuable. If the markets should move against all of
the futures interests positions held by a Trading Company in respect of any
Series at the same time, and if the Trading Advisor(s) of such Trading Company
are unable to offset such futures interests positions, such Trading Company
could lose all of its assets and the holders of Units of such Series would
realize a 100% loss. The Managing Owner seeks to minimize market risk through
real-time monitoring of open positions and the level of diversification of each
Trading Advisor's portfolio. It is anticipated that any Trading Advisor's
margin-to-equity ratio will typically not exceed approximately 35% although the
actual ratio could be higher or lower from time to time.
In addition to market risk, trading futures, forward and swap
contracts entails credit risk in that a counterparty will not be able to meet
its obligations to a Trading Company. The counterparty for futures contracts
traded in the United States and on most foreign exchanges is the clearinghouse
associated with such exchange. In general, clearinghouses are backed by the
corporate members of the clearinghouse who are required to share any financial
burden resulting from the non-performance by one of their members and, as such,
should significantly reduce this credit risk. In cases where the clearinghouse
is not backed by the clearing members, like some foreign exchanges, it is
normally backed by a consortium of banks or other financial institutions. Some
non-U.S. exchanges, in contrast to U.S. exchanges are principals' markets in
which performance is the responsibility only of the individual counterparty with
whom the Trading Company has entered into the transaction with and not of the
exchange or clearing corporation. In these kinds of markets, there is risk of
bankruptcy or other failure or refusal to perform by the counterparty.
In the case of forward contracts traded on the interbank market and
swaps, neither are traded on exchanges. The counterparty is generally a single
bank or other financial institution, rather than a group of financial
institutions; thus there may be a greater counterparty credit risk. The Managing
Owner expects the Trading Advisors to trade only with those counterparties which
it believes to be creditworthy. All positions of each Trading Company are valued
each day on a mark-to-market basis. There can be no assurance that any clearing
member, clearinghouse or other counterparty will be able to meet its obligations
to any Trading Company.
Risk Factors
The Trust is a new venture in a high-risk business. An investment in
the Units of each Series is very speculative. You should make an investment in
one or more of the Series only after consulting with independent, qualified
sources of investment and tax advice and only if your financial condition will
permit you to bear the risk of a total loss of your investment. You should
consider an investment in the Units only as a long-term investment. Moreover, to
evaluate the risks of this investment properly, you must familiarize yourself
with the relevant terms and concepts relating to commodities trading and the
regulation of commodities trading, which are incorporated herein by reference
from the section captioned "Statement of Additional Information" in the
Prospectus.
You should carefully consider the risks and uncertainties provided in
the Prospectus under the section captioned "Risk Factors," and such section is
incorporated herein by reference in its entirety from the Prospectus. You should
also carefully consider all of the other information included in this report
before you decide whether to purchase any Units. Any of the risks and
uncertainties set forth in the section of the Prospectus captioned "Risk
Factors" could materially adversely affect the Trust, its trading activities,
operating results, financial condition and Net Asset Value and therefore could
negatively impact the value of your investment. You should not invest in the
Units unless you can afford to lose all of your investment.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Series are speculative commodity pools. The market sensitive
instruments which are held by the Trading Companies in which the Series are
invested are acquired for speculative trading purposes, and all or a substantial
14
amount of the Series' 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 Series' main line of business.
Market movements result in frequent changes in the fair market value
of each Trading Company's open positions and, consequently, in each Series of
the Trust's earnings and cash flow. The Trading Companies' and consequently the
Series' market risk is influenced by a wide variety of factors, including the
level and volatility of exchange rates, interest rates, equity price levels, the
market value of financial instruments and contracts, the diversification effects
among the open positions and the liquidity of the markets in which trades are
made.
Each Trading Company 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 past performance for any Series is not necessarily
indicative of the future results of such Series.
The Trading Companies' and consequently the Series' primary market
risk exposures as well as the strategies used and to be used by the Trading
Advisors for managing such exposures are subject to numerous uncertainties,
contingencies and risks, any one of which could cause the actual results of the
Trust's and the Managing Owner'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 Trading Companies and consequently the Trust.
There can be no assurance that the Trading Companies' 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 a Series.
Quantitative Market Risk
Trading Risk
The Series' approximate risk exposure in the various market sectors
traded by its trading advisors is quantified below in terms of value at risk.
Due to the Series' mark-to-market accounting, any loss in the fair value of the
Series' (through the Trading Companies) open positions is directly reflected in
the Series' earnings, realized or unrealized.
Exchange maintenance margin requirements have been used by the Trust
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% to 99% of any one-day
interval. The maintenance margin levels are established by brokers, dealers and
exchanges using historical price studies as well as an assessment of current
market volatility 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 that is not relevant to value at
risk.
In the case of market sensitive instruments that are not
exchange-traded, including currencies and some energy products and metals, the
margin requirements for the equivalent futures positions have been used as value
at risk. In those cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
In the case of contracts denominated in foreign currencies, the value
at risk figures include foreign currency margin amounts converted into U.S.
dollars with an incremental adjustment to reflect the exchange rate risk
inherent to the Series, which is valued in U.S. dollars, in expressing value at
risk in a functional currency other than U.S. dollars.
In quantifying each Series' value at risk, 100% positive correlation
in the different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been aggregated to determine each trading category's aggregate value at
risk. The diversification effects resulting from the fact that the Series'
positions held through the Trading Companies are rarely, if ever, 100%
positively correlated have not been reflected.
15
Value at Risk by Market Sectors
The following table presents the trading value at risk associated with
the each Series' exposure to open positions (as held by the Trading Companies)
by market sector as of December 31, 2004. All open position trading risk
exposures of the Series have been included in calculating the figures set forth
below.
Balanced Series:
% OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION
- ------------- ------------- --------------
Interest Rates ................................ $1,081,482 3.3%
Currencies .................................... $1,417,398 4.3%
Stock Indices ................................. $ 856,457 2.6%
Metals ........................................ $ 472,565 1.4%
Agriculturals/Softs ........................... $ 310,779 1.0%
Energy ........................................ $ 322,841 1.0%
Total: ........................................ $4,461,524 13.7%
Beach Series:
% OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION
- ------------- ------------- --------------
Interest Rates ................................ $ 8,560 1.3%
Currencies .................................... $ 47,457 7.1%
Stock Indices ................................. $ 17,865 2.7%
Metals ........................................ $ 16,228 2.4%
Agriculturals/Softs ........................... $ 6,339 0.9%
Energy ........................................ $ 9,387 1.4%
Total: ........................................ $105,835 15.9%
16
C-View Currency Series:
% OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION
- ------------- ------------- --------------
Interest Rates ................................ $ 0 0%
Currencies .................................... $448,185 15.8%
Stock Indices ................................. $ 0 0%
Metals ........................................ $ 0 0%
Agriculturals/Softs ........................... $ 0 0%
Energy ........................................ $ 0 0%
Total: ........................................ $448,185 15.8%
Dunn Series:
% OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION
- ------------- ------------- --------------
Interest Rates ................................ $210,261 8.8%
Currencies .................................... $ 64,466 2.7%
Stock Indices ................................. $ 45,261 1.9%
Metals ........................................ $ 0 0%
Agriculturals/Softs ........................... $ 0 0%
Energy ........................................ $ 42,652 1.8%
Total: ........................................ $362,639 15.1%
Graham Series:
% OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION
- ------------- ------------- --------------
Interest Rates ................................ $ 220,876 3.2%
Currencies .................................... $1,414,648 20.6%
Stock Indices ................................. $ 523,600 7.6%
Metals ........................................ $ 51,406 0.8%
Agriculturals/Softs ........................... $ 6,600 0.1%
Energy ........................................ $ 22,950 0.3%
Total: ........................................ $2,240,079 32.7%
17
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held on behalf of the
Series is typically many times the applicable maintenance margin requirement,
which generally ranges between approximately 1% and 10% of contract face value,
as well as many times the capitalization of the Series. The magnitude of each
Series' open positions creates a risk of ruin not typically found in most other
investment vehicles. Because of the size of their positions, certain market
conditions, although unusual, but historically recurring from time to time,
could cause the a Series to incur severe losses over a short period of time. The
value at risk table above, as well as the past performance of the Series, gives
no indication of this risk of ruin.
Non-Trading Risk
The Series have non-trading market risk on their foreign cash balances
not needed for margin. However, these balances, as well as the market risk they
represent, are immaterial. The Series also have non-trading market risk as a
result of investing a portion of their available assets in U.S. government
securities which include any security issued or guaranteed as to principal or
interest by the United States, or by a person controlled by or supervised by and
acting as an instrumentality of the government of the United States pursuant to
authority granted by Congress of the United States or any certificate of deposit
for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and
issues of agencies of the United States government, and certain cash items such
as money market funds, certificates of deposit (under nine months) and time
deposits. The market risk represented by these investments is also immaterial.
Qualitative Market Risk
The following are the primary trading risk exposures of the Series of
the Trust as of December 31, 2004, by market sector.
