UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended September 30, 2009

 

OR (  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 000-50718

 

TACTICAL DIVERSIFIED FUTURES FUND L.P.

(Exact name of registrant as specified in its charter)

 

 

c/o Ceres Managed Futures LLC
55 East 59^th Street – 10^th Floor
New York, New York 10022

(Address of principal executive offices) (Zip Code)

 

(212) 559-2011

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes X  No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     No   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes     No X

 

As of October 31, 2009, 608,209.1615 Limited Partnership Redeemable Units were outstanding.

 

TACTICAL DIVERSIFIED FUTURES FUND L.P.

 

FORM 10-Q

 

INDEX

 

10.12 Agency Agreement among the Partnership, the General Partner, Citigroup Global Markets Inc. and Morgan Stanley Smith Barney LLC dated as of November 11, 2009 and effective July 31, 2009

2

 

Tactical Diversified Futures Fund L.P.

 

 

See accompanying notes to financial statements.

		Number of								% of Partners
		Contracts				Fair Value				Capital
Futures Contracts Purchased
Currencies			248			$	648,975				0.08	%
Indices			44				6,286				0.00	*
Interest Rates — U.S.			220				21,876				0.01
Interest Rates Non — U.S.			340				229,354				0.03
Metals			144				726,305				0.09
Softs			168				127,290				0.02
Total futures contracts purchased							1,760,086				0.23
Futures Contracts Sold
Currencies			16				7,900				0.00	*
Energy			46				(95,772	)			(0.01	)
Grains			248				450,240				0.06
Softs			8				(2,000	)			(0.00	)*
Total futures contracts sold							360,368				0.05
Investment in Partnerships
CMF Drury Capital Master Fund L.P.							94,964,238				12.16
CMF Willowbridge Argo Master Fund L.P.							73,889,288				9.46
CMF Aspect Master Fund L.P.							96,863,299				12.40
CMF Capital Fund Management Master Fund L.P.							153,341,135				19.63
CMF Winton Master L.P.							93,950,779				12.03
AAA Master Fund LLC							131,509,626				16.83
CMF Graham Capital Master Fund L.P.							83,112,887				10.64
CMF SandRidge Master Fund L.P.							30,325,370				3.88
Total investment in Partnerships							757,956,622				97.03
Total fair value						$	760,077,076				97.31	%

See accompanying notes to financial statements.

Tactical Diversified Futures Fund L.P.

		Number of								% of Partners’
		Contracts				Fair Value				Capital
Futures Contracts Purchased
Currencies			85			$	21,063				0.00	*%
Grains			9				(738	)			(0.00	)*
Interest Rates - U.S.			116				644,683				0.06
Interest Rates Non - U.S.			142				209,160				0.02
Metals			9				37,600				0.01
Total futures contracts purchased							911,768				0.09
Futures Contracts Sold
Currencies			24				16,212				0.00	*
Energy			68				101,398				0.01
Grains			18				(23,868	)			(0.00	)*
Indices			10				(1,641	)			(0.00	)*
Softs			68				62,431				0.01
Total futures contracts sold							154,532				0.02
Investment in Partnerships
CMF Drury Capital Master Fund L.P.							154,127,975				15.15
CMF Willowbridge Argo Master Fund L.P.							126,449,928				12.43
CMF Aspect Master Fund L.P.							162,328,063				15.95
CMF Capital Fund Management Master Fund L.P.							171,427,475				16.85
CMF Winton Master L.P.							149,948,887				14.74
AAA Master Fund LLC							136,584,029				13.42
CMF Graham Capital Master Fund L.P.							113,642,734				11.17
CMF Avant Master Fund L.P.							29,972,072				2.94
Total investment in Partnerships							1,044,481,163				102.65
Total fair value						$	1,045,547,463				102.76	%

See accompanying notes to financial statements.

Tactical Diversified Futures Fund L.P.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Income:
Net gains (losses) on trading of commodity interests and investment in Partnerships:
Net realized gains (losses) on closed contracts		$	(3,867,920	)		$	1,857,541			$	(5,111,540	)		$	6,853,878
Net realized gains (losses) on investment in Partnerships			23,514,952				8,962,360				101,332,111				103,798,609
Change in net unrealized gains (losses) on open contracts			1,980,297				591,396				1,054,154				509,762
Change in net unrealized gains (losses) on investment in Partnerships			17,239,194				(21,745,810	)			(66,847,707	)			46,504,691
Gain (loss) from trading, net			38,866,523				(10,334,513	)			30,427,018				157,666,940
Interest income			6,968				46,579				18,877				155,939
Interest income from investment in Partnerships			155,217				2,425,257				508,288				8,143,918
Total income (loss)			39,028,708				(7,862,677	)			30,954,183				165,966,797
Expenses:
Brokerage commissions including clearing fees			11,685,913				12,932,724				38,696,763				39,329,264
Management fees			3,855,472				4,264,238				12,617,576				12,856,036
Incentive fees			2,963,733				4,004,117				5,601,417				17,663,465
Other			56,158				533,095				659,417				1,232,816
Total expenses			18,561,276				21,734,174				57,575,173				71,081,581
Net income (loss)			20,467,432				(29,596,851	)			(26,620,990	)			94,885,216
Additions — Limited Partners			47,869				48,526,000				47,869				116,696,699
Additions — General Partner			—				—				—				1,000,000
Redemptions — Limited Partners			(30,386,870	)			(48,689,831	)			(209,767,249	)			(146,398,117	)
Net increase (decrease) in Partners’ Capital			(9,871,569	)			(29,760,682	)			(236,340,370	)			66,183,798
Partners’ Capital, beginning of period			791,002,053				915,120,551				1,017,470,854				819,176,071
Partners’ Capital, end of period		$	781,130,484			$	885,359,869			$	781,130,484			$	885,359,869
Net Asset Value per Unit (622,152.8424 and 788,593.3269 Units outstanding at September 30, 2009 and 2008, respectively)		$	1,255.53			$	1,122.71			$	1,255.53			$	1,122.71
Net income (loss) per Redeemable Unit of Limited Partnership Interest and General Partner Unit equivalent		$	32.21			$	(36.79	)		$	(34.93	)		$	116.10
Weighted average units outstanding			636,263.7066				802,922.1989				691,724.3480				812,316.8149

See accompanying notes to financial statements.

