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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter 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: 000-51651

 

 

WORLD MONITOR TRUST III – SERIES J

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		20-2446281
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

900 King Street, Suite 100, Rye Brook, New York		10573
(Address of principal executive offices)		(Zip Code)

(914) 307-7000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨		Smaller Reporting Company		x

Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 

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WORLD MONITOR TRUST III – SERIES J

INDEX TO QUARTERLY REPORT ON FORM 10-Q

SEPTEMBER 30, 2009

 

				Page
PART I – FINANCIAL INFORMATION				3
Item 1.		Financial Statements		3
		World Monitor Trust III - Series J
		Condensed Statements of Financial Condition as of September 30, 2009 (Unaudited) and December 31, 2008		5
		Condensed Schedules of Investments as of September 30, 2009 (Unaudited) and December 31, 2008		6
		Condensed Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2009 and 2008		7
		Condensed Statements of Changes in Unitholders’ Capital (Unaudited) for the Nine Months Ended September 30, 2009 and 2008		8
		Notes to Condensed Financial Statements (Unaudited)		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.		Controls and Procedures		40
PART II – OTHER INFORMATION				41
Item 1.		Legal Proceedings		41
Item 1.A.		Risk Factors		41
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3.		Defaults Upon Senior Securities		41
Item 4.		Submission of Matters to a Vote of Security Holders		41
Item 5.		Other Information		41
Item 6.		Exhibits:		41

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;

FINANCIAL STATEMENTS TO FOLLOW]

 

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WORLD MONITOR TRUST III – SERIES J

FINANCIAL STATEMENTS

September 30, 2009

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF FINANCIAL CONDITION

September 30, 2009 (Unaudited) and December 31, 2008

 

 

 

		September 30, 2009			December 31, 2008
ASSETS
Cash and cash equivalents (See Note 2)		$	123,619,885		$	131,724,537
Net unrealized gain on open futures contracts			2,587,846			660,900
Net unrealized gain on open forward contracts			1,755,679			0
Commodity options owned, at fair value (premiums paid $5,018,667 and $0 at September 30, 2009 and December 31, 2008, respectively)			4,429,019			0
Interest receivable			0			5,905
Total assets		$	132,392,429		$	132,391,342
LIABILITIES
Accrued expenses payable		$	198,195		$	90,163
Commissions payable			7,255			0
Interest payable			2,460			0
Trading advisor management fees payable			216,802			301,942
Incentive fees payable			969,111			1,590,799
Offering costs payable			21,845			2,258
Net unrealized loss on open forward contracts			0			1,737,730
Commodity options written, at fair value (premiums received $4,418 and $0 at September 30, 2009 and December 31, 2008, respectively)			997			0
Service fees payable			145,706			0
Redemptions payable			1,601,034			3,832,492
Subscriptions received in advance			1,488,847			373,900
Total liabilities			4,652,252			7,929,284
UNITHOLDERS’ CAPITAL (Net Asset Value)
Class I Units:
Unitholders’ Interests – 861,251.967 and 893,067.142 Units outstanding at September 30, 2009 and December 31, 2008, respectively			111,452,331			107,680,197
Managing Owner’s Interests – 0.000 and 9,467.578 Units outstanding at September 30, 2009 and December 31, 2008, respectively			0			1,141,538
Class II Units:
Unitholders’ Interests – 110,513.018 and 125,313.352 Units outstanding at September 30, 2009 and December 31, 2008, respectively			14,867,140			15,462,954
Managing Owner’s Interests – 10,560.643 and 1,437.417 Units outstanding at September 30, 2009 and December 31, 2008, respectively			1,420,706			177,369
Total unitholders’ capital (Net Asset Value)			127,740,177			124,462,058
Total liabilities and unitholders’ capital		$	132,392,429		$	132,391,342
NET ASSET VALUE PER UNIT
Class I		$	129.41		$	120.57
Class II		$	134.53		$	123.39

See accompanying notes.

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED SCHEDULES OF INVESTMENTS

September 30, 2009 (Unaudited) and December 31, 2008

 

 

 

		September 30, 2009							December 31, 2008
Futures and Forward Contracts		Net Unrealized Gain (Loss) as a % of Unitholders’ Capital			Net Unrealized Gain (Loss)				Net Unrealized Gain (Loss) as a % of Unitholders’ Capital			Net Unrealized Gain (Loss)
Futures contracts purchased:
Commodities		0.00	%		$	3,700			0.16	%		$	193,130
Currencies		0.13	%			171,410			0.17	%			212,493
Energy		0.13	%			160,662			0.00	%			0
Interest rates		0.80	%			1,020,058			0.26	%			325,215
Metals		1.89	%			2,410,925			0.01	%			13,911
Stock indices		0.12	%			154,646			0.00	%			0
Net unrealized gain on futures contracts purchased		3.07	%			3,921,401			0.60	%			744,749
Futures contracts sold:
Commodities		0.10	%			129,015			(0.05	)%			(61,677	)
Currencies		0.02	%			17,983			0.00	%			1,625
Energy		0.03	%			37,386			(0.01	)%			(13,115	)
Interest rates		0.00	%			1,922			0.00	%			(4,499	)
Metals		(1.19	)%			(1,515,164	)		0.01	%			13,881
Stock indices		0.00	%			(4,697	)		(0.02	)%			(20,064	)
Net unrealized loss on futures contracts sold		(1.04	)%			(1,333,555	)		(0.07	)%			(83,849	)
Net unrealized gain on open futures contracts		2.03	%		$	2,587,846			0.53	%		$	660,900
Forward currency contracts purchased:
Net unrealized loss on forward contracts purchased		(0.29	)%		$	(363,910	)		(1.19	)%		$	(1,472,511	)
Forward currency contracts sold:
Net unrealized gain (loss) on forward contracts sold		1.66	%			2,119,589			(0.21	)%			(265,219	)
Net unrealized gain (loss) on open forward contracts		1.37	%		$	1,755,679			(1.40	)%		$	(1,737,730	)
Purchased Options on Futures Contracts		Fair Value As a % of Unitholders’ Capital			Fair Value				Fair Value As a % of Unitholders’ Capital			Fair Value
Fair value on options purchased:
Commodities		0.81	%		$	1,030,476			0.00	%		$	0
Energy		1.13	%			1,445,630			0.00	%			0
Interest rates		0.00	%			4,390			0.00	%			0
Metals		1.53	%			1,948,523			0.00	%			0
Total commodity options owned, at fair value (premiums paid $5,018,667 and $0 at September 30, 2009 and December 31, 2008, respectively)		3.47	%		$	4,429,019			0.00	%		$	0
Written Options on Futures Contracts
Fair value on options written:
Commodities		0.00	%		$	(119	)		0.00	%		$	0
Stock indices		0.00	%			(878	)		0.00	%			0
Total commodity options written, at fair value (premiums received $4,418 and $0 at September 30, 2009 and December 31, 2008, respectively)		0.00	%		$	(997	)		0.00	%		$	0