Interest rates
Interest rate risk is one of the principal market exposures of each
Series. Interest rate movements directly affect the price of interest rate
futures positions held and indirectly the value of a Trading Company's stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact
profitability. The primary interest rate exposure is to interest rate
fluctuations in the United States and the other G-7 countries. However, the
Trading Companies also may take futures positions on the government debt of
smaller nations. The Managing Owner anticipates that G-7 interest rates will
remain the primary market exposure of the each Trading Company and accordingly
the each Series for the foreseeable future. The changes in interest rates which
are expected to have the most effect on the Series are changes in long-term, as
opposed to short-term rates. Most of the speculative positions to be held by the
Trading Companies will be in medium- to long-term instruments. Consequently,
even a material change in short-term rates is expected to have little effect on
the Series if the medium- to long-term rates remain steady. The first two
percent (2.0%) of interest income earned by the Trust on each Series is paid to
the Managing Owner per annum. In addition, if interest rates fall below 0.75%,
the Managing Owner is paid the difference between the Trust's annualized income
interest and 0.75%. Interest income above 2.0% per Series is retained by the
Series.
Currencies
Exchange rate risk is a significant market exposure of each Series of
the Trust in general and the C-View Currency Series in particular. For each
Series of the Trust in general and the C-View Currency Series in particular
currency exposure is to exchange rate fluctuations, primarily fluctuations that
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 Trading Advisors on
behalf of a Series trade in a large number of currencies, including cross-rates,
which are positions between two currencies other than the U.S. dollar. The
Managing Owner does not anticipate that the risk profile of the Series' currency
sector will change significantly in the future.
18
Stock Indices
For each Series (other than the C-View Currency Series), its primary
equity exposure is equity price risk in the G-7 countries as well as other
smaller jurisdictions. Each Series of the Trust (other than the C-View Currency
Series) is primarily exposed to the risk of adverse price trends or static
markets in the major U.S., European and Japanese indices.
Metals
For each Series (other than the C-View Currency Series), its metals
market exposure is fluctuations in the price of both precious metals, including
gold and silver, as well as base metals including aluminum, copper, nickel and
zinc. Some metals, such as gold, are used as surrogate stores of value, in place
of hard currency, and thus have an associated currency or interest rate risk
associated with them relative to their price in a specific currency. Other
metals, such as silver, platinum, copper and steel, have substantial industrial
applications, and may be subject to forces affecting industrial production and
demand.
Agriculturals/Softs
Each Series (other than the C-View Currency Series) may also invest in
raw commodities and may thus have exposure to agricultural price movements,
which are often directly affected by severe or unexpected weather conditions or
by political events in countries that comprise significant sources of commodity
supply.
Energy
For each Series (other than the C-View Currency Series), its primary
energy market exposure is in oil, gas and other energy product price movements,
often resulting from political developments and ongoing conflicts in the Middle
East. Oil and gas prices can be volatile and substantial profits and losses have
been and are expected to continue to be experienced in this market.
Other Trading Risks
As a result of leverage, small changes in the price of a Trading
Company's positions may result in substantial losses for a Series. Futures,
forwards and options are typically traded on margin. This means that a small
amount of capital can be used to invest in contracts of much greater total
value. The resulting leverage means that a relatively small change in the market
price of a contract can produce a substantial loss. Like other leveraged
investments, any purchase or sale of a contract may result in losses in excess
of the amount invested in that contract. The Trading Companies may lose more
than their initial margin deposits on a trade.
The Trading Companies' trading is subject to execution risks. Market
conditions may make it impossible for the Trading Advisors to execute a buy or
sell order at the desired price, or to close out an open position. Daily price
fluctuation limits are established by the exchanges and approved by the
Commodity Futures Trading Commission. When the market price of a contract
reaches its daily price fluctuation limit, no trades can be executed at prices
outside the limit. The holder of a contract may therefore be locked into an
adverse price movement for several days or more and lose considerably more than
the initial margin put up to establish the position. Thinly traded or illiquid
markets also can make it difficult or impossible to execute trades.
The Trading Advisor's positions are subject to speculative limits. The
Commodity Futures Trading Commission and domestic exchanges have established
speculative position limits on the maximum futures position which any person, or
group of persons acting in concert, may hold or control in particular futures
contracts or options on futures contracts traded on U.S. commodity exchanges.
Under current regulations, other accounts of the Trading Advisors are combined
with the positions held by them on behalf of the applicable Trading Company for
position limit purposes. This trading could preclude additional trading in these
commodities by the Trading Advisors for the accounts of the Series.
19
Systematic strategies do not consider fundamental types of data and do
not have the benefit of discretionary decision making. The assets of the Series
are allocated to Trading Advisors that rely on technical, systematic strategies
that do not take into account factors external to the market itself (although
certain of these strategies may have minor discretionary elements incorporated
into their systematic strategy). The widespread use of technical trading systems
frequently results in numerous trading advisors attempting to execute similar
trades at or about the same time, altering trading patterns and affecting market
liquidity. Furthermore, the profit potential of trend-following systems may be
diminished by the changing character of the markets, which may make historical
price data (on which technical programs are based) only marginally relevant to
future market patterns. Systematic strategies are developed on the basis of a
statistical analysis of market prices. Consequently, any factor external to the
market itself that dominates prices that a discretionary decision maker may take
into account may cause major losses for a systematic strategy. For example, a
pending political or economic event may be very likely to cause a major price
movement, but a systematic strategy may continue to maintain positions indicated
by its trading method that might incur major losses if the event proved to be
adverse.
However, because certain of the Trading Advisors' strategies involves
some discretionary aspects in addition to their technical factors, certain of
the Trading Advisors may occasionally use discretion in investing the assets of
a Series. For example, the Trading Advisors often use discretion in selecting
contracts and markets to be followed. In exercising such discretion, such
Trading Advisor may take positions opposite to those recommended by the Trading
Advisor's trading system or signals. Discretionary decision making may also
result in a Trading Advisor failing to capitalize on certain price trends or
making unprofitable trades in a situation where another trader relying solely on
a systematic approach might not have done so. Furthermore, such use of
discretion may not enable the relevant Series of the Trust to avoid losses, and
in fact, such use of discretion may cause such Series to forego profits which it
may have otherwise earned had such discretion not been used.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item is submitted as a separate section of this
report commencing on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
Item 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of
the Managing Owner, including its Chief Executive Officer and Chief Financial
Officer, the Trust evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13(a)-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2004 (the "Evaluation
Date"). Any control system, no matter how well designed and operated, can
provide only reasonable (not absolute) assurance that its objectives will be
met. Furthermore, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. Based
upon our evaluation, the Chief Executive Officer and Chief Financial Officer of
the Managing Owner concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective to provide reasonable assurance that they
are timely alerted to the material information relating to the Trust required to
be included in the Trust's periodic SEC filings.
Changes in Internal Control Over Financial Reporting
There were no significant changes made in our internal controls during
the fourth quarter or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their last
evaluation.
20
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Trust has no directors or executive officers and also does not
have any employees. The Trust is managed solely by Equinox Fund Management, LLC,
a Delaware limited liability company formed in June 2003, in the capacity as
managing owner. The Managing Owner became registered with the CFTC as a
commodity pool operator, or a CPO, as of August 6, 2003, and has been a member
in the National Futures Association, or the NFA, in such capacity since that
date.
Principals of the Managing Owner
The current officers and directors of the Managing Owner are as
follows:
Richard E. Bornhoft is the President, Chief Operating Officer, Manager
and a member of the managing committee of the Managing Owner, or the Executive
Committee. In addition, Mr. Bornhoft has been registered as a principal and an
associated person of the Managing Owner since August 2003. Mr. Bornhoft also is
President of The Bornhoft Group Corporation, or The Bornhoft Group, and has been
registered as a principal and an associated person of The Bornhoft Group since
September 1985 and November 1985, respectively. Mr. Bornhoft is also a principal
of Bornhoft Group Securities Corporation, a registered broker/dealer, and
SectorQuant Capital Management. Mr. Bornhoft has over twenty years of experience
in advising both Private and Institutional clientele in the alternative
investment industry, beginning his career in 1979. The Bornhoft Group was formed
in 1985 as an investment management firm, providing alternative investments
(i.e., investments other than long-only investments in publicly-traded stocks,
bonds and cash-equivalent securities) to institutions and high net worth
investors. Over the past two decades, Mr. Bornhoft has been responsible for the
planning, creation and execution of the company's business strategy. This
responsibility has included such tasks as the design, technology and
implementation of the asset allocation, valuation and risk management systems,
and the distribution of client assets into alternative investment products and
services. His company has designed and operated alternative investment
portfolios for approximately twenty (20) pension plans, corporations and banking
institutions throughout the world. Prior to forming The Bornhoft Group in 1985,
Mr. Bornhoft was Vice-President of Product Development for the Managed Account
Corporation, an investment- consulting firm that offered Alternative Investment
products to its clientele. From 1979 to 1983, his activities included serving as
a Denver branch manager for Geldermann, Inc. (a Chicago-based brokerage firm)
and as an investment advisor, developing trading systems and advising client
assets in alternative investments. He has served on numerous arbitration boards
and various committees of certain regulatory and industry organizations and is a
frequent speaker at international conferences and symposiums on alternative
investments. He has written numerous articles in leading financial publications
and is a contributing author to The Handbook of Managed Futures--Performance,
Evaluation and Analysis (McGraw-Hill, 1997) and Searching for Alpha--The Quest
for Exceptional Investment Performance (Wiley, 2000). Mr. Bornhoft is a board
member and principal of Morningstar Hedge Inc. He currently holds SEC/NASD
Series 7, 24 and 63 registrations, in addition to a CFTC/NFA series 3
registration.