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Tactical Diversified Futures Fund L.P. (formerly, Citigroup Diversified Futures Fund L.P.) (the “Partnership”) is a limited partnership organized under the laws of the State of New York on December 3, 2002 to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk.

 

Between March 27, 2003 (commencement of the public offering period) and April 30, 2003, 36,616 redeemable units of Limited Partnership Interest (“Redeemable Units”) were publicly offered at $1,000 per Redeemable Unit. The proceeds of the initial public offering were held in an escrow account until April 30, 2003, at which time they were turned over to the Partnership for trading. The Partnership was authorized to publicly offer 300,000 Redeemable Units during the initial public offering period. As of December 4, 2003, the Partnership was authorized to publicly offer an additional 700,000 Redeemable Units. As of October 7, 2004, the Partnership was authorized to publicly offer an additional 1,000,000 Redeemable Units. As of June 30, 2005, the Partnership was authorized to publicly offer the 2,000,000 Redeemable Units previously registered. The public offering of Redeemable Units terminated on November 30, 2008. The Partnership currently privately and continuously offers up to 200,000 Redeemable Units to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

 

Ceres Managed Futures LLC (formerly Citigroup Managed Futures LLC), a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”), a newly registered non-clearing futures commission merchant and a member of the National Futures Association. Morgan Stanley, indirectly through various subsidiaries, owns 51% of MSSB Holdings. Citigroup Global Markets Inc. (“CGM”), the commodity broker and a selling agent for the Partnership, owns 49% of MSSB Holdings. Citigroup Inc. (“Citigroup”), indirectly through various subsidiaries, wholly owns CGM. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup.

 

As of September 30, 2009, all trading decisions are made for the Partnership by Drury Capital, Inc., (“Drury”), Graham Capital Management L.P., (“Graham”), John W. Henry & Company, Inc., (“JWH”), Willowbridge Associates Inc. (“Willowbridge”), Aspect Capital Limited (“Aspect”), Capital Fund Management S.A. (“CFM”), Winton Capital Management Limited (“Winton”), AAA Capital Management Advisors, Ltd. (“AAA”) and SandRidge Capital L.P. (“SandRidge”), (each an “Advisor” and collectively, the “Advisors”). Avant Capital Management L.P. (“Avant”) was terminated as of January 31, 2009. SandRidge was added as an advisor to the Partnership on March 1, 2009. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to JWH directly, where as the Partnership invests the portion of its assets allocated to each of the other Advisors indirectly through investments in master funds.

 

The General Partner and each Limited Partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no Limited Partner shall be liable for obligations of the Partnership in excess of their initial capital contribution and profits, if any, net of distributions.

 

The accompanying financial statements are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at September 30, 2009 and December 31, 2008 and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2009 and 2008. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2008.

 

The preparation of financial statements and accompanying notes in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. In making these estimates and assumptions, management has considered the effects, if any, of events occurring after the date of the Partnership’s Statements of Financial Condition through November 16, 2009, which is the date the financial statements were issued. As a result, actual results could differ from these estimates.

 

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, also known as FASB Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles” (“ASC 105-10”) (the “Codification”). ASC 105-10 established the exclusive authoritative reference for U.S. GAAP for use in financial statements except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. Codification became the single source of authoritative accounting principles generally accepted in the United States and applies to all financial statements issued after September 15, 2009.

 

The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230-10 Statement of Cash Flows (formerly, FAS No. 102, “Statement of Cash Flows Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale”).

 

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Changes in the Net Asset Value per Redeemable Unit of Limited Partnership Interest for the three and nine months ended September 30, 2009 and 2008 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net realized and unrealized gains (losses) *		$	42.72			$	(28.91	)		$	(8.44	)		$	144.99
Interest income			0.26				3.08				0.77				10.20
Expenses **			(10.77	)			(10.96	)			(27.26	)			(39.09	)
Increase (decrease) for the period			32.21				(36.79	)			(34.93	)			116.10
Net Asset Value per Redeemable Unit, beginning of period			1,223.32				1,159.50				1,290.46				1,006.61
Net Asset Value per Redeemable Unit, end of period		$	1,255.53			$	1,122.71			$	1,255.53			$	1,122.71

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Ratios to average net assets:***
Net investment income (loss) before incentive fees****			(7.8	)%			(6.9	)%			(8.0	)%			(7.0	)%
Operating expenses			7.9	%			8.0	%			8.1	%			8.2	%
Incentive fees			0.4	%			0.5	%			0.6	%			2.0	%
Total expenses			8.3	%			8.5	%			8.7	%			10.2	%
Total return:
Total return before incentive fees			3.0	%			(2.7	)%			(2.0	)%			13.8	%
Incentive fees			(0.4	)%			(0.5	)%			(0.7	)%			(2.3	)%
Total return after incentive fees			2.6	%			(3.2	)%			(2.7	)%			11.5	%

 

 

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets.

 

 

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

The customer agreement between the Partnership and CGM gives the Partnership the legal right to net unrealized gains and losses on open futures and forward contracts. The Partnership nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts on the Statements of Financial Condition as the criteria under ASC 210-20, Balance Sheet (formerly, FIN No. 39, “Offsetting of Amounts Related to Certain Contracts”) have been met.