See accompanying notes.

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Three Months Ended September 30,							Nine Months Ended September 30,
		2009			2008				2009			2008
REVENUES
Realized		$	5,590,644		$	(3,750,011	)		$	13,138,026		$	14,974,865
Change in unrealized			1,952,732			(5,012,262	)			4,834,128			(2,531,314	)
Interest income			0			729,452				20,956			1,320,440
Total revenues (losses)			7,543,376			(8,032,821	)			17,993,110			13,763,991
EXPENSES
Brokerage commissions			212,073			104,221				457,052			227,617
Interest expense			3,783			0				3,783			0
Management fees			156,782			146,326				463,009			386,416
Advisor management fees			636,122			617,642				1,983,269			1,706,547
Advisor incentive fees			972,007			199,622				2,415,412			3,726,905
Service fee – Class I Units (See Note 5)			604,180			506,946				1,724,643			1,360,683
Sales commission			313,566			292,651				926,019			772,832
Offering costs			155,287			31,438				376,337			407,010
Operating expenses			238,010			219,756				558,435			573,242
Total expenses			3,291,810			2,118,602				8,907,959			9,161,252
NET INCOME (LOSS)		$	4,251,566		$	(10,151,423	)		$	9,085,151		$	4,602,739
NET INCOME (LOSS) PER WEIGHTED AVERAGE UNITHOLDER AND MANAGING OWNER UNIT
Net income (loss) per weighted average Unitholder and Managing Owner Unit
Class I		$	4.18		$	(10.42	)		$	8.86		$	5.56
Class II		$	5.36		$	(10.02	)		$	10.62		$	3.16
Weighted average number of Units outstanding – Class I			869,032			849,633				883,727			771,234
Weighted average number of Units outstanding – Class II			115,714			129,580				118,566			100,244

See accompanying notes.

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF CHANGES IN UNITHOLDERS’ CAPITAL

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)

 

 

 

		Class I														Class II													Total
		Unitholders							Managing Owner Interests							Unitholders							Managing Owner Interests
		Units			Amount				Units			Amount				Units			Amount				Units		Amount				Units			Amount
Nine Months Ended September 30, 2009
Unitholders’ capital at December 31, 2008		893,067.142			$	107,680,197			9,467.578			$	1,141,538			125,313.352			$	15,462,954			1,437.417		$	177,369			1,029,285.489			$	124,462,058
Additions		112,836.793				13,558,326			0.000				0			9,188.514				1,170,000			0.000			0			122,025.307				14,728,326
Redemptions		(144,651.968	)			(17,563,157	)		0.000				0			(23,988.848	)			(2,972,201	)		0.000			0			(168,640.816	)			(20,535,358	)
Transfers		0.000				0			(9,467.578	)			(1,190,639	)		0.000				0			9,123.226			1,190,639			(344.352	)			0
Net income						7,776,965							49,101							1,206,387						52,698							9,085,151
Unitholders’ capital at September 30, 2009		861,251.967			$	111,452,331			0.000			$	0			110,513.018			$	14,867,140			10,560.643		$	1,420,706			982,325.628			$	127,740,177
Nine Months Ended September 30, 2008
Unitholders’ capital at December 31, 2007		688,045.259			$	72,522,810			7,461.871			$	786,512			57,736.703			$	6,106,173			601.816		$	63,647			753,845.649			$	79,479,142
Additions		230,076.292				26,947,573			1,828.235				215,241			73,004.337				8,593,198			818.174			95,798			305,727.038				35,851,810
Offering costs						(97,255	)						(1,049	)						(9,800	)					(107	)						(108,211	)
Redemptions		(42,474.856	)			(4,920,382	)		0.000				0			(2,928.903	)			(340,145	)		0.000			0			(45,403.759	)			(5,260,527	)
Transfers		(4,356.349	)			(502,919	)		0.000				0			4,177.441				485,222			0.000			0			(178.908	)			(17,697	)
Net income						4,239,265							46,234							313,608						3,632							4,602,739
Unitholders’ capital at September 30, 2008		871,290.346			$	98,189,092			9,290.106			$	1,046,938			131,989.578			$	15,148,256			1,419.990		$	162,970			1,013,990.020			$	114,547,256

See accompanying notes.