Ron S. Montano is the Chief Administration Officer and Secretary of
the Managing Owner. In addition, Mr. Montano has been registered as a principal
of the Managing Owner since August 2003. Mr. Montano is also the Chief
Operations Officer of The Bornhoft Group. Mr. Montano joined the Bornhoft Group
in November 1997 and has been registered as a principal thereof since May 1998.
Mr. Montano is also a principal of Bornhoft Group Securities Corporation. His
responsibilities include providing oversight and management to all divisions of
The Bornhoft Group companies, managing all personnel activities, and directing
marketing campaigns. Mr. Montano draws upon his extensive experience in
leadership and management skills during his successful and highly decorated
23-year career in the United States Army/Army Recruiting Command. He achieved
the rank of Command Sergeant Major responsible for administrative functions
including manpower assessment, relocation and problem solving, training,
documentation and community relations. During his tenure, his oversight has
included overseeing six recruiting companies and 51 recruiting stations within
the New England states territory, and seven companies and 52 recruiting offices
and over 300 recruiting sales representatives in Michigan, which was the largest
recruiting territory in the United States. He graduated with a degree in Applied
Science as well as being selected for and graduated from the United States Army
Sergeants Major Academy. Mr. Montano was selected to be directly involved in the
United States Army Recruiting Command policy development process. He has been
highly decorated for his accomplishments in promoting his assigned territories,
which
21
earned him the Army's coveted "Legion of Merit Award."
Brent Bales is the Chief Financial Officer of the Managing Owner. In
addition, Mr. Bales has been registered as a principal of the Managing Owner
since August 2003. Mr. Bales is also the Vice President of Finance for The
Bornhoft Group. Mr. Bales joined The Bornhoft Group in June 2000 and has been
registered as a principal thereof since December 2001. Prior to that, from June
1992 through June 2000, he was employed as the Controller of Colorado Pen
Company. Mr. Bales' responsibilities include supervision of all accounting
activities, valuation of client portfolios and monitoring of risk management
systems. Mr. Bales has over 25 years of experience in finance, accounting and
the operation of businesses, as well as over 15 years of experience in senior
management positions with various start-up and developmental businesses. He is a
Certified Public Accountant with past experience that includes tenures with
Touche Ross & Co. and other corporations with responsibilities that encompassed
auditing, revenue and cost accounting, cash management and tax audit
representation. Mr. Bales received his Bachelor's degree in Accounting in 1973
from University of Denver and his Certified Public Accountant certification in
1977.
Executive Committee of the Managing Owner
The Executive Committee is responsible for the general oversight of
the Managing Owner's business and functions like a board of directors of a
corporation. The initial members of the Executive Committee are Richard E.
Bornhoft, John C. Plimpton and John R. Zumbrunn.
Richard E. Bornhoft's biography appears above under the caption
"Principals of the Managing Owner" above.
John C. Plimpton is a member of the Executive Committee of the
Managing Owner. In addition, Mr. Plimpton has been registered as a principal and
associated person of the Managing Owner since August 2003 and has been a member
of the NFA in such capacities as of such date. He has raised assets and marketed
the investment programs of several prominent commodity trading advisors. In
November 2002, Mr. Plimpton formed Solon Capital, LLC and T-Rex Brokerage, LLC,
commodity pool operators and independent brokerage firms. These businesses raise
assets for commodity trading advisors and structure innovative products to
support asset-raising. Mr. Plimpton has been registered with the CFTC as a
principal and as an associated person of Solon Capital, LLC since December 2002
and has been a member of the NFA in such capacities since June 2003. Mr.
Plimpton is associated with T-Rex Brokerage, LLC which had applied for
registration with the CFTC as an introducing broker but withdrew such
registration in September 2003.
He was a Director of Investments at Willowbridge Associates Inc. from
1995 through September of 2000 where he was responsible for raising assets and
for evaluating investment opportunities in insurance and financial services for
Willowbridge Associates Inc. and its affiliates, including Union Spring Asset
Management, Inc. From September 2000 through January 2001, he was employed at
Quantitative Financial Services in Stamford, Connecticut.
From February 2001 through September 2002, he was the Director of
Corporate Development for Beacon Management Corporation USA of Princeton, New
Jersey. Mr. Plimpton has been registered with the CFTC as an associated person
of Beacon Management Corporation USA since February 2001 and has been a member
of the NFA in such capacity as of such date.
He holds a B.A. in Economics from the University of Chicago and an
M.B.A. in corporate finance and corporate accounting from the William E. Simon
School of Management at the University of Rochester. He earned his Chartered
Life Underwriter and Chartered Financial Consultant designations from the
American College.
John R. Zumbrunn is a member of the Executive Committee of the
Managing Owner. In addition, Mr. Zumbrunn has been registered as a principal of
the Managing Owner since August 2003. Since 1995 he has served as a financial
and trading consultant to Willowbridge Associates Inc. and Union Spring Asset
Management, Inc., and as a principal of Millstone Portfolio Management, an
advisory affiliate of Union Spring Asset Management, Inc. Since 1985 Mr.
Zumbrunn was Managing Director of Princeton Investment Technologies, an
investment advisory and consulting firm. From 1991 to 1994, he was the Director
of Research of Tricon U.S.A., a managed futures and alternative investments
fund. Since July 1982, Mr. Zumbrunn has been registered with the CFTC as a sole
proprietor commodity trading advisor and has been a member of the NFA in such
capacity as of such date. He has over 20 years of investment,
22
trading, and quantitative research experience with Chemical Bank, The Prudential
Insurance Company of America, Salomon Brothers, and Commodities Corporation. Mr.
Zumbrunn holds a Ph.D. in Mathematics from the University of California at
Berkeley and an A.B. in Mathematics from Princeton University and has taught
mathematics at Columbia University and the City University of New York.
The sole members of the Managing Owner are Plimpton Capital, LLC and
The Bornhoft Group which have been registered as principals of the Managing
Owner since August 2003.
Code of Ethics
The Trust has not adopted a code of ethics because it does not have
any officers or employees. The Managing Owner has adopted a code of ethics for
employees and principals of the Managing Owner.
In general, the Managing Owner, its principals, and all other persons
associated with the Managing Owner shall observe high standards of commercial
honor and just and equitable principles of trade in the conduct of their
commodity futures business. All employees including anyone not on the regular
payroll but filling in on a temporary basis shall be held to the highest
standards of honesty and integrity. This conduct will be valid for all duties
involved with the daily management and responsibilities as Managing Owner of the
Trust.
Employees will conduct their daily duties in a responsible manner to
ensure that all customers are treated fairly and equally. The reputation of the
Managing Owner is crucial to its business, and understanding that will make
every effort to ensure that our reputation is not tarnished in any way.
Employees are urged to seek the advice of their supervisor for any questions
applicable to this code relative to their individual circumstances.
Section 16(a) Beneficial Ownership Reporting Compliance
As of December 31, 2004, the Units were not registered under Section
12 of the Securities Exchange Act. Accordingly, the Trust was not subject to
Section 16(a) beneficial ownership reporting requirements.
Item 11. EXECUTIVE COMPENSATION.
The Trust has no directors or officers. Its affairs are managed solely
by the Managing Owner, which receives compensation for its services from the
Trust, as follows:
Management Fees
Each Series, except for Dunn Series, pays to the Managing Owner a
monthly management fee equal to the following percentages of such Series' Net
Asset Value: 1/12th of 0.50% for Balanced Series (0.50% annually), 1/12th of
2.50% for Graham Series (2.50% annually), 1/12th of 2.00% for Beach Series
(2.00% annually), 1/12th of 2.00% for C-View Currency Series (2.00% annually).
Dunn Series currently does not pay any management fees to the Managing Owner.
See "Item 1. Business--Overview." The Managing Owner may pay all or a portion of
such management fees to the Trading Advisor(s) for each Series.
Incentive Fees
Each Series also pays to the Managing Owner an incentive fee of the
following percentages of profits net of fees and expenses generated by such
Series, including realized and unrealized gains and losses thereon, as of the
close of business on the last day of each calendar month or quarter: 25% for
Balanced Series, 20% for Graham Series, 20% for Beach Series, 20% for C-View
Currency Series and 25% for Dunn Series. The Managing Owner pays all or a
portion of such incentive fees to the Trading Advisor(s) for each Series.
23
Interest Income
The first 2.0% of interest income earned by the Trust on each Series
will be paid to the Managing Owner per annum. In addition, if interest rates
fall below 0.75%, the Managing Owner will be paid the difference between the
Trust's annualized interest income and 0.75%. Interest income above 2.0% per
Series will be retained by the Trust.