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

All of the commodity interests owned by the Partnership are held for trading purposes. The average fair values of these interests during the nine months ended September 30, 2009 and the year ended December 31, 2008, based on a monthly calculation, were $840,466 and $1,089,419, respectively. The fair value of these commodity interests, including options thereon, if applicable, at September 30, 2009 and December 31, 2008 were $2,120,454 and $1,066,300, respectively. Fair values for exchange traded commodity futures and options are based on quoted market prices for those futures and options.

 

Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions.

 

The Partnership adopted ASC 815-10 Derivatives and Hedging (formerly, FAS No. 16 “Disclosures about Derivative Instruments and Hedging Activities”) as of January 1, 2009 which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. ASC 815-10 only expands the disclosure requirements for derivative instruments and related hedging activities and has no impact on the Statements of Financial Condition or Statements of Income and Expenses and Changes in Partners’ Capital. The contracts outstanding at the period ended September 30, 2009, are indicative of volume traded during the period. See the Schedule of Investments. The following table indicates the fair values of derivative instruments of futures contracts as separate assets and liabilities.

		September 30, 2009
Assets
Futures Contracts
Currencies		$	656,875
Energy			11,750
Grains			504,032
Indices			32,821
Interest Rates - U.S.			49,977
Interest Rates Non - U.S.			246,538
Metals			726,305
Softs			240,990
Total unrealized appreciation on open futures contracts		$	2,469,288
Liabilities
Futures Contracts
Energy		$	(107,522	)
Grains			(53,792	)
Indices			(26,536	)
Interest Rates - U.S.			(28,100	)
Interest Rates Non - U.S.			(17,184	)
Softs			(115,700	)
Total unrealized depreciation on open futures contracts		$	(348,834	)
Net unrealized appreciation on open futures contracts		$	2,120,454	*

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2009.

		Three Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2009
Sector		Gain (loss) from trading				Gain (loss) from trading
Currencies		$	114,369			$	(774,968	)
Energy			(1,610,086	)			(1,455,983	)
Grains			(66,190	)			(238,969	)
Indices			(3,275	)			142,632
Interest Rates U.S.			(490,235	)			(1,042,052	)
Interest Rates Non-U.S.			(240,846	)			(647,438	)
Metals			398,555				(36,530	)
Softs			10,085				(4,078	)
Total		$	(1,887,623	)		$	(4,057,386	)

 

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

Investments.  All commodity interests (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

Fair Value Measurements.  The Partnership and the Funds (as defined in note 5 “Investment in Partnerships”) adopted ASC 820-10, Fair Value Measurements and Disclosures (formerly, FAS No. 157, “Fair Value Measurements”) as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a framework for measuring fair value and expands disclosures regarding fair value measurements in accordance with GAAP. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Partnership and the Funds did not apply the deferral allowed by ASC 820-10, for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

 

The Partnership and the Funds consider prices for exchange traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange traded forwards, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in partnerships reflects its proportional interest in the partnerships. As of and for the periods ended September 30, 2009 and December 31, 2008, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable Inputs				Unobservable
		9/30/2009				Assets (Level 1)				(Level 2)				Inputs (Level 3)
Assets
Investment in Partnerships		$	757,956,622			$	—			$	757,956,622			$	—
Futures			2,120,454				2,120,454				—				—
Total assets			760,077,076				2,120,454				757,956,622				—
Total fair value		$	760,077,076			$	2,120,454			$	757,956,622			$	—
						Quoted Prices in
						Active Markets				Significant Other				Significant
						for Identical				Observable Inputs				Unobservable
		12/31/2008				Assets (Level 1)				(Level 2)				Inputs (Level 3)
Assets
Investment in Partnerships		$	1,044,481,163			$	—			$	1,044,481,163			$	—
Futures			1,066,300				1,066,300				—				—
Total assets			1,045,547,463				1,066,300				1,044,481,163				—
Total fair value		$	1,045,547,463			$	1,066,300			$	1,044,481,163			$	—

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

The assets allocated to JWH for trading are invested directly pursuant to JWH’s Global Analytics Program.

 

On December 1, 2004, the assets allocated to Winton for trading were invested in the CMF Winton Master L.P. (“Winton Master”), a limited partnership which was organized under the partnership laws of the State of New York. The Partnership purchased 52,981.2908 Redeemable Units of Winton Master with cash of $57,471,493. Winton Master was formed in order to permit accounts managed now or in the future by Winton using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure should promote efficiency and economy in the trading process.

 

On March 1, 2005, the assets allocated to Aspect for trading were invested in the CMF Aspect Master Fund L.P. (“Aspect Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 131,340.8450 Redeemable Units of Aspect Master with cash of $122,786,448 and a contribution of open commodity futures and forward contracts with a fair value of $8,554,397. Aspect Master was formed in order to permit accounts managed now or in the future by Aspect using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Aspect Master. Individual and pooled accounts currently managed by Aspect, including the Partnership are permitted to be limited partners of Aspect Master. The General Partner and Aspect believe that trading through this structure should promote efficiency and economy in the trading process.

 

On July 1, 2005, the assets allocated to Willowbridge for trading were invested in the CMF Willowbridge Argo Master Fund L.P. (“Willowbridge Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 95,795.8082 Redeemable Units of Willowbridge Master with cash of $85,442,868 and a contribution of open futures and forward contracts with a fair value of $10,352,940. Willowbridge Master was formed in order to permit accounts managed now or in the future by Willowbridge using the Argo Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process.