 

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1. ORGANIZATION

A. General Description of the Trust

World Monitor Trust III (the “Trust”) is a business trust organized under the laws of Delaware on September 28, 2004. The Trust consisted of four separate and distinct series (“Series”): Series G, H, I and J. Series G, H, I and J commenced trading operations on December 1, 2005. Effective March 31, 2007, Series H and Series I were no longer offered and on April 30, 2007 Series H and Series I were dissolved. Effective December 31, 2007, Series G was no longer offered and was dissolved. Series J will continue to exist unless terminated at some future date pursuant to the provisions of Article XIII of the Trust’s Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). The assets of each Series have been segregated from those of the other Series, separately valued and independently managed, and separate financial statements have been prepared for each Series. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts and may, from time to time, engage in cash and spot transactions.

Kenmar Preferred Investments Corp. is the managing owner of the Trust and of each Series. Effective May 5, 2009, Preferred Investment Solutions Corp. changed its name to Kenmar Preferred Investments Corp. (“Preferred” or the “Managing Owner”). Preferred or Managing Owner refers to either Preferred Investment Solutions Corp. or Kenmar Preferred Investments Corp., depending on the applicable period discussed.

Each Series is initially divided into two classes: Class I Units and Class II Units. The Class I and Class II Units are identical except for the applicable service fee charged to each Class.

From January 1, 2008 through June 30, 2009, Series J allocated its assets to three managed accounts separately managed by the following trading advisors: Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program, Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program, and Graham Capital Management, L.P. (“Graham”) pursuant to its Global Diversified Program at 150% leverage. Effective July 1, 2009, Series J entered into trading agreements with GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus (1.5x) Program (collectively with Eagle, Ortus and Graham, the “Trading Advisors”). Beginning July 1, 2009, Series J allocated approximately one-sixth of its net assets to each Trading Advisor’s managed account (collectively, the “Managed Accounts”), with such allocations to be re-balanced quarterly.

B. Regulation

As a registrant with the Securities and Exchange Commission (“SEC”), the Trust and each Series are subject to the regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. As a commodity pool, the Trust and each Series are subject to the regulations of the Commodity Futures Trading Commission (“CFTC”), an agency of the U.S. government which regulates most aspects of the commodity futures industry; rules of the National Futures Association (“NFA”), an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Trust through the Managed Accounts executes transactions.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1. ORGANIZATION (CONTINUED)

 

C. The Offering

Up to $281,250,000 Series J, Class I; and $93,750,000 Series J, Class II of Units are being offered (totaling $375,000,000) (“Subscription Maximum”). Interests are being offered to investors who meet certain established suitability standards. Prior to November 30, 2008, investments required a minimum aggregate initial subscription of $5,000 and $2,000 for certain Benefit Plan Investors (including IRAs), although the minimum purchase for any single series was $500.

Effective November 30, 2008, the Board of Directors of the Managing Owner of Series J determined that the Units would no longer be publicly offered and would only be available on a private placement basis to “accredited investors” pursuant to Regulation D under the Securities Act of 1933.

For new subscribers, the minimum initial investment is $25,000 ($10,000 for benefit plan investors (including IRAs)). The minimum additional subscription amount for current investors is $5,000.

Initially, the Units for each Series were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Interest.

The subscription minimum of $30,000,000 for Series J was reached during the Initial Offering Period permitting all Series G, H, I and J to commence trading operations. Series J completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443. Series H and I Units were fully redeemed as of April 30, 2007 and Series G’s Units as of December 31, 2007. Until the Subscription Maximum for Series J is reached, Series J’s Units will continue to be offered on a monthly basis at the then current net asset value per Unit.

D. Exchanges, Redemptions and Termination

Units owned in one series of the Trust (Series G, H, I and J) were permitted to be exchanged, without any charge, for Units of one or more other Series on a monthly basis for as long as Units in those Series were being offered to the public. Exchanges were made at the applicable Series’ then current net asset value per Unit as of the close of business on the last day of the month in which the exchange request was effected. The exchange of Units was treated as redemption of Units in one Series (with the related tax consequences) and the simultaneous purchase of Units in the other Series.

Following Series H and I’s liquidations on April 30, 2007 and Series G’s liquidation on December 31, 2007, Series J unitholders are no longer able to effect exchanges from Series J into Series G, H or I.

Redemptions from Series J are permitted on a monthly basis. For Class I Units issued from July 1, 2008 through June 1, 2009, Kenmar Securities Inc. is entitled to a redemption charge for Class I Units redeemed prior to the first anniversary of their purchase of up to 2% of the Net Asset Value per Unit at which they were redeemed. Class I Units issued beginning July 1, 2009 will not be subject to a redemption charge. There is no redemption charge associated with the Class II Units.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1. ORGANIZATION (CONTINUED)

 

D. Exchanges, Redemptions and Termination (Continued)

 

In the event that the net asset value of a Series, after adjustments for distributions, contributions and redemptions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. Should the Managing Owner make a determination that Series J’s aggregate net assets in relation to its operating expenses make it unreasonable or imprudent to continue the business of Series J, or, in the exercise of its reasonable discretion, if the aggregate net asset value of Series J as of the close of business on any business day declines below $10 million, the Managing Owner may dissolve Series J. In addition, in the event that the net asset value of the allocated assets, after adjustments for distributions, contributions and redemptions, for the Managed Accounts traded by any of the Trading Advisors declines by 40% or more since the commencement of trading activities or the first day of a fiscal year, that Managed Account will automatically terminate.