Other Fees
Each Series pays to the Managing Owner a monthly trading fee, or FCM
Fee, equal to 1/12th of 0.50% of such Series' Net Asset Value, calculated daily.
Also, a monthly service fee equal to 3.0% of the Net Asset Value, calculated
daily, is paid to the Managing Owner. The Managing Owner pays the service fee to
Selling Agents to assist in the making of offers and sales of Units and provide
customary ongoing services including advising Limited Owners. To the extent that
an affiliate of the Managing Owner provides such services, it may receive
service fees in proportion to the valuation of its clients' accounts.
Rebates to Certain Class 2 Unitholders of Balanced Series
With respect to strategic investors who purchased at lease $2,000,000
of Class 2 Units of Balanced Series during the initial offering period and
agreed to maintain such investment for at least 120 days following the
commencement of trading activities for Balanced Series, the Managing Owner has
agreed to rebate such investors 100% of the interest income and 20% of the
incentive fees earned by the Managing Owner with respect to such investments
over such 120 day period or such longer period of up to 12 months during which
such investors agreed to maintain such investment.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The Trust has no officers or directors. Its affairs are managed solely
by the Managing Owner. Set forth in the table below is information regarding the
beneficial ownership of Units of the principals of the Managing Owner as of
March 31, 2005:
Equinox Fund Management, L.L.C:
Total Units in Percentage Ownership
Series of Units Units Owned Each Series of Each Series
- -------------------------- ----------- -------------- --------------------
Balanced Series .......... 158,194.92 635,863.30592 24.879%
Beach Series ............. 10 12,051.38593 0.083%
C-View Series ............ 4262.34 4,536.09070 93.965%
Campbell/Graham Series ... 10 25,031.53098 0.040%
Dunn Series .............. 10 22,876.53819 0.044%
Graham Series ............ 44,010 95,511.58389 46.078%
Total of All Series ...... 206,497.26 795,870.43561 25.946%
24
Richard E. Bornhoft:
Total Units in Percentage Ownership
Series of Units Units Owned Each Series of Each Series
- -------------------------- ----------- -------------- --------------------
Balanced Series .......... 15.1 635,863.30592 0.002%
Beach Series ............. 20 12,051.38593 0.166%
C-View Series ............ 15.13 4,536.09070 0.334%
Campbell/Graham Series ... 20 25,031.53098 0.080%
Dunn Series .............. 348.6 22,876.53819 1.524%
Graham Series ............ 300 95,511.58389 0.314%
Total of All Series ...... 718.83 795,870.43561 0.090%
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Trust has and will continue to have certain relationships with the
Managing Owner and its affiliates. However, there have been no direct financial
transactions between the Trust and the directors or officers of the Managing
Owner.
Reference is made to Item 11, "EXECUTIVE COMPENSATION" and Item 12,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth the fees billed to Equinox Fund
Management, LLC, the Managing Owner of the Trust, for professional services
provided by Deloitte & Touche LLP, the Trust's independent registered public
accounting firm, for the years ended December 31, 2004 and 2003. In accordance
with the prospectus of the Trust, the Managing Owner has agreed to pay all costs
of the Trust, and the Trust therefore bears no direct obligation to its
independent registered public accounting firm.
FEE CATEGORY 2004 2003
- -------------------------- ------- --------
Audit Fees (1) ........... $83,514 $108,924
Audit-Related Fees (2) ... $ 0 $ 0
Tax Fees (3) ............. $ 0 $ 0
All Other Fees (4) ....... $ 0 $ 0
TOTAL FEES ............... $83,514 $108,924
- ----------
(1) Audit Fees consist of fees for professional services rendered for the audit
of the Trust's financial statements and review of financial statements
included in the Trust's quarterly reports, as well as services normally
provided by the independent accountant in connection with statutory and
regulatory filings or engagements, including the Trust's initial
registration in 2003.
(2) Audit-Related Fees consist of fees for assurance and related services by
Deloitte & Touche LLP that are reasonably related to the performance of the
audit or review of the Trust's financial statements and are not reported
under "Audit Fees," above.
(3) Tax Fees consist of fees for professional services rendered for tax
compliance, tax advice and tax planning.
25
(4) All Other Fees consist of any fees not otherwise reported in this table
The Managing Owner approved all the services provided by Deloitte &
Touche LLP to the Trust described above. The Managing Owner has determined that
the payments made to Deloitte & Touche LLP for these services during 2004 and
2003 are compatible with maintaining that firm's independence. The Managing
Owner pre-approves all audit and permitted non-audit services of the Trust's
independent registered public accounting firm, including all engagement fees and
terms.
26
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to these portions of Item 15 is submitted as a
separate section of this report commencing on page F-1.
(a)(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
1.1 Form of Selling Agent Agreement among the Registrant, Equinox Fund
Management, LLC and the Selling Agents ++
1.2 Form of Amendment Agreement among the Registrant, Equinox Fund
Management, LLC and the Selling Agents ++
4.1 Declaration of Trust and Amended and Restated Trust Agreement of the
Registrant (annexed to the Prospectus as Exhibit A) +
4.2 Form of Subscription Agreement (annexed as Exhibit B) +
4.3 Form of Exchange Request (annexed as Exhibit C) +
4.4 Form of Request for Redemption (annexed to as Exhibit D) +
4.5 Form of Request for Additional Subscription (annexed as Exhibit E) +
4.6 Form of Application for Transfer of Ownership / Re-registration Form
(annexed as Exhibit F) +
4.7 Form of Privacy Notice (annexed as Exhibit G) +
10.1 Form of Amended and Restated Escrow Agreement among the Registrant,
Equinox Fund Management, LLC, Bornhoft Group Securities Corporation
and the U.S. Bank National Association, Denver Colorado +
10.2 Form of Brokerage Agreement between each Trading Company and UBS
Securities, LLC *
10.21 Form of Brokerage Agreement between each Trading Company and Banc of
America Futures Incorporated *
10.3 Form of Advisory Agreement among the Registrant, the Trading Company,
Equinox Fund Management, LLC, and each Trading Advisor *
21.1 Subsidiaries of Registrant +++
31.1 Certification of Principal Executive Officer of the Managing Owner
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +++
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 +++
32.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 +++
27
32.2 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 +++
* Previously filed as like-numbered exhibit to the initial filing or the
first, second, third or fourth pre-effective amendment or the first or
second post-effective amendment to Registration Statement No.
333-108397 and incorporated by reference herein.
** Previously filed as like-numbered exhibit to the initial filing of
Registration Statement No. 333-119596 and incorporated by reference
herein.
+ Previously filed as like-numbered exhibit to the pre-effective
amendment to Registration Statement No. 333-119596 and incorporated by
reference herein.
++ Previously filed as like-numbered exhibit to the first post-effective
amendment to Registration Statement No. 333-119596.
+++ Filed herewith.
28
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.
Date: April 15, 2005 The Frontier Fund
-------------------------------------
(Registrant)
Date: April 15, 2005 By: /s/ Richard E. Bornhoft
---------------------------------
Richard E. Bornhoft
President and Chief Executive Officer
of Equinox Fund Management, LLC, the
Managing Owner of The Frontier Fund
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unitholders of The Frontier Fund,
We have audited the accompanying statements of financial condition of Balanced
Series, Beach Series, C-View Currency Series, Dunn Series and Graham Series of
The Frontier Fund (the "Trust"), as of December 31, 2004 and 2003, including the
condensed schedules of investments of the Balanced Series and Graham Series as
of December 31, 2004, and the related statements of operations and changes in
owners' capital for the year ended December 31, 2004. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Trust's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, such financial statements present fairly, in all material
respects, the financial position of Balanced Series, Beach Series, C-View
Currency Series, Dunn Series and Graham Series of The Frontier Fund as of
December 31, 2004 and 2003, and the results of their operations and changes in
owners' capital for the year ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
- -----------------------------
Princeton, New Jersey
April 11, 2005
F-1
The Frontier Fund
Statements of Financial Condition
December 31, 2004
C-View Currency
Balanced Series Beach Series Series DunnSeries Graham Series
--------------- ------------ --------------- ---------- -------------
ASSETS
Cash and cash equivalents ......................... $11,554,318 $207,744 $457,055 $ 576,904 $1,707,951
Short-term investments ............................ 15,808,825 438,528 1,520 1,699,960 2,649,787
Cash held at futures commodity merchants .......... 5,518,100 -- -- -- 2,553,921
Open trade equity ................................. 623,376 -- -- -- (28,060)
Investments in unconsolidated trading companies ... -- 15,709 138 126,163 --
Prepaid service fees .............................. 144,092 5,708 14 2,606 17,463
Subscriptions Receivable .......................... -- 3,369 -- -- 77,969
Other assets ...................................... 12,520 242 3 1,115 2,596
----------- -------- -------- ---------- ----------
Total Assets ................................... $33,661,231 $671,300 $458,730 $2,406,748 $6,981,627
=========== ======== ======== ========== ==========
LIABILITIES & OWNERS' CAPITAL
LIABILITIES
Pending owner additions ........................ $ 616,797 $ -- $ -- $ -- $ 46,126
Redemptions payable ............................ 56,738 -- -- -- --
Incentive fees payable to Managing Owner ....... 35,629 1,226 -- (12) 50,855
Management fees payable to Managing Owner ...... 13,673 1,086 22 -- 16,747
Interest fees payable to Managing Owner ........ 125,603 1,293 48 11,912 13,767
Trading fees payable to Managing Owner ......... 13,596 274 5 1,179 3,345
----------- -------- -------- ---------- ----------
Total Liabilities ........................... 862,036 3,879 75 13,079 130,840
----------- -------- -------- ---------- ----------
MINORITY INTERESTS ................................ 142,010 -- -- -- --
OWNERS' CAPITAL
Managing Owner Units - Class 2 ................. 16,902,820 1,068 441,035 1,058 4,573,598
Limited Owner Units - Class 1 .................. 11,772,262 488,932 16,586 117,047 1,961,583
Limited Owner Units - Class 2 .................. 3,982,103 177,421 1,034 2,275,564 315,606
----------- -------- -------- ---------- ----------
Total Owners' Capital ....................... 32,657,185 667,421 458,655 2,393,669 6,850,787
----------- -------- -------- ---------- ----------
Total Liabilities, Minority Interests
and Owners' Capital ......................... $33,661,231 $671,300 $458,730 $2,406,748 $6,981,627
=========== ======== ======== ========== ==========
Units Outstanding
Class 1 ........................................ 111,031 4,612 162 1,115 18,939
Class 2 ........................................ 195,464 1,671 4,272 21,524 47,047
Net Asset Value per Unit
Class 1 ........................................ $ 106.03 $ 106.01 $ 102.67 $ 104.96 $ 103.57
Class 2 ........................................ $ 106.85 $ 106.84 $ 103.47 $ 105.77 $ 103.92
The accompanying notes are an integral part of these statements.