 

On August 1, 2005, the assets allocated to Drury for trading were invested in the CMF Drury Capital Master Fund L.P. (“Drury Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 120,720.7387 Redeemable Units of Drury Master with cash of $117,943,205 and a contribution of open futures and forward contracts with a fair value of $2,777,533. Drury Master was formed in order to permit accounts managed now or in the future by Drury using the Diversified Trend-Following Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Drury Master. Individual and pooled accounts currently managed by Drury, including the Partnership, are permitted to be limited partners of Drury Master. The General Partner and Drury believe that trading through this structure should promote efficiency and economy in the trading process.

 

On August 1, 2005, the assets allocated to CFM for trading were invested in the CMF Capital Fund Management Master Fund L.P. (“CFM Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 159,434.0631 Redeemable Units of CFM Master with cash of $157,804,021 and a contribution of open futures and forward contracts with a fair value of $1,630,043. CFM Master was formed in order to permit accounts managed now or in the future by CFM using the Discus Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of CFM Master. Individual and pooled accounts currently managed by CFM, including the Partnership are permitted to be limited partners of CFM Master. The General Partner and CFM believe that trading through this structure should promote efficiency and economy in the trading process.

 

On October 1, 2005, the assets allocated to AAA for trading were invested in the AAA Master Fund LLC (formerly, Citigroup AAA Master Fund LLC), (“AAA Master”) a limited liability company which was organized under the limited liability company laws of the State of New York. The Partnership purchased 13,956.1190 Units of AAA Master with cash of $50,000,000. AAA Master was formed in order to permit accounts managed now or in the future by AAA using the Energy Program — Futures and Swaps, a proprietary, discretionary trading program, to invest in one trading vehicle. The General Partner is also the managing member of AAA Master. Individual and pool accounts currently managed by AAA, including the Partnership are permitted to be non-managing members of AAA Master. The General Partner and AAA believe that trading through this structure should promote efficiency and economy in the trading process.

 

On June 1, 2006, the assets allocated to Graham for trading were invested in the CMF Graham Capital Master Fund L.P. (“Graham Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 101,486.0491 Redeemable Units of Graham Master with cash of $103,008,482. Graham Master was formed in order to permit accounts managed now or in the future by Graham using the K4D-12.5 program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Graham Master. Individual and pooled accounts currently managed by Graham, including the Partnership, are permitted to be limited partners of Graham Master. The General Partner and Graham believe that trading through this structure should promote efficiency and economy in the trading process.

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

On July 1, 2006, the assets allocated to Avant for trading were invested in the CMF Avant Master Fund L.P. (“Avant Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 17,941.7382 Redeemable Units of Avant Master with cash of $20,000,000. Avant Master was formed in order to permit accounts managed now or in the future by Avant using the Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in Avant Master on January 31, 2009 for cash equal to $14,065,898.

 

On March 1, 2009, the assets allocated to SandRidge for trading were in invested in the CMF SandRidge Master Fund L.P. (“SandRidge Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 14,408.1177 Redeemable Units of SandRidge Master with cash of $27,000,000. SandRidge Master was formed in order to permit commodity pools managed now or in the future by SandRidge using SandRidge’s Energy Program, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of SandRidge Master. Individual and pooled accounts currently managed by SandRidge, including the Partnership, are permitted to be limited partners of SandRidge Master. The General Partner and SandRidge believe that trading through this structure should promote efficiency and economy in the trading process.

 

The General Partner is not aware of any material changes to the trading programs discussed above during the fiscal quarter ended September 30, 2009.

 

Winton Master’s, Aspect Master’s, Drury Master’s, Willowbridge Master’s, CFM Master’s, AAA Master’s, Graham Master’s and SandRidge Master’s (collectively, the “Funds”) trading of futures, forwards, swaps and options contracts, if applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. The Funds and the Partnership engage in such trading through a commodity brokerage account maintained with CGM.

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

A Limited Partner/non-managing member may withdraw all or part of their capital contribution and undistributed profits, if any, from the Funds in multiples of the Net Asset Value per Redeemable Unit of Limited Partnership Interest as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the General Partner/managing member at least 3 days in advance of the Redemption Date. The Units are classified as a liability when the Limited Partner/non-managing member elects to redeem and inform the Funds.

 

Management and incentive fees are charged at the Partnership level. All exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively the “clearing fees”) are borne by the Partnership directly and through its investment in the Funds. All other fees including CGM’s direct brokerage commission are charged at the Partnership level.

 

At September 30, 2009, the Partnership owned approximately 89.5% of Drury Master, 31.0% of Willowbridge Master, 58.9% of Aspect Master, 76.2% of CFM Master, 17.9% of Winton Master, 9.9% of AAA Master, 49.5% of Graham Master and 4.9% of SandRidge Master. At December 31, 2008, the Partnership owned approximately 92.4% of Drury Master, 42.5% of Willowbridge Master, 67.8% of Aspect Master, 84.0% of CFM Master, 27.4% of Winton Master, 10.2% of AAA Master, 50.6% of Graham Master and 57.2% of Avant Master. The performance of the Partnership is directly affected by the performance of the Funds. It is the Partnership’s intention to continue to invest in the Funds. Expenses to investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.

 

Summarized information reflecting the Total Assets, Liabilities and Capital for the Funds are shown in the following tables.