E. Foreign Currency Transactions

Series J’s functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the condensed statements of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in operations currently under the caption realized in the condensed statements of operations.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Accounting

The condensed statement of financial condition, including the condensed schedule of investments, as of September 30, 2009, the condensed statements of operations for the three months and nine months ended September 30, 2009 and 2008, and the condensed statements of changes in unitholders’ capital for the nine months ended September 30, 2009 and 2008, are unaudited. In the opinion of the Managing Owner, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of Series J as of September 30, 2009 and the results of its operations for the three months and nine months ended September 30, 2009 and 2008. The operating results for the interim periods may not be indicative of the results expected for the full year.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Series J’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

The financial statements of Series J are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Commodity futures, options and foreign exchange transactions are reflected in the accompanying condensed statements of financial condition on the trade date. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) are offset when reflected in the financial statements since the contracts are executed with the same counter party under a master netting arrangement. The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The values which will be used by Series J for open forward and option positions will be provided by its administrator, who obtains market quotes from data vendors and third parties. Any change in net unrealized gain or loss during the current period is reported in the condensed statement of operations. Realized gains and losses on transactions are recognized in the period in which the contracts are closed. Brokerage commissions include other trading fees and are charged to expense when incurred.

The weighted average number of Units outstanding was computed for purposes of disclosing net income (loss) per weighted average Unit. The weighted average Units is equal to the number of Units outstanding at period end, adjusted proportionately for Units subscribed and redeemed based on their respective time outstanding during such period.

Series J has elected not to provide a Statement of Cash Flows since substantially all of Series J’s investments are highly liquid and carried at fair value, Series J has little or no debt and a statement of changes in unitholders’ capital is provided.

Consistent with standard business practices in the normal course of business, Series J has provided general indemnifications to the Managing Owner, and others when they act, in good faith, in the best interests of Series J. Series J is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.

Series J accounts for financial assets and liabilities using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels: quoted market prices in active markets for identical assets and liabilities (Level 1), inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly (Level 2), and unobservable inputs for the asset or liability (Level 3).

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

Series J considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by Super Derivatives, Bloomberg, Reuters, and or other third party data vendors or pricing services who derive fair values for those assets from observable inputs (Level 2). There are no Level 3 investments on September 30, 2009 or December 31, 2008.

The following table summarizes the assets and liabilities measured at fair value using the fair value hierarchy:

 

September 30, 2009		Level 1			Level 2				Level 3			Total
Assets:
Net unrealized gain on open futures contracts		$	2,587,846		$	0			$	0		$	2,587,846
Net unrealized gain on open forward contracts		$	0		$	1,755,679			$	0		$	1,755,679
Commodity options owned, at fair value		$	0		$	4,429,019			$	0		$	4,429,019
Liabilities:
Commodity options written, at fair value		$	0		$	(997	)		$	0		$	(997	)
December 31, 2008		Level 1			Level 2				Level 3			Total
Assets:
Net unrealized gain on open futures contracts		$	660,900		$	0			$	0		$	660,900
Liabilities:
Net unrealized loss on open forward contracts		$	0		$	(1,737,730	)		$	0		$	(1,737,730	)

In April 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance clarifying the application of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures.” The additional guidance provides for how the fair value of a financial asset is determined when the market for that financial asset is inactive. The guidance was effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. Series J adopted the guidance effective January 1, 2009. As required, Series J also adopted guidance relating to recognition and presentation of other-than-temporary impairments, effective January 1, 2009. The adoption of these pronouncements did not have an impact on Series J’s financial statements.

In March 2008, the FASB issued accounting guidance which established among other things, the disclosure requirements for derivative instruments and for hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Series J adopted the guidance effective January 1, 2009. The following table summarizes quantitative information required by the guidance.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

The fair value of Series J’s derivatives by instrument type, as well as the location of those instruments on the condensed statement of financial condition as of September 30, 2009 are included in the condensed schedule of investments, all of which are deemed derivatives not designated as hedging instruments under ASC Topic 815, “Derivatives and Hedging.”

The trading revenue of Series J’s derivatives by instrument type, as well as the location of those gains and losses on the condensed statements of operations, for the three and nine months ended September 30, 2009 is as follows:

 

		Trading Revenue for the Three Months Ended September 30, 2009				Trading Revenue for the Nine Months Ended September 30, 2009
Type of Instrument
Commodities Contracts		$	631,397			$	(326,475	)
Currencies Contracts			798,620				2,040,421
Energy Contracts			(995,711	)			1,670,781
Interest Rate Contracts Metals Contracts			(135,143 1,698,682	)			178,522 1,911,976
Stock Indices Contracts Purchased Options on Futures Contracts Written Options on Futures Contracts			4,247,004 (922,114 4,412	)			7,138,299 (922,114 4,412	)
Forward Currency Contracts			2,216,229				6,276,332
Total		$	7,543,376			$	17,972,154
Line item in Condensed Statements of Operations
Realized		$	5,590,644			$	13,138,026
Change in unrealized			1,952,732				4,834,128
Total		$	7,543,376			$	17,972,154

Effective for the quarter ending June 30, 2009, Series J adopted ASC Topic 855, “Subsequent Events” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of ASC Topic 855 did not have a material impact on Series J’s financial statements.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A. Basis of Accounting (Continued)

 

In June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS 166”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. SFAS 166 is effective for Series J on January 1, 2010. Preferred, as Managing Owner of Series J, is evaluating the impact of adopting SFAS 166 and its impact on Series J’s financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is effective for Series J on January 1, 2010. Preferred, as Managing Owner of Series J, is evaluating the impact of adopting SFAS 167 and its impact on Series J’s financial statements.