F-2
The Frontier Fund
Statements of Financial Condition
December 31, 2003
C-View Currency
Balanced Series Beach Series Series DunnSeries Graham Series
--------------- ------------ --------------- ---------- -------------
ASSETS
Cash ............................................. $ 2,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
------- ------- ------- ------- -------
Total Assets .................................. $ 2,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
======= ======= ======= ======= =======
LIABILITIES & OWNERS' CAPITAL
LIABILITIES
Due to Managing Owner ......................... $ 1,000 $ -- $ -- $ -- $ --
------- ------- ------- ------- -------
Total Liabilities .......................... 1,000 -- -- -- --
------- ------- ------- ------- -------
OWNERS' CAPITAL
Managing Owner Units - Class 2 ................ 1,000 1,000 1,000 1,000 1,000
------- ------- ------- ------- -------
Total Owners' Capital ...................... 1,000 1,000 1,000 1,000 1,000
------- ------- ------- ------- -------
Total Liabilities and Owners' Capital ......... $ 2,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
======= ======= ======= ======= =======
Units Outstanding
Class 1 ....................................... -- -- -- -- --
Class 2 ....................................... 10 10 10 10 10
Net Asset Value per Unit
Class 1 ....................................... -- -- -- -- --
Class 2 ....................................... $100.00 $100.00 $100.00 $100.00 $100.00
The accompanying notes are an integral part of these statements.
F-3
The Frontier Fund
Condensed Schedules of Investments
December 31, 2004
Balanced Series Graham Series
------------------------ -----------------------
% of Net % of Net
Description Value Asset Value Value Asset Value
----------- ---------- ----------- --------- -----------
LONG FUTURES CONTRACTS
Various base metals futures contracts (US) ............ $ 214,940 0.66% $ -- 0.00%
Various base metals futures contracts (Europe) ........ 658,461 2.02% 30,760 0.45%
Various currency futures contracts (US) ............... 131,451 0.40% (2,825) -0.04%
Various currency futures contracts (Europe) ........... 7,541 0.02% 11,037 0.16%
Various currency futures contracts (Far East) ......... 220 0.00% -- 0.00%
Various energy futures contracts (US) ................. (9,979) -0.03% -- 0.00%
Various energy futures contracts (Europe) ............. (12,250) -0.04% -- 0.00%
Various interest rates futures contracts (US) ......... (12,539) -0.04% 15,883 0.23%
Various interest rates futures contracts (Canada) ..... 6,879 0.02% -- 0.00%
Various interest rates futures contracts (Europe) ..... 39,870 0.12% (29,838) -0.44%
Various interest rates futures contracts (Far East) ... (178,511) -0.55% (3,835) -0.06%
Various precious metals futures contracts (US) ........ (79,090) -0.24% (14,150) -0.21%
Various soft futures contracts (US) ................... 68,752 0.21% 4,556 0.07%
Various soft futures contracts (Europe) ............... (645) 0.00% -- 0.00%
Various stock index futures contracts (US) ............ 97,810 0.30% 73,878 1.08%
Various stock index futures contracts (Canada) ........ 1,502 0.00% -- 0.00%
Various stock index futures contracts (Europe) ........ 92,027 0.28% 27,299 0.40%
Various stock index futures contracts (Far East) ...... 164,573 0.50% 3,176 0.05%
---------- ----- --------- -----
Total Long Futures Contracts .......................... 1,191,012 3.65% 115,941 1.69%
---------- ----- --------- -----
LONG CURRENCY FORWARDS ................................... 63,666 0.19% (140,733) -2.05%
---------- ----- --------- -----
SHORT FUTURES CONTRACTS
Various base metals futures contracts (US) ............ (115,946) -0.36% -- 0.00%
Various base metals futures contracts (Europe) ........ (539,218) -1.65% (9,228) -0.13%
Various currency futures contracts (US) ............... 28,248 0.09% 1,275 0.02%
Various currency futures contracts (Europe) ........... -- 0.00% (4,485) -0.07%
Various energy futures contracts (US) ................. 50,730 0.16% 9,170 0.13%
Various energy futures contracts (Europe) ............. 1,910 0.01% -- 0.00%
Various interest rates futures contracts (US) ......... (49,370) -0.15% -- 0.00%
Various interest rates futures contracts (Canada) ..... 1,231 0.00% -- 0.00%
Various interest rates futures contracts (Europe) ..... (5,479) -0.02% -- 0.00%
Various interest rates futures contracts (Far East) ... (259) 0.00% -- 0.00%
Various precious metals futures contracts (US) ........ 3,460 0.01% -- 0.00%
Various soft futures contracts (US) ................... 6 0.00% -- 0.00%
Various soft futures contracts (Canada) ............... 749 0.00% -- 0.00%
Various soft futures contracts (Europe) ............... 726 0.00% -- 0.00%
Various stock index futures contracts (US) ............ 530 0.00% -- 0.00%
Various stock index futures contracts (Far East) ...... (8,620) -0.03% -- 0.00%
---------- ----- --------- -----
Total Short Futures Contracts ......................... (631,302) -1.93% (3,268) -0.05%
---------- ----- --------- -----
Total Open Trade Equity ............................... $ 623,376 1.91% $ (28,060) -0.41%
========== ===== ========= =====
The accompanying notes are an integral part of these statements.
F-4
The Frontier Fund
Statements of Operations
For the Year Ended December 31, 2004 /(1)/
C-View Currency
Balanced Series Beach Series Series Dunn Series Graham Series
--------------- ------------ --------------- ----------- -------------
Investment Income:
Interest - net ................................. $ 5,876 $ 116 $ 2 $ -- $ --
Total Income ................................ 5,876 116 2 -- --
Expenses:
Incentive Fees ................................. 595,855 2,929 -- 74,896 50,855
Management Fees ................................ 31,548 1,232 22 -- 16,747
Broker Service Fees ............................ 28,836 1,190 17 333 3,562
Trading Fees ................................... 31,442 310 5 2,985 3,345
---------- ------- ----- -------- --------
Total Expenses .............................. 687,681 5,661 44 78,214 74,509
---------- ------- ----- -------- --------
Investment loss - net ....................... (681,805) (5,545) (42) (78,214) (74,509)
---------- ------- ----- -------- --------
Realized and unrealized gain (loss) on investments:
Net realized gain on investments ............... 1,842,923 -- -- -- 306,423
Net change in open trade equity ................ 623,376 -- -- -- (28,060)
Trading commissions ............................ (69,857) -- -- -- (6,161)
Equity in earnings from trading company ........ -- 17,300 154 204,380 --
---------- ------- ----- -------- --------
Net gain on investments ..................... 2,396,442 17,300 154 204,380 272,202
---------- ------- ----- -------- --------
Minority interests ................................ (221,836) -- -- -- --
---------- ------- ----- -------- --------
NET INCREASE IN OWNERS' CAPITAL RESULTING
FROM OPERATIONS ................................ $1,492,801 $11,755 $ 112 $126,166 $197,693
========== ======= ===== ======== ========
NET INCOME PER UNIT
Class 1 ........................................ $ 6.03 $ 6.01 $2.67 $ 4.96 $ 3.57
Class 2 ........................................ $ 6.85 $ 6.84 $3.47 $ 5.77 $ 3.92
/(1)/ The Balanced Series, Beach Series, C-View Currency Series and Dunn Series
of the Trust received additional capital contributions to break escrow and
commence trading operations on September 24, 2004. The Graham Series of the
Trust broke escrow and commenced trading operations on November 19, 2004.