		September 30, 2009
		Total Assets				Total Liabilities				Total Capital
Drury Master		$	106,144,819			$	17,780			$	106,127,039
Willowbridge Master			238,192,320				30,172				238,162,148
Aspect Master			164,579,268				16,670				164,562,598
CFM Master			201,206,982				18,714				201,188,268
Winton Master			524,755,608				442,584				524,313,024
AAA Master			1,933,729,139				605,566,558				1,328,162,581
Graham Master			168,037,387				14,694				168,022,693
SandRidge Master			621,430,942				752,175				620,678,767
Total		$	3,958,076,465			$	606,859,347			$	3,351,217,118

		December 31, 2008
		Total Assets				Total Liabilities				Total Capital
Drury Master		$	166,832,228			$	16,757			$	166,815,471
Willowbridge Master			297,439,763				19,759				297,420,004
Aspect Master			240,236,167				881,834				239,354,333
CFM Master			204,219,612				189,265				204,030,347
Winton Master			547,770,185				18,642				547,751,543
AAA Master			1,962,984,697				624,353,598				1,338,631,099
Graham Master			224,787,639				296,697				224,490,942
Avant Master			67,629,391				15,257,355				52,372,036
Total		$	3,711,899,682			$	641,033,907			$	3,070,865,775

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

Summarized information reflecting the net gain (loss) from trading, total income (loss) and net income (loss) for the Funds are shown in the following tables.

		For the three months ended September 30, 2009
		Gain (Loss) from				Total Income
		Trading, net				(Loss)				Net Income (Loss)
Drury Master		$	14,026,369			$	14,048,678			$	13,992,367
Willowbridge Master			(20,085,700	)			(20,026,877	)			(20,139,642	)
Aspect Master			9,440,451				9,476,242				9,387,591
CFM Master			19,379,509				19,423,002				18,945,243
Winton Master			7,322,348				7,447,037				7,339,274
AAA Master			40,194,995				40,401,333				39,460,830
Graham Master			14,413,920				14,449,688				14,240,193
SandRidge Master			34,131,288				34,264,993				34,047,914
Total		$	118,823,180			$	119,484,096			$	117,273,770

		For the nine months ended September 30, 2009
		Gain (Loss) from				Total Income
		Trading, net				(Loss)				Net Income (Loss)
Drury Master		$	12,436,326			$	12,508,714			$	12,367,730
Willowbridge Master			(23,802,080	)			(23,622,469	)			(23,895,630	)
Aspect Master			(16,781,998	)			(16,658,459	)			(16,878,438	)
CFM Master			30,794,979				30,925,716				28,772,541
Winton Master			(29,310,166	)			(28,936,214	)			(29,217,064	)
AAA Master			143,718,324				144,327,480				141,598,562
Graham Master			10,826,683				10,942,253				10,429,707
Avant Master			2,359,038				2,375,401				2,302,189
SandRidge Master			106,906,561				107,255,829				106,581,046
Total		$	237,147,667			$	239,118,251			$	232,060,643

		For the three months ended September 30, 2008
		Gain (Loss) from				Total Income
		Trading, net				(Loss)				Net Income (Loss)
Drury Master		$	10,630,937			$	10,970,141			$	10,930,002
Willowbridge Master			8,930,938				9,817,051				9,686,363
Aspect Master			(20,271,442	)			(19,655,505	)			(19,753,889	)
CFM Master			(16,676,409	)			(16,114,178	)			(16,476,614	)
Winton Master			(39,233,959	)			(37,573,727	)			(37,692,795	)
AAA Master			193,315,855				194,927,645				193,836,326
Graham Master			(8,833,929	)			(8,216,506	)			(8,473,481	)
Avant Master			(6,528,088	)			(6,342,304	)			(6,387,237	)
Total		$	121,333,903			$	127,812,617			$	125,668,675

		For the nine months ended September 30, 2008
		Gain (Loss) from				Total Income
		Trading, net				(Loss)				Net Income (Loss)
Drury Master		$	29,918,321			$	30,036,694			$	30,888,492
Willowbridge Master			87,588,256				90,440,613				90,089,941
Aspect Master			22,293,556				24,471,311				24,178,434
CFM Master			2,765,897				4,691,897				3,402,948
Winton Master			59,111,379				64,841,142				64,405,072
AAA Master			395,536,118				400,447,961				397,460,650
Graham Master			29,103,729				31,236,297				30,332,774
Avant Master			3,945,849				4,556,472				4,402,983
Total		$	630,263,105			$	650,722,387			$	645,161,294

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

Summarized information reflecting the Partnership’s investment in, and the operations of, the Funds are as shown in the following tables.