Effective July 1, 2009, Series J adopted ASC Topic 105, “Generally Accepted Accounting Principles.” ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change U.S. GAAP but reorganizes the existing literature into Topics. References for FASB guidance throughout this document have been updated for the Codification.

On September 30, 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (“ASU 2009-12”). ASU 2009-12 provides guidance on measuring the fair value of certain alternative investments, and amends ASC Topic 820 to offer investors a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share and require certain disclosures. ASU 2009-12 is effective for periods ending after December 15, 2009, and early adoption is permitted. Preferred, as Managing Owner of Series J, is evaluating the impact this guidance will have on Series J’s financial statements.

 

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Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

B. Cash and Cash Equivalents

Cash represents amounts deposited with a clearing broker and bank, a portion of which is restricted for purposes of meeting margin requirements, which typically range from 0% to 35% of the notional amounts of the derivatives traded. As of September 30, 2009 and December 31, 2008, restricted cash totaled $13,753,520 and $3,269,154, respectively. Series J receives interest on all cash balances held by the clearing broker and bank at prevailing rates.

C. Income Taxes

Series J is treated as a partnership for Federal income tax purposes. As such, Series J is not required to provide for, or pay, any Federal or state income taxes. Income tax attributes that arise from its operations are passed directly to the individual Unitholders including the Managing Owner. Series J may be subject to other state and local taxes in jurisdictions in which it operates.

Series J has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense. All tax years which are statutorily open are subject to examination by the appropriate taxing authorities.

D. Profit and Loss Allocations and Distributions

Income and expenses (excluding the service fee and upfront sales commissions further discussed in Note 5) are allocated pro rata to the Class I Units and Class II Units monthly based on the units outstanding during the month. Class I Units are charged with the service fee applicable to such units. Distributions (other than redemptions of units) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the Unitholders. The Managing Owner has not and does not presently intend to make any distributions.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

E. Organization and Offering Costs

In accordance with the Trust’s Agreement and Prospectus, organization and initial offering costs were paid by the Managing Owner, subject to reimbursement by the Trust, without interest, in up to 36 monthly payments during each of the first 36 months of Series J’s operations, provided that the Managing Owner shall not be entitled to reimbursement for such expenses in an aggregated amount in excess of 2.5% of the aggregate amount of all subscriptions accepted by Series J during the initial offering period and the first 36 months of Series J’s operations (the “Continuous Offering Period”).

In addition, Series J shall not reimburse the Managing Owner for organization and offering expenses (both initial and ongoing) in excess of 0.50% per annum of Series J’s net asset value. Organization and initial offering costs (exclusive of the initial selling fee), totaling $1,454,441 for all Series of the Trust were paid by the Managing Owner. Series J’s allocable portion of such costs was $1,384,181 of which $1,120,668 was reimbursed by Series J to the Managing Owner through September 30, 2009.

The Managing Owner is also responsible for the payment of all offering expenses of Series J incurred after the Initial Offering Period (“ongoing offering costs”), provided that the amount of such ongoing offering costs paid by the Managing Owner are subject to reimbursement by the Trust, without interest, in up to 36 monthly payments during each of the first 36 months following the month in which such expenses were paid by the Managing Owner. Through September 30, 2009, the Managing Owner has paid $1,736,953 in ongoing offering costs, of which $1,679,791 has been allocated to Series J. Ongoing offering costs incurred through November 30, 2006 in the amount of $599,062 will not be reimbursed to the Managing Owner. For the period December 1, 2006 through September 30, 2009, the Managing Owner incurred and Series J was allocated ongoing offering costs in the amount of $1,100,334 and $1,080,728, respectively. Of the $1,679,791, allocated to Series J, $599,062 will not be reimbursable to the Managing Owner.

Series J will only be liable for payment of initial and ongoing offering costs on a monthly basis. If a Series terminates prior to completion of payment of such amounts to the Managing Owner, the Managing Owner will not be entitled to any additional payments, and Series J will have no further obligation to the Managing Owner.

During the nine months ended September 30, 2008, Series J’s allocable portion of organization and initial and ongoing offering costs exceeded 0.50% per annum of the Net Asset Value of Series J and, as such, Series J was only liable to the Managing Owner up to the 0.50% per annum limitation.

During the nine months ended September 30, 2009, Series J’s allocable portion of organization and initial and ongoing offering costs did not exceed 0.50% per annum of the Net Asset Value of Series J.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

E. Organization and Offering Costs (Continued)

 

For the three months ended March 31, 2008, Series J charged the amount reimbursable to Preferred for organizational and initial offering costs as a charge against capital monthly based upon the limitation noted above. Moreover, because Series J did not reimburse Preferred for ongoing offering costs, ongoing offering costs were neither charged against capital nor against expense. Generally accepted accounting principles provide that (a) organization costs should have been expensed as incurred and a liability for their reimbursement recorded, (b) a liability and deferred asset should have been recorded on December 1, 2005 (date of commencement of investment operations) for the amount of initial offering costs estimated to be reimbursed to Preferred, (c) such deferred asset should have been amortized to expense over a twelve month period (from the date of commencement of investment operations through November 30, 2006) on a straight line basis, (d) such estimated liability should have been reviewed and adjusted on a periodic basis through the end of the repayment period for initial offering costs which ends on November 30, 2008, (e) the liability should have been reduced as Series J reimbursed Preferred for initial offering costs and (f) ongoing offering costs should have been expensed and recorded as a liability as incurred.