The results of operations and changes in owners' capital represent the
operations and transactions of the Series for the period from September 24,
2004, to December 31, 2004.
The accompanying notes are an integral part of these statements.
F-5
The Frontier Fund
Statements of Changes in Owners' Capital
For the Year Ended December 31, 2004 /(1)/
Balanced Series
-------------------------------------------------
Class 1 Class 2
---------------------- ------------------------
Managing Limited Managing Limited
Owner Owners Owner Owners
-------- ----------- ----------- ----------
Owner's Capital, January 1, 2004 ............. $-- $ -- $ 1,000 $ --
Sale of Units ............................. 11,653,988 20,000,000 3,968,134
Redemption of Units ....................... (8,738) (4,400,000) (50,000)
Net increase (decrease) in Owners'
Capital resulting from operations ...... 127,012 1,301,820 63,969
--- ----------- ----------- ----------
Owners' Capital, December 31, 2004 ........... $-- $11,772,262 $16,902,820 $3,982,103
=== =========== =========== ==========
Owner's Capital - Units, January 1, 2004 ..... -- -- 10 --
Sale of Units ............................. -- 111,113 200,000 37,741
Redemption of Units ....................... -- (82) (41,815) (472)
--- ----------- ----------- ----------
Owners' Capital - Units, December 31, 2004 ... -- 111,031 158,195 37,269
=== =========== =========== ==========
Beach Series
-----------------------------------------
Class 1 Class 2
------------------- -------------------
Managing Limited Managing Limited
Owner Owners Owner Owners
-------- -------- -------- --------
Owner's Capital, January 1, 2004 ............. $-- $ -- $ 1,000 $ --
Sale of Units ............................. 481,793 172,873
Redemption of Units .......................
Net increase (decrease) in Owners'
Capital resulting from operations ...... 7,139 68 4,548
--- -------- -------- --------
Owners' Capital, December 31, 2004 ........... $-- $488,932 $ 1,068 $177,421
=== ======== ======== ========
Owner's Capital - Units, January 1, 2004 ..... -- -- 10 --
Sale of Units ............................. -- 4,612 -- 1,661
Redemption of Units ....................... -- --
--- -------- -------- --------
Owners' Capital - Units, December 31, 2004 ... -- 4,612 10 1,661
=== ======== ======== ========
/(1)/ The Balanced Series, Beach Series, C-View Currency Series and Dunn Series
of the Trust received additional capital contributions to break escrow and
commence trading operations on September 24, 2004. The Graham Series of the
Trust broke escrow and commenced trading operations on November 19, 2004.
The results of operations and changes in owners' capital represent the
operations and transactions of the Series for the period from September 24,
2004, to December 31, 2004.
The accompanying notes are an integral part of these statements.
F-6
The Frontier Fund
Statements of Changes in Owners' Capital
For the Year Ended December 31, 2004 /(1)/
C-View Currency Series Dunn Series
------------------------------------ ----------------------------------------
Class 1 Class 2 Class 1 Class 2
----------------- ----------------- ------------------ --------------------
Managing Limited Managing Limited Managing Limited Managing Limited
Owner Owners Owner Owners Owner Owners Owner Owners
-------- ------- -------- ------- -------- -------- -------- ----------
Owner's Capital, January 1, 2004 ............ $-- $ -- $ 1,000 $ -- $-- $ -- $1,000 $ --
Sale of Units ............................ 16,543 440,000 1,000 121,000 2,145,503
Redemption of Units
Net increase (decrease) in Owners'
Capital resulting from operations ..... 43 35 34 (3,953) 58 130,061
--- ------- -------- ------ --- -------- ------ ----------
Owners' Capital, December 31, 2004 .......... $-- $16,586 $441,035 $1,034 $-- $117,047 $1,058 $2,275,564
=== ======= ======== ====== === ======== ====== ==========
Owner's Capital - Units, January 1, 2004 .... -- -- 10 -- -- -- 10 --
Sale of Units ............................ -- 162 4,252 10 -- 1,115 -- 21,514
Redemption of Units ...................... -- -- -- --
--- ------- -------- ------ --- -------- ------ ----------
Owners' Capital - Units, December 31, 2004 .. -- 162 4,262 10 -- 1,115 10 21,514
=== ======= ======== ====== === ======== ====== ==========
/(1)/ The Balanced Series, Beach Series, C-View Currency Series and Dunn Series
of the Trust received additional capital contributions to break escrow and
commence trading operations on September 24, 2004. The Graham Series of the
Trust broke escrow and commenced trading operations on November 19, 2004.
The results of operations and changes in owners' capital represent the
operations and transactions of the Series for the period from September 24,
2004, to December 31, 2004.
The accompanying notes are an integral part of these statements.
F-7
The Frontier Fund
Statements of Changes in Owners' Capital
For the Year Ended December 31, 2004 /(1)/
Graham Series
---------------------------------------------
Class 1 Class 2
--------------------- ---------------------
Managing Limited Managing Limited
Owner Owners Owner Owners
-------- ---------- ---------- --------
Owner's Capital, January 1, 2004 ........... $-- $ -- $ 1,000 $ --
Sale of Units ........................... 1,939,594 4,400,000 312,500
Redemption of Units
Net increase (decrease) in Owners'
Capital resulting from operations .... 21,989 172,598 3,106
--- ---------- ---------- --------
Owners' Capital, December 31, 2004 ......... $-- $1,961,583 $4,573,598 $315,606
=== ========== ========== ========
Owner's Capital - Units, January 1, 2004 ... -- -- 10 --
Sale of Units ........................... -- 18,939 44,000 3,037
Redemption of Units ..................... -- --
--- ---------- ---------- --------
Owners' Capital - Units, December 31, 2004 -- 18,939 44,010 3,037
=== ========== ========== ========
/(1)/ The Balanced Series, Beach Series, C-View Currency Series and Dunn Series
of the Trust received additional capital contributions to break escrow and
commence trading operations on September 24, 2004. The Graham Series of the
Trust broke escrow and commenced trading operations on November 19, 2004.
The results of operations and changes in owners' capital represent the
operations and transactions of the Series for the period from September 24,
2004, to December 31, 2004.
The accompanying notes are an integral part of these statements.
F-8
The Frontier Fund
Notes to Financial Statements
As of December 31, 2004, and December 31, 2003
1. Organization and Purpose
The Frontier Fund, or the Trust, was formed as a Delaware statutory trust on
August 8, 2003, with separate Series of Units. Its term will expire on December
31, 2053 (unless terminated earlier in certain circumstances). The Trust is a
multi-advisor commodity pool as described in CFTC Regulation Section 4.10(d)(2).
The Trust offers six (6) separate and distinct Series: Balanced Series, Beach
Series, C-View Currency Series, Dunn Series, Graham Series, and Campbell Graham
Series (each, a "Series" and collectively, the "Series"). The Trust may issue
additional Series of Units. The Units of each Series are separated into two
sub-classes of Units. The Trust, with respect to each Series:
. engages in the speculative trading of a diversified portfolio of
futures, forward (including interbank foreign currencies) and options
contracts and may, from time to time, engage in cash and spot
transactions;
. allocates funds to a subsidiary limited liability Trading Company or
Companies. Each Trading Company has one-year renewable contracts with
its own independent commodity trading advisor(s), or each, a Trading
Advisor, that will manage all or a portion of such Trading Company's
assets, make the trading decisions for the assets of each Series
vested in such Trading Company, segregate its assets from any other
Trading Company and maintain separate, distinct records for each
Series, and account for its assets separately from the other Series
and the other Trust assets;
. calculates the Net Asset Value of its Units separately from the other
Series;
. has an investment objective of increasing the value of each Series'
Units over the long term (capital appreciation), while controlling
risk and volatility; further, to offer exposure to the investment
programs of individual Trading Advisors and to specific instruments
(currencies); and
. offers each Series of Units in two Sub-Classes-Class 1 and Class 2.
Investors who purchase Class 1 Units of any Series are charged a
service fee of up to three percent (3.0%) annually of the Net Asset
Value of each Unit purchased, for the benefit of Selling Agents
selling such Class 1 Units. Equinox Fund Management, LLC, or the
Managing Owner, prepays the initial service fee which is amortized
monthly at an annual rate of three percent (3.0%) of the average daily
Net Asset Value of Class 1 of such Series; provided, however, that
investors who redeem all or a portion of their Class 1 Units of any
Series during the first twelve (12) months following the effective
date of their purchase are subject to a redemption fee of up to three
percent (3.0%) of the Net Asset Value at which such investor redeemed
to reimburse the Managing Owner for the then-unamortized balance of
the prepaid initial service fee. Investors who purchase Class 2 Units
of any Series are charged no initial or ongoing service fee. However,
the Managing Owner may pay the Selling Agents an on-going service fee
for certain administrative services. Any such payments by the Managing
Owner will not be subject to reimbursement by the Unitholders.
. Units of any Class in a Series may be redeemed, in whole or in part,
on a daily basis, at the then current Net Asset Value per Unit for
such Series on the day of the week after the date the Managing Owner
is in receipt of a redemption request for at least one (1) Business
Day to be received by the Managing Owner prior to 4:00 PM in New York.