		September 30, 2009								For the three months ended September 30, 2009
		% of												Expenses								Net
		Partnership’s				Fair				Income												Income				Investment				Redemptions
Funds		Net Assets				Value				(Loss)				Commissions				Other				(Loss)				Objective				Permitted
Drury Master			12.16	%		$	94,964,238			$	12,670,516			$	41,259			$	9,407			$	12,619,850			Commodity Portfolio				Monthly
Willowbridge Master			9.46	%			73,889,288				(6,817,147	)			30,204				6,055				(6,853,406	)		Commodity Portfolio				Monthly
Aspect Master			12.40	%			96,863,299				5,585,594				47,444				5,279				5,532,871			Commodity Portfolio				Monthly
CFM Master			19.63	%			153,341,135				15,089,867				361,197				7,425				14,721,245			Commodity Portfolio				Monthly
Winton Master			12.03	%			93,950,779				1,168,076				18,702				1,650				1,147,724			Commodity Portfolio				Monthly
AAA Master			16.83	%			131,509,626				4,328,120				81,740				13,398				4,232,982			Energy Portfolio				Monthly
Graham Master			10.64	%			83,112,887				7,143,988				98,592				4,942				7,040,454			Commodity Portfolio				Monthly
SandRidge Master			3.88	%			30,325,370				1,740,349				9,045				1,850				1,729,454			Energy Portfolio				Monthly
Total						$	757,956,622			$	40,909,363			$	688,183			$	50,006			$	40,171,174
		September 30, 2009								For the nine months ended September 30, 2009
		% of												Expenses								Net
		Partnership’s				Fair				Income												Income				Investment				Redemptions
Funds		Net Assets				Value				(Loss)				Commissions				Other				(Loss)				Objective				Permitted
Drury Master			12.16	%		$	94,964,238			$	11,249,850			$	101,971			$	26,604			$	11,121,275			Commodity Portfolio				Monthly
Willowbridge Master			9.46	%			73,889,288				(9,824,490	)			82,379				13,911				(9,920,780	)		Commodity Portfolio				Monthly
Aspect Master			12.40	%			96,863,299				(10,176,888	)			118,504				17,193				(10,312,585	)		CommodityPortfolio				Monthly
CFM Master			19.63	%			153,341,135				24,690,837				1,707,971				23,392				22,959,474			Commodity Portfolio				Monthly
Winton Master			12.03	%			93,950,779				(6,766,742	)			54,668				6,089				(6,827,499	)		Commodity Portfolio				Monthly
AAA Master			16.83	%			131,509,626				15,092,229				231,926				50,467				14,809,836			Energy Portfolio				Monthly
Graham Master			10.64	%			83,112,887				5,511,472				245,065				13,564				5,252,843			Commodity Portfolio				Monthly
Avant Master			0.00	%			—				246,615				2,975				1,254				242,386			Energy Portfolio				Monthly
SandRidge Master			3.88	%			30,325,370				4,969,809				22,927				5,809				4,941,073			Energy Portfolio				Monthly
Total						$	757,956,622			$	34,992,692			$	2,568,386			$	158,283			$	32,266,023
		December 31, 2008								For the three months ended September 30, 2008
		% of												Expenses								Net
		Partnership’s				Fair				Income												Income				Investment				Redemptions
Funds		Net Assets				Value				(Loss)				Commissions				Other				(Loss)				Objective				Permitted
Drury Master			15.15	%		$	154,127,975			$	10,054,812			$	30,796			$	6,031			$	10,017,985			Commodity Portfolio				Monthly
Willowbridge Master			12.43	%			126,449,928				4,162,880				52,887				4,039				4,105,954			Commodity Portfolio				Monthly
Aspect Master			15.95	%			162,328,063				(13,002,235	)			58,076				6,648				(13,066,959	)		Commodity Portfolio				Monthly
CFM Master			16.85	%			171,427,475				(13,467,502	)			294,646				8,477				(13,770,625	)		Commodity Portfolio				Monthly
Winton Master			14.74	%			149,948,887				(9,605,705	)			27,905				2,354				(9,635,964	)		Commodity Portfolio				Monthly
AAA Master			13.42	%			136,584,029				18,984,709				82,065				24,400				18,878,244			Energy Portfolio				Monthly
Graham Master			11.17	%			113,642,734				(3,868,594	)			119,523				3,148				(3,991,265	)		Commodity Portfolio				Monthly
Avant Master			2.94	%			29,972,072				(3,616,558	)			17,543				7,999				(3,642,100	)		Energy Portfolio				Monthly
Total						$	1,044,481,163			$	(10,358,193	)		$	683,441			$	63,096			$	(11,104,730	)
		December 31, 2008								For the nine months ended September 30, 2008
		% of												Expenses								Net
		Partnership’s				Fair				Income												Income				Investment				Redemptions
Funds		Net Assets				Value				(Loss)				Commissions				Other				(Loss)				Objective				Permitted
Drury Master			15.15	%		$	154,127,975			$	28,506,176			$	114,125			$	22,194			$	28,369,857			Commodity Portfolio				Monthly
Willowbridge Master			12.43	%			126,449,928				38,410,209				138,957				11,728				38,259,524			Commodity Portfolio				Monthly
Aspect Master			15.95	%			162,328,063				15,938,727				176,074				17,108				15,745,545			Commodity Portfolio				Monthly
CFM Master			16.85	%			171,427,475				4,527,139				1,084,936				24,549				3,417,654			Commodity Portfolio				Monthly
Winton Master			14.74	%			149,948,887				16,014,563				102,946				6,671				15,904,946			Commodity Portfolio				Monthly
AAA Master			13.42	%			136,584,029				38,741,974				229,392				57,717				38,454,865			Energy Portfolio				Monthly
Graham Master			11.17	%			113,642,734				13,819,977				402,848				10,722				13,406,407			Commodity Portfolio				Monthly
Avant Master			2.94	%			29,972,072				2,488,453				64,186				22,356				2,401,911			Energy Portfolio				Monthly
Total						$	1,044,481,163			$	158,447,218			$	2,313,464			$	173,045			$	155,960,709

 

 

Tactical Diversified Futures Fund L.P.
Notes to Financial Statements
September 30, 2009
(Unaudited)

 

 

In the normal course of its business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index or reference rate, and generally represent future commitments to exchange currencies or cash balances, to purchase or sell other financial instruments on specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments are standardized and include futures and certain forwards and option contracts. OTC contracts are negotiated between contracting parties and include forwards and certain options. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange traded instruments because of the greater risk of default by the counterparty to an OTC contract.

 

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

 

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk as the sole counterparty or broker with respect to the Partnership’s/Funds’ assets is CGM or a CGM affiliate. Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.

 

As both a buyer and seller of options, the Partnership/Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership/Funds to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Funds do not consider these contracts to be guarantees as described in ASC 460-10 Guarantees (formerly, FAS No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees”).

 

The General Partner monitors and controls the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds are subject. These monitoring systems allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, on-line monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

 

The majority of these instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Funds’ businesses, these instruments may not be held to maturity.

 

Liquidity and Capital Resources

 

The Partnership does not engage in the sale of goods or services. The Partnership’s assets are its (i) investment in Partnerships, (ii) equity in its trading account, consisting of cash and cash equivalents, net unrealized appreciation on open futures contracts (iii) and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such losses occurred during the third quarter of 2009.