Series J has evaluated the difference in accounting methods and concluded that the impact was not material to Series J’s financial statements. Effective April 1, 2008, Series J recorded a liability and expense for the remaining initial costs expected to be reimbursed and expensed any additional ongoing costs as incurred in the condensed statement of operations and recorded a corresponding liability in the condensed statement of financial condition.

At September 30, 2009, of the $21,845 of offering cost payable listed on the condensed statement of financial condition, $0 is initial offering costs and $21,845 represents ongoing offering cost.

F. Interest Income

Interest income is recorded on an accrual basis.

Note 3. RELATED PARTIES

Series J reimburses the Managing Owner for services it performs for Series J, which include, but are not limited to: management, accounting, registrar, transfer and assignment functions, investor communications, printing, and other administrative services.

The expenses incurred by Series J for services performed by the Managing Owner for Series J were:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2009			2008			2009			2008
Management		$	156,782		$	146,326		$	463,009		$	386,416
General and administrative			42,937			27,605			125,107			94,210
		$	199,719		$	173,931		$	588,116		$	480,626

 

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Note 3. RELATED PARTIES (CONTINUED)

 

Expenses payable to the Managing Owner and its affiliates as of September 30, 2009 and December 31, 2008 were $42,937 and $23,455, respectively. Such amounts are included in accrued expenses payable on the condensed statements of financial condition.

Note 4. MANAGING OWNER

The Managing Owner conducts and manages the business of the Trust. As of September 30, 2009, the Managing Owner and or its affiliates have purchased and maintained an interest in Series J in an amount not less than 1% of the net asset value of Series J.

The Managing Owner is paid a monthly management fee of  ¹/12 of 0.5% (0.5% annually) of Series J’s net asset value at the beginning of the month.

Note 5. SERVICE FEES AND SALES COMMISSIONS

Through June 30, 2009, Series J paid a service fee with respect to Class I Units, monthly in arrears, equal to  ¹/12 of 2% (2% per annum) of the Net Asset Value per Unit of the outstanding Class I Units as of the beginning of the month. The service fee was paid directly by Series J to the Kenmar Securities Inc. (“Selling Agent”), an affiliate of the Managing Owner. The Selling Agent was responsible for paying all commissions owing to the correspondent selling agents, who were entitled to receive from the Selling Agent an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased. Commencing with the 13^th month after the purchase of a Class I Unit, the correspondent selling agent received an ongoing monthly commission equal to  ¹/12^th of 2% (2% per annum) of the Net Asset Value per Class I Unit as of the beginning of each month of the Class I Units sold by them. Beginning July 1, 2009, Series J (rather than the Selling Agent) pays its service fee on Class I Units directly to the correspondent selling agents.

Class II Unitholders are not assessed service fees.

Starting July 1, 2009, Service fee – Class I Units disclosed on the condensed statements of operations represents the monthly  ¹/12 of 2% service fee calculated on all Class I Units, the initial upfront sales commission of 2% and a deduction for Series J’s recapture of the  ¹/12 of 2% service fee on all Units owned for less than 12 months that have received the 2% upfront sales commission.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

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Note 5. SERVICE FEES AND SALES COMMISSIONS (CONTINUED)

 

For the three months ended September 30, 2009, the Service Fee – Class I Units on Series J’s condensed statement of operations is composed of the following:

 

Monthly  1/ 12 of 2% service fee calculated on all Class I Units		$	550,315
Initial upfront 2% sales commission			82,748
Series J’s recapture of  1 /12 of 2% service fee on select Units			(28,883	)
Total		$	604,180

Series J will also pay the Selling Agent a monthly sales commission equal to  ¹/12^th of 1% (1% annually) of the Net Asset Value of the outstanding units as of the beginning of each month.

Note 6. TRUSTEE

The trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The trustee has delegated to the Managing Owner the power and authority to manage the business and affairs of the Trust and has only nominal duties and liabilities with respect to the Trust.

Note 7. COSTS, FEES AND EXPENSES

A. Operating Expenses

Operating expenses of Series J are paid for by Series J.

B. Management and Incentive Fees

Series J pays Ortus, Eagle, Graham, GLC, Krom and Crabel monthly management fees at the annual rate of 2.0%, 2.0%, 2.5%, 2.0%, 2.0% and 1.0%, respectively, of their Managed Accounts’ allocated assets as defined in their respective Advisory Agreements. Additionally, Series J pays Ortus, Eagle, Graham, GLC, Krom and Crabel an incentive fee accrued monthly and paid quarterly of 20%, 20%, 20%, 20%, 20% and 25%, respectively, for achieving “New High Net Trading Profits” in their specific Managed Accounts as defined in their respective Advisory Agreements. For the nine months ended September 30, 2009 and 2008, incentive fees earned by the Trading Advisors were $2,415,412 and $3,726,905, respectively, of which $969,111 remains payable by Series J at September 30, 2009.

Note 8. MARKET AND CREDIT RISK

Series J has cash on deposit with financial institutions and in broker trading accounts. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protection afforded such deposits.

Series J is exposed to various types of risks associated with the derivative instruments and related markets in which it directly invests through its Managed Accounts. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series J’s investment activities (credit risk).

 

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Note 8. MARKET AND CREDIT RISK (CONTINUED)

 

The Managing Owner has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Unitholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.

Market Risk

Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series J’s net assets being traded, significantly exceeds Series J’s future cash requirements since Series J intends to close out its open positions prior to settlement. As a result, Series J is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series J considers the fair value of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series J’s commitments to purchase commodities is limited to the gross or face amount of the contracts held.