Redemption of Class 1 Units of any Series, which have been held by the
Unit holder for less than twelve (12) full months, will be subject to
a redemption fee of up to three percent (3.0%) of the value of such
Units being redeemed. Redemption fees are payable to Equinox Fund
Management, LLC as Managing Owner of the Trust.
As of September 24, 2004, the Trust commenced operations for each Series except
the Graham Series and Campbell Graham Series. The Graham Series commenced
operations as of November 19, 2004. The Campbell Graham Series commenced
operations on February 11, 2005.
2. Significant Accounting Polices
The following are the significant accounting policies of the Trust.
Basis of Presentation - The financial statements of each Series of the Trust
included herein have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP").
F-9
The Series, through investing in Trading Companies, place assets under
management of certain Trading Advisors. The Trading Companies were organized by
the Managing Owner for the purpose of investing in securities and derivative
instruments, and have no operating income or expenses, except for trading income
and expenses, all of which is allocated to the Series. Trading Companies in
which a Series has a majority equity interest are consolidated by such Series.
Investments in Trading Companies in which a Series does not have a controlling
or majority interest are accounted for under the equity method and are carried
in the statement of financial condition of such Series at fair value based on
the interest of each Series in such Trading Company.
The consolidated financial statements of Balanced Series include the assets,
liabilities and earnings of its wholly-owned and majority owned Trading
Companies, Frontier Trading Company I, LLC, Frontier Trading Company II, LLC,
Frontier Trading Company III, LLC and Frontier Trading Company IV, LLC.
The consolidated financial statements of Graham Series include the assets,
liabilities and earnings of its wholly-owned trading company, Frontier Trading
Company V, LLC.
Cash and Cash Equivalents and Short Term Investments - For purposes of the
statements of financial condition, cash and cash equivalents include money
market accounts, money market funds, and time deposits with original maturities
of 90 days or less. Short term investments include time deposits with original
maturities of 91 days up to one year. The cash and cash equivalents, and short
term investments of all Series is pooled for maximization of return. Aggregate
interest income from all sources, including assets held at clearing brokers, up
to 2% (annualized) is paid to the Managing Owner; any excess is accrued as
income allocated to all Series in proportion to their daily net asset value.
Use of Estimates - The preparation of financial statements in conformity with
GAAP requires the Managing Owner to adopt accounting policies and make estimates
and assumptions that affect amounts reported in the Trust's financial
statements. The Trust's significant accounting policies and related estimates
and judgments underlying the financial statements are as identified below.
Allocation of Earnings - Each Series of the Trust offers two sub-classes of
Units - Class 1 and Class 2. All classes have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class 1 Units of each Series bear certain expenses related to the servicing of
such Units. Revenues, expenses (other than expenses attributable to a specific
class), and realized and unrealized trading profits and losses of each Series
are allocated daily to Class 1 and Class 2 Units based on each Class' relative
owners' capital balance.
Each Series allocates funds to a subsidiary Trading Company, or Companies, of
the Trust. Each Trading Company allocates all of its daily trading profits or
losses to the Series in proportion to each Series' funds allocated to the
Trading Company, adjusted on a daily basis. As of December 31, 2004, the value
of all open contracts and cash held at clearing brokers is similarly allocated
to the Series in proportion to each Series' funds allocated to the Trading
Company, or Companies.
Investment Transactions and Valuation - The Trust records investment
transactions on trade date and all investments are recorded at fair value in its
financial statements, with changes in fair value reported as a component of
Trading Profits (Losses) in the Statements of Operations. Generally, fair values
will be based on quoted market prices; however, in certain circumstances,
significant judgments and estimates may be required in determining fair value in
the absence of an active market closing price.
Income Taxes - The Trust is not subject to federal income taxes; each owner
reports his allocable share of income, gain, loss, deductions or credits on his
own income tax return.
Fees and Expenses - All management fees, incentive fees, and service fees of the
Trust are paid to the Managing Owner. Additionally, the trading fees are paid to
the Managing Owner. It is the responsibility of the Managing Owner to pay all
Trading Advisor management and incentive fees, as well as all other operating
expenses and continuing offering costs of the Trust.
Pending Owner Additions - Funds received for new subscriptions and for additions
to existing owner interests are recorded as capital additions at the net asset
value per unit of the second business day following receipt.
In applying these policies, the Managing Owner may make judgments that may
require estimates about matters that are inherently uncertain.
F-10
3. Investments in Unconsolidated Trading Companies
The following tables summarize the Beach Series, C-View Currency Series and Dunn
Series investments in unconsolidated trading companies as of and for the year
ended December 31, 2004.
Percentage Realized Change in Net
of Net Fair Trading Gain Unrealized Income
Trading Company /(1)/ Assets Value Commissions (Loss) Gain (Loss) (Loss)
- ------------------------------------ ---------- -------- ----------- ---------------------- --------
Beach Series -
Frontier Trading Company II, LLC.... 2.35% $ 15,709 ($770) $ 2,515 $15,555 $ 17,300
==== ======== ======= ======== ======= ========
C-View Currency Series -
Frontier Trading Company III, LLC... 0.03% $ 138 $0 $ 256 ($102) $ 154
==== ======== ======= ======== ======= ========
Dunn Series -
Frontier Trading Company IV, LLC.... 5.27% $126,163 ($5,170) $219,345 ($9,795) $204,380
==== ======== ======= ======== ======= ========
/(1)/ The Frontier Trading Company II, LLC, Frontier Trading Company III, LLC
and Frontier Trading Company IV, LLC each commenced operations on September
24, 2004.
The unaudited condensed statements of financial condition and statements of
income as of and for the year ended December 31, 2004 for the unconsolidated
trading companies are as follows:
Condensed Statement of Financial Frontier Trading Frontier Trading Frontier Trading
Condition - December 31, 2004 Company II, LLC Company III, LLC Company IV, LLC
- --------------------------------------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
Cash held at futures commodities merchants... $1,342,163 $448,185 $1,658,389
Open trade equity............................ 385,128 8,328 (81,158)
---------- -------- ----------
Total Assets................................. $1,727,291 $456,513 $1,577,231
========== ======== ==========
Members equity............................... $1,727,291 $456,513 $1,577,231
========== ======== ==========
Condensed Statement of Income - For the
Year Ended December 31, 2004 /(1)/
Interest income.............................. $ 4,628 $ 1,161 $ 4,592
Net realized gain on investments............. 273,019 53,601 642,377
Change in open trade equity.................. 385,128 8,328 (81,158)
Trading commissions.......................... (22,295) 0 (16,461)
---------- -------- ----------
Net income................................... $ 640,480 $ 63,090 $ 549,350
========== ======== ==========
/(1)/ The Frontier Trading Company II, LLC, Frontier Trading Company III, LLC
and Frontier Trading Company IV, LLC each commenced operations on September
24, 2004.
4. Transactions with Affiliates
The initial $6,000 seed capital of the Trust was provided by its Managing Owner,
Equinox Fund Management, LLC, or the Managing Owner, a Delaware limited
liability company formed on June 25, 2003, to organize and manage various funds,
including the Trust. $1,000 was contributed to Class 2 of each of the original
six (6) Series of the Trust. Effective August 26, 2003, the Trust's Beacon
Series Units were redeemed by the Managing Owner for $1,000 and will no longer
be offered by the Trust.
On September 23, 2004, the Managing Owner paid $5,000,000 to purchase a barrier
option which effectively leveraged the purchase of $20,000,000 of the Trust's
Balanced Series Class 2 Units upon escrow break. On November 19, 2004,
$4,400,000 of the Balanced Series Class 2 Units were exchanged by the Managing
Owner for Graham Series Class 2 Units. These Units are controlled by the
Managing Owner, subject to certain provisions in favor of the counterparty.
F-11
On December 30, 2004, the Managing Owner purchased Units in the Trust's C-View
Currency Series Class 2 for $440,000 at $103.47 per Unit. The Managing Owner may
make purchases or redemptions at any time on the same terms as any Limited
Owner.
As sponsoring management company of the Trust, the Managing Owner has agreed to
bear the organization and offering costs of the Trust, which as of December 31,
2003, were estimated to be approximately $1,250,000. As of December 31, 2004,
such ongoing costs are approximately $2,450,000.
Each Series of Units will pay to the Managing Owner a monthly management fee
equal to a certain percentage of such Series' assets, calculated on a daily
basis. The annual rate of the management fee for the Balanced Series is 0.5%,
for the Graham Series and Campbell Graham Series is 2.5%, and for the Beach
Series and C-View Currency Series is 2.0%. There is no management fee for the
Dunn Series. The Managing Owner may pay all or a portion of such management fees
to the Trading Advisor(s) for such Series.