 

The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on trading, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

 

For the nine months ended September 30, 2009, Partnership capital decreased 23.2% from $1,017,470,854 to $781,130,484. This decrease was attributable to the net loss from operations of $26,620,990, coupled with the redemption of 166,344.3546 Redeemable Units of Limited Partnership Interest resulting in an outflow of $209,767,249, which was partially offset by the addition of 38.8459 Redeemable Units of Limited Partnership Interest totaling $47,869. Future redemptions could impact the amount of funds available for investment in commodity contract positions in subsequent months.

 

Critical Accounting Policies

 

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

 

Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows as permitted by ASC 230-10.

 

Investments. All commodity interests (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

Fair Value Measurements. The Partnership and the Funds adopted ASC 820-10 as of January 1, 2008 which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Partnership and the Funds did not apply the deferral allowed by ASC 820-10, for nonfinancial assets and nonfinancial liabilities measured at fair value on a nonrecurring basis.

 

The Partnership and the Funds consider prices for exchange traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange traded forwards, swaps and certain options contracts for which market quotations are not readily available, are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). Investments in partnerships (other commodity pools) where there are no other rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in partnerships reflects its proportional interest in the partnerships. As of and for the period ended September 30, 2009, the Partnership and the Funds did not hold any derivative instruments that are priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3).

 

Futures Contracts. The Partnership and the Funds trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and the Funds. When the contract is closed, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Partnership and the Funds agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Partnership’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively and are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

The Partnership does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses and Changes in Partners’ Capital.

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of Aluminum, Copper, Lead, Nickel, Tin or Zinc. LME contracts traded by the Partnership and the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Partnership and the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Partnership and the Funds. A contract is considered offset when all long positions have been matched with short positions. When the contract is closed at the prompt date, the Partnership and the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Because transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME, credit exposure is limited. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Options. The Funds may purchase and write (sell) both exchange listed and over the counter, options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Funds write an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Funds purchase an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses and Changes in Partners’ Capital.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on their share of the Partnership’s income and expenses.

In 2007, the Partnership adopted ASC 740-10 Income Taxes (formerly, FAS No. 48, “Accounting for Uncertainty in Income Taxes”). ASC 740-10 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has continued to evaluate the application of ASC 740-10 and has concluded that the adoption of ASC 740-10 had no impact on the operations of the Partnership for the nine months ended September 30, 2009 and that no provision for income tax is required in the Partnership’s financial statements.

The following are the major tax jurisdictions for the Partnership and the earliest tax year subject to examination: United States — 2005.

Recent Accounting Pronouncements. In 2009, the Partnership adopted ASC 820-10-65 Fair Value Measurements (formerly, FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). ASC 820-10-65 reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820-10-65 also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The application of ASC 820-10-65 is required for interim and annual reporting periods ending after June 15, 2009. Management has concluded that based on available information in the marketplace, there has not been a decrease in the volume and level of activity in the Partnership’s Level 2 assets and liabilities. The adoption of ASC 820-10-65 had no effect on the Partnership’s Financial Statements.

Subsequent Events. In 2009, the Partnership adopted ASC 855-10 Subsequent Events (formerly, FAS No. 165, “Subsequent Events”). The objective of ASC 855-10 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.

Results of Operations

 

During the third quarter of 2009, the Partnership’s Net Asset Value per Redeemable Unit increased 2.6% from $1,223.32 to $1,255.53 as compared to a decrease of 3.2% in the same period of 2008. The Partnership experienced a net trading gain before brokerage commissions and related fees in the third quarter of 2009 of $38,866,523. Gains were primarily attributable to the Partnership/Funds’ trading in currencies, U.S. and non-U.S. interest rates, livestock, metals, softs, lumber and indices and were partially offset by losses in energy and grains. The Partnership experienced a net trading loss before brokerage commissions and related fees in the third quarter of 2008 of $10,334,513. Losses were primarily attributable to the Partnership/Funds’ trading in currencies, energy, grains, non-U.S. interest rates, and softs and were partially offset by gains in U.S. interest rates, livestock, metals, indices and lumber.

 

Markets around the world rose again in the third quarter of 2009. Economic activity in the U.S. further stabilized with many important sectors of the economy demonstrating marked improvements over the depressed levels reached earlier this year. The overall economy continued to face headwinds with employment further contracting, albeit at a much slower pace. Consumer confidence has bounced off record lows but remains well below historical averages. The Partnership realized gains for the quarter, primarily in equity indices, fixed income, and metals.

 

The majority of the profits were earned on the back of the equity rally. The combination of strong growth news, benign inflation data and accommodative monetary policy stances from key central banks has continued to support the price action in risky assets. Gains were recorded from fixed income trading as central banks maintained low levels of interest rates during the period while both the U.S. Federal Reserve and Bank of England reiterated their commitment to quantitative easing. Strong demand for new issues of government-backed debt and a weaker-than-expected rise in a key index of German business sentiment contributed to the market’s rise as well. Gains were also recorded in metals, primarily in copper and gold, as prices established firm bullish trends that began in early 2009. The Partnership capitalized on these trends and registered strong gains.

 

In the energy sector, losses were captured as the markets remained in contango. Natural gas demonstrated a strong bearish trend but the trend seemed to be reversing late in the quarter. Crude oil and heating oil remained mostly trendless and volatile, thus contributing to losses.

 

During the Partnership’s nine months ended September 30, 2009, the Net Asset Value per Redeemable Unit decreased 2.7% from $1,290.46 to $1,255.53 as compared to an increase of 11.5% in the same period of 2008. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2009 of $30,427,018. Gains were primarily attributable to the Partnership/Funds’ trading in currencies, livestock, metals and indices and were partially offset by losses in energy, grains, U.S. and non-U.S. interest rates, lumber and softs. The Partnership experienced a net trading gain before brokerage commissions and related fees in the nine months ended September 30, 2008 of $157,666,940. Gains were primarily attributable to the Partnership/Funds’ trading in currencies, energy, grains, U.S. and non-U.S. interest rates, indices, livestock, lumber, metals and softs.