However, when Series J enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contracts at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series J to unlimited risk. In addition, as both a buyer and seller of options, Series J pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose Series J to potentially unlimited liability, and purchased options expose Series J to a risk of loss limited to the premiums paid.

Market risk is influenced by a wide variety of factors, including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effect among the derivative instruments Series J holds and the liquidity and inherent volatility of the markets in which Series J trades.

Credit Risk

When entering into futures or forward contracts, Series J is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by their corporate members 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 (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions entered into by Series J, as Series J’s clearing broker is the sole counterparty.

Series J has entered into master netting agreements with its clearing brokers and, as a result, when applicable, presents unrealized gains and losses on open forward positions as a net amount in the condensed statements of financial condition. The amount at risk associated with counterparty non-performance of all of Series J’s contracts is the net unrealized gain (loss) included in the condensed statements of financial condition; however, counterparty non-performance on only certain of Series J’s contracts may result in greater loss than non-performance on all of Series J’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series J.

 

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(Unaudited)

 

 

 

Note 8. MARKET AND CREDIT RISK (CONTINUED)

 

Credit Risk (Continued)

 

The Managing Owner attempts to minimize both credit and market risks by requiring Series J and its Trading Advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies, which include, but are not limited to, executing and clearing all trades with creditworthy counterparties; limiting the amount of margin or premium required for any one commodity or all commodities combined; and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions.

Series J’s futures commission merchant, in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to Series J all assets of Series J relating to domestic futures trading and is not allowed to commingle such assets with its other assets.

At September 30, 2009 and December 31, 2008, such segregated assets totaled $85,636,405 and $90,283,908, respectively, which are included in cash and cash equivalents on the condensed statements of financial condition. Part 30.7 of the CFTC regulations also requires Series J’s futures commission merchant to secure assets of Series J related to foreign futures trading, which totaled $649,984 and $220,120 at September 30, 2009 and December 31, 2008, respectively. There are no segregation requirements for assets related to forward trading.

As of September 30, 2009, all of Series J’s open futures contracts mature within eighteen months.

 

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Note 9. FINANCIAL HIGHLIGHTS

The following information presents per Unit operating performance data and other supplemental financial data for the three months and nine months ended September 30, 2009 and 2008. This information has been derived from information presented in the financial statements.

 

		Class I								Class II
Per Unit Performance		Three months ended				Nine months ended				Three months ended				Nine months ended
(for a Unit outstanding throughout the entire period)		September 30, 2009								September 30, 2009
Net asset value per Unit at beginning of period		$	125.23			$	120.57			$	129.48			$	123.39
Income from operations:
Net realized and change in unrealized gain(1)			7.58				17.92				7.93				18.45
Interest income(1)			0.00				0.02				0.00				0.02
Interest expense(1)			0.00				0.00				0.00				0.00
Other expenses(1), (5)			(3.40	)			(9.10	)			(2.88	)			(7.33	)
Total income from operations			4.18				8.84				5.05				11.14
Offering costs(1), (5)			0.00				0.00				0.00				0.00
Net increase for the period			4.18				8.84				5.05				11.14
Net asset value per Unit at end of period		$	129.41			$	129.41			$	134.53			$	134.53
Total Return(4)
Total return before incentive fees			4.12	%			9.32	%			4.73	%			11.02	%
Incentive fees			(0.78	)%			(1.99	)%			(0.83	)%			(1.99	)%
Total return after incentive fees			3.34	%			7.33	%			3.90	%			9.03	%
Supplemental Data
Ratios to average net asset value:
Net investment loss before incentive fees(2), (3), (5)			(7.69	)%			(7.32	)%			(5.54	)%			(5.17	)%
Incentive fees(4)			(0.77	)%			(1.98	)%			(0.82	)%			(1.96	)%
Net investment loss after incentive fees			(8.46	)%			(9.30	)%			(6.36	)%			(7.13	)%
Interest income(3)			0.00	%			0.02	%			0.00	%			0.02	%
Incentive fees(4)			0.77	%			1.98	%			0.82	%			1.96	%
Interest expense(3)			0.01	%			0.00	%			0.01	%			0.00	%
Other expenses(3), (5)			7.68	%			7.34	%			5.53	%			5.19	%
Total expenses			8.46	%			9.32	%			6.36	%			7.15	%

Total returns are calculated based on the change in value of a Unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.

 

(1)

Interest income per Unit, interest expense per Unit, other expenses per Unit and offering costs per Unit are calculated by dividing interest income, interest expense, other expenses and offering costs applicable to each class by the weighted average number of Units of each class outstanding during the period. Net realized and change in unrealized gain is a balancing amount necessary to reconcile the change in net asset value per Unit of each class with the other per Unit information.

(2)	Represents interest income less total expenses (exclusive of incentive fees).

(3)	Annualized.

(4)	Not annualized.

(5)	Offering costs were charged against capital through March 31, 2008. Beginning April 1, 2008, offering costs were expensed.