In addition, each Series will pay to the Managing Owner an incentive fee of a
certain percentage of new net trading profits generated by such Series, monthly
or quarterly. Because the Balanced Series will employ multiple Trading Advisors,
the Balanced Series will pay the Managing Owner a monthly incentive fee
calculated on a Trading Advisor by Trading Advisor basis. It is therefore
possible that in any given period the Balanced Series may pay incentive fees to
the Managing Owner for one or more Trading Advisors while the Balanced Series as
a whole experiences losses. The incentive fee for the Balanced and Dunn Series
is 25%, and for the Beach, C-View Currency and Graham and Campbell Graham Series
is 20%. The Managing Owner may pay all or a portion of such incentive fees to
the Trading Advisor(s) for such Series.
Aggregate interest income from all sources, including assets held at clearing
brokers, up to 2% (annualized) is paid to the Managing Owner. In 2004, the Trust
paid $149,580 of such interest income to the Managing Owner.
With respect to Class 1 of each Series, the Series will pay to the Managing
Owner a service fee at an annualized rate of up to 3.0%, which the Managing
Owner pays to selling agents of the Trust. Bornhoft Group Securities
Corporation, an affiliate of the Managing Owner, was paid service fees of $120
in 2004.
The Managing Owner pays to The Bornhoft Group Corporation, an affiliate of the
Trust, a monthly fee of 0.25% (annualized) of the net asset value of the Trust,
for services in connection with the daily valuation of each Series and Class.
Additionally, The Bornhoft Group Corporation provides office space to the
Managing Owner, prorates office expenses, and advances certain direct expenses
on behalf of the Managing Owner. Under this agreement, the Managing Owner
reimbursed The Bornhoft Group Corporation $43,507 in 2004.
F-12
5. Financial Highlights
The following information presents the financial highlights of the Fund for the
year ended December 31, 2004. This data has been derived from information
presented in the financial statements.
C-View Currency
Balanced Series Beach Series Series
----------------- ----------------- -----------------
Class 1 Class 2 Class 1 Class 2 Class 1 Class 2
------- ------- ------- ------- ------- -------
Per unit operating performance (1)
Net asset value, inception of Series ... 100.00 100.00 100.00 100.00 100.00 100.00
Net operating results:
Interest income ..................... .02 .02 .02 .02 .01 .00
Expenses ............................ (.93) (2.99) (.82) (1.11) (.19) (0)
Net gain on investments ............. 7.16 10.83 6.81 7.93 2.85 3.47
Minority Interests .................. (.22) (1.01)
Net income ............................. 6.03 6.85 6.01 6.84 2.67 3.47
Net asset value, December 31, 2004 ..... 106.03 106.85 106.01 106.84 102.67 103.47
Ratios to average net assets (2)
Net investment loss .................... (3.79)% (0.90)% (5.30)% (2.32)% (5.30)% (2.35)%
Expenses before incentive fees ......... 3.97% 0.97% 5.50% 2.48% 5.48% 2.35%
Expenses after incentive fees .......... 5.76% 3.61% 6.60% 4.10% 5.48% 2.35%
Total return before incentive fees (3) .... 9.09% 9.51% 7.37% 8.79% 2.67% 3.47%
Total return after incentive fees (3) ..... 6.03% 6.85% 6.01% 6.84% 2.67% 3.47%
Dunn Series Graham Series
----------------- -----------------
Class 1 Class 2 Class 1 Class 2
------- ------- ------- -------
Per unit operating performance (1)
Net asset value, inception of Series ... 100.00 100.00 100.00 100.00
Net operating results:
Interest income ..................... 0 0 0 0
Expenses ............................ (1.38) (3.56) (1.06) (1.16)
Net gain on investments ............. 6.34 9.33 4.63 5.08
Net income ............................. 4.96 5.77 3.57 3.92
Net asset value, December 31, 2004 ..... 104.96 105.77 103.57 103.92
Ratios to average net assets (2)
Net investment loss .................... (3.48)% (0.49)% (6.04)% (2.95)%
Expenses before incentive fees ......... 3.48% 0.49% 6.04% 2.95%
Expenses after incentive fees .......... 6.28% 3.81% 7.32% 3.75%
Total return before incentive fees (3) .... 3.51% 9.04% 5.67% 4.77%
Total return after incentive fees (3) ..... 4.96% 5.77% 3.57% 3.92%
(1) Selected data for a Unit outstanding from inception through year-end. The
Balanced, Beach, C-View and Dunn Series commenced operations on September
24, 2004. The Graham Series commenced November 19, 2004.
(2) Ratios have been annualized and exclude the impact of the incentive fees
except where otherwise noted. Incentive fees have not been annualized.
(3) An owner's total returns may vary from the above returns based on the
timing of contributions and withdrawals. Total returns are not annualized.
6. Off-Balance Sheet Risk
The term "off-balance sheet risk" refers to an unrecorded potential liability
that, even though it does not appear on the Statement of Financial Condition,
may result in future obligation or loss in excess of the amount paid by the
Series for a particular investment. Each Trading Company expects to trade in
futures, forward and swap contracts and will therefore be a party to financial
instruments with elements of off-balance sheet market and credit risk. In
entering into these contracts, there exists a market risk that such contracts
may be significantly influenced by market conditions, such as interest rate
volatility, resulting in such contracts being less valuable. If the markets
should move against all of the futures positions held by a Trading Company in
respect of any Series at the same time, and if the Trading Advisor(s) of such
Trading Company are unable to offset such futures interests positions, such
Trading Company could lose all of its assets and the holders of Units of such
Series would realize a 100% loss. The Managing Owner will seek to minimize
market risk through real-time monitoring of open positions and the level of
diversification of each Trading Advisor's portfolio. It is anticipated that any
Trading Advisor's margin-to-equity ratio will typically not exceed approximately
35% although the actual ratio could be higher or lower from time to time.
In addition to market risk, trading futures, forward and swap contracts entails
credit risk in that a counterparty will not be able to meet its obligations to a
Trading Company. The counterparty for futures contracts traded in the United
States and on most foreign exchanges is the clearinghouse associated with such
exchange. In general, clearinghouses are backed by the corporate members of the
clearinghouse who are required to share any financial burden resulting from the
non-performance by one of their members and, as such, should significantly
reduce this credit risk. In cases where the clearinghouse is not backed by the
clearing members, like some foreign exchanges, it is normally backed by a
consortium of banks or other financial institutions. Some non-U.S. exchanges, in
contrast to US. exchanges, are
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principals' markets in which performance is the responsibility only of the
individual counterparty with whom the Trading Company has entered into the
transaction with and not of the exchange or clearing corporation. In these kinds
of markets, there is risk of bankruptcy or other failure or refusal to perform
by the counterparty.
In the case of forward contracts traded on the interbank market and swaps,
neither are traded on exchanges. The counterparty is generally a single bank or
other financial institution, rather than a group of financial institutions; thus
there may be a greater counterparty credit risk. The Managing Owner expects the
Trading Advisors to trade only with those counterparties which it believes to be
creditworthy. All positions of each Trading Company will be valued each day on a
mark-to-market basis. There can be no assurance that any clearing member,
clearinghouse or other counterparty will be able to meet its obligations to any
Trading Company.
7. Summary of Quarterly Results (unaudited)
For the Three Months Ended December 31, 2004
C-View Currency
Balanced Series Beach Series Series DunnSeries Graham Series
--------------- ------------ --------------- ---------- -------------
Investment Income:
Interest - net ............................ $ 5,826 $ 116 $ 2 $ -- $ --
---------- ------- ---- -------- --------
Total Income ........................... 5,826 116 2 -- --
---------- ------- ---- -------- --------
Expenses:
Incentive Fees ............................ 526,523 2,867 -- 74,896 50,855
Management Fees ........................... 30,449 1,230 21 -- 16,747
Broker Service Fees ....................... 28,799 1,190 17 333 3,562
Trading Fees .............................. 30,342 310 5 7,620 3,347
---------- ------- ---- -------- --------
Total Expenses ......................... 616,113 5,597 43 82,849 74,511
---------- ------- ---- -------- --------
Investment income - net ................ (610,287) (5,481) (41) (82,849) (74,511)
---------- ------- ---- -------- --------
Realized and unrealized gain (loss) on
investments:
Net realized gain on investments .......... 1,905,196 -- -- -- 306,423
Net change in open trade equity ........... 623,609 -- -- -- (28,060)
Trading Commissions ....................... (62,433) -- -- -- (6,159)
Equity in earnings from trading company ... -- 16,966 155 313,736 --
---------- ------- ---- -------- --------
Net gain on investments ................ 2,466,372 16,966 155 313,736 272,204
---------- ------- ---- -------- --------
Minority Interests ........................... (330,857) -- -- -- --
---------- ------- ---- -------- --------
NET INCREASE IN OWNERS' CAPITAL RESULTING
FROM OPERATIONS ........................... $1,525,228 $11,485 $114 $230,887 $197,693
---------- ------- ---- -------- --------
8. Indemnifications
The Trust has entered into agreements, which provide for the indemnification
against losses, costs, claims and liabilities arising from the performance of
their individual obligations under such agreements, except for gross negligence
or bad faith. The Trust has had no prior claims or payments pursuant to these
agreements. The Trust's individual maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Trust
that have not yet occurred. However, based on experience the Trust expects the
risk of loss to be remote.
9. Subsequent Events
The Campbell/Graham Series broke escrow and commenced operations on February 11,
2004.
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