 

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership/Funds depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations.

 

Interest income on 80% of the Partnership’s average daily equity maintained in cash was earned at the monthly average 30-day U.S. Treasury bill yield. CGM may continue to maintain the Partnership’s assets in cash and/or place all of the Partnership’s assets in 90-day Treasury bills and pay the Partnership 80% of the interest earned on the Treasury bills purchased. Twenty percent of the interest earned on Treasury bills purchased may be retained by CGM and/or credited to the General Partner. Interest income for the three and nine months ended September 30, 2009 decreased $2,309,651 and $7,772,692, respectively, as compared to the corresponding periods in 2008. The decrease is due to lower U.S. Treasury bill rates for the three and nine months ended September 30, 2009, as compared to the corresponding periods in 2008.

Brokerage commissions are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, additions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage commissions and fees for the three and nine months ended September 30, 2009 decreased $1,246,811 and $632,501, respectively, as compared to the corresponding periods in 2008. The decrease is due to a decrease in average net assets for the three and nine months ended September 30, 2009, as compared to the corresponding periods in 2008.

 

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, additions and redemptions. Management fees for the three and nine months ended September 30, 2009 decreased $408,766 and $238,460, respectively, as compared to the corresponding period in 2008. The decrease is due to a decrease in average net assets for the three and nine months ended September 30, 2009, as compared to the corresponding periods in 2008.

 

Incentive fees paid quarterly are based on the new trading profits generated by each Advisor as defined in the management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three and nine months ended September 30, 2009 resulted in incentive fees of $2,963,733 and $5,601,417, respectively. Trading performance for the three and nine months ended September 30, 2008 resulted in incentive fees of $4,004,117 and $17,663,465, respectively.

 

In allocating the assets of the Partnership among the trading advisors, the General Partner considers past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the trading advisors and may allocate assets to additional advisors at any time.

 

The Partnership/Funds is a speculative commodity pool. The market sensitive instruments held by them are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

 

The risk to the Limited Partners that have purchased interests in the Partnership is limited to the amount of their capital contributions to the Partnership and their share of the Partnership’s assets and undistributed profits. This limited liability is a consequence of the organization of the Partnership as a limited partnership under applicable law.

 

Market movements result in frequent changes in the fair value of the Partnership’s/Funds’ open positions and, consequently, in its earnings and cash flow. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects of the Partnership’s/Funds’ open positions and the liquidity of the markets in which it trades.

 

The Partnership/Funds rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s/Funds’ past performance is not necessarily indicative of its future results.

 

Value at Risk is a measure of the maximum amount which the Partnership/Funds could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s/Funds’ speculative trading and the recurrence in the markets traded by the Partnership/Funds of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s/Funds’ experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership’s/Funds’ losses in any market sector will be limited to Value at Risk or by the Partnership’s/Funds’ attempts to manage its market risk.

 

Exchange maintenance margin requirements have been used by the Partnership/Funds as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

The following tables indicate the trading Value at Risk associated with the Partnership’s direct investments and indirect investments in the Funds by market category as of September 30, 2009 and the highest, lowest and average values, during the three months ended September 30, 2009. All open position trading risk exposures have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2008. As of September 30, 2009, the Partnership’s total capitalization was $781,130,484. As of September 30, 2009, the Partnership’s Value at Risk for the portion of its assets that are traded directly by JWH was as follows:

										Three months ended September 30, 2009
						% of Total				High				Low				Average
Market Sector		Value at Risk				Capitalization				Value at Risk				Value at Risk				Value at Risk*
Currencies		$	1,034,640				0.13	%		$	1,093,705			$	426,172			$	814,240
Energy			194,885				0.02	%			585,665				118,694				305,357
Grains			602,640				0.08	%			706,320				282,555				480,119
Interest Rates U.S.			371,520				0.05	%			498,150				40,014				216,475
Interest Rates Non -U.S.			631,449				0.08	%			632,703				102,281				310,220
Metals			691,157				0.09	%			691,157				64,800				432,514
Softs			407,200				0.05	%			473,920				181,640				328,091
Indices			165,743				0.02	%			231,803				10,500				166,394
Total		$	4,099,234				0.52	%
*   Average of month-end Values at Risk
As of September 30, 2009, Drury Master’s total capitalization was $106,127,039. The Partnership owned approximately 89.5% of Drury Master. As of September 30, 2009, the Partnership’s Value at Risk for the portion of its assets that are traded indirectly through its investment in Drury Master was as follows:
September 30, 2009 (Unaudited)
										Three Months Ended September 30, 2009
						% of Total				High				Low				Average
Market Sector		Value at Risk				Capitalization				Value at Risk				Value at Risk				Value at Risk*
Currencies		$	1,988,083				1.88	%		$	2,129,368			$	1,699,038			$	1,851,233
Energy			840,814				0.79	%			1,647,440				840,814				1,090,906
Grains			1,137,580				1.07	%			1,502,215				723,633				1,190,977
Interest Rates U.S.			1,031,603				0.97	%			1,031,603				97,576				810,045
Interest Rates Non-U.S.			1,623,437				1.53	%			2,109,650				1,089,172				1,679,831
Metals			1,886,353				1.78	%			2,600,199				1,885,753				2,318,864
Softs			618,100				0.58	%			1,060,832				548,802				698,463
Indices			6,205,993				5.85	%			6,313,897				5,318,317				5,957,419
Total		$	15,331,963				14.45	%