 

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Note 9. FINANCIAL HIGHLIGHTS (CONTINUED)

 

 

		Class I								Class II
		Three months				Nine months				Three months				Nine months
Per Unit Performance		ended				ended				ended				ended
(for a Unit outstanding throughout the entire period)		September 30, 2008								September 30, 2008
Net asset value per Unit at beginning of period		$	123.17			$	105.40			$	124.79			$	105.76
Income (loss) from operations:
Net realized and change in unrealized gain (loss)(1)			(8.98	)			16.64				(9.11	)			16.37
Interest income(1)			0.74				1.50				0.75				1.62
Expenses(1), (5)			(2.24	)			(10.72	)			(1.66	)			(8.88	)
Total income (loss) from operations			(10.48	)			7.42				(10.02	)			9.11
Offering costs(1), (5)			0.00				(0.13	)			0.00				(0.10	)
Net increase (decrease) for the period			(10.48	)			7.29				(10.02	)			9.01
Net asset value per Unit at end of period		$	112.69			$	112.69			$	114.77			$	114.77
Total Return(4)
Total return before incentive fees			(8.33	)%			10.66	%			(7.86	)%			11.94	%
Incentive fees			(0.18	)%			(3.74	)%			(0.17	)%			(3.42	)%
Total return after incentive fees			(8.51	)%			6.92	%			(8.03	)%			8.52	%
Supplemental Data
Ratios to average net asset value:
Net investment loss before incentive fees(2), (3), (5)			(4.44	)%			(5.68	)%			(2.38	)%			(3.69	)%
Incentive fees(4)			(0.18	)%			(3.74	)%			(0.17	)%			(3.42	)%
Net investment loss after incentive fees			(4.62	)%			(9.42	)%			(2.55	)%			(7.11	)%
Interest income(3)			2.56	%			1.74	%			2.55	%			1.84	%
Incentive fees(4)			0.18	%			3.74	%			0.17	%			3.42	%
Other expenses(3), (5)			7.00	%			7.42	%			4.93	%			5.53	%
Total expenses			7.18	%			11.16	%			5.10	%			8.95	%

Total returns are calculated based on the change in value of a Unit during the period. An individual unitholders’ total returns and ratios may vary from the above total returns and ratios based on the timing of additions and redemptions.

 

(1)

Interest income per Unit, expenses per Unit and offering costs per Unit are calculated by dividing interest income, expenses and offering costs applicable to each class by the weighted average number of Units of each class outstanding during the period. Net realized and change in unrealized gain (loss) is a balancing amount necessary to reconcile the change in net asset value per Unit of each class with the other per Unit information.

(2)	Represents interest income less total expenses (exclusive of incentive fees).

(3)	Annualized.

(4)	Not annualized.

(5)	Offering costs were charged against capital through March 31, 2008. Beginning April 1, 2008, offering costs were expensed.

 

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 10. SUBSEQUENT EVENTS

The Managing Owner has evaluated events and transactions that occurred between September 30, 2009 and November 16, 2009, which is the date the financial statements were issued, for possible disclosure or recognition in the financial statements. The Managing Owner has determined that there were no such events or transactions that warrant disclosure or recognition in the financial statements.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report on Form 10-Q (the “Report”) for the quarter ending September 30, 2009 (“Third Quarter 2009”) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments Corp., the managing owner of World Monitor Trust III – Series J (“Registrant”), about the future results, performance, prospects and opportunities of Registrant. The managing owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “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 this Report, and unknown, that could cause Registrant’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 in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

General

World Monitor Trust III (the “Trust”) was formed as a Delaware Statutory Trust on September 28, 2004, with separate series (each, a “Series”) of units of beneficial interest (“Units” or “Interests”). Its term will expire on December 31, 2054 (unless terminated earlier in certain circumstances). The trustee of the Trust is Wilmington Trust Company. The Trust’s fiscal year for book and tax purposes ends on December 31.

The Trust’s Units were initially offered in four (4) separate and distinct Series: Series G, Series H, Series I and Series J. The Trust may issue additional Series of Units in the future. Each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Third Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). Each Series offers Units in two classes (each, a “Class”) – Class I and Class II. Class I Units pay a service fee. Class II Units may only be offered to investors who are represented by approved correspondent selling agents who are directly compensated by the investor for services rendered in connection with an investment in the Trust (such arrangements commonly referred to as “wrap-accounts”) (see Note 5 of the financial statements for a further discussion).

Series G, H, I and J commenced trading operations on December 1, 2005.

Units are offered as of the beginning of each month, and Units will continue to be offered in each Series until the maximum amount of each Series’ Units which are registered are sold. The managing owner may suspend or terminate the offering of Units of any Series at any time or extend the offering by registering additional Units. The managing owner terminated the offering of Units of Series H and Series I effective March 31, 2007 and dissolved Series H and Series I effective close of business on April 30, 2007. The Managing Owner terminated the offering of Units of Series G on December 31, 2007 and dissolved Series G effective close of business on December 31, 2007.

Managing Owner and its Affiliates

Effective May 5, 2009, Preferred Investment Solutions Corp. changed its name to Kenmar Preferred Investments Corp. (“Preferred” or the “Managing Owner”). Preferred or Managing Owner refers to either Preferred Investment Solutions Corp. or Kenmar Preferred Investments Corp., depending on the applicable period discussed.

Preferred has been the Managing Owner of Registrant since October 1, 2004. As of September 30, 2009, the Managing Owner and or its affiliates have purchased and maintained an interest in Registrant in an amount not less than 1% of the Net Asset Value of Registrant.

 

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The Offering

Up to $281,250,000 Registrant, Class I; and $93,750,000 Registrant, Class II of Units are being offered (totaling $375,000,000) (“Subscription Maximum”). Interests are being offered to investors who meet certain established suitability standards. Prior to November 30, 2008, investments required a minimum aggregate initial subscription of $5,000 and $2,000 for certain Benefit Plan Investors (including IRAs), although the minimum purchase for any single series was $500. Effective December 1, 2008, the minimum initial investment for new subscribers is $25,000 ($10,000 for benefit plan investors (including IRAs)) and the minimum additional subscription amount for current investors, who are “accredited investors,” is $5,000.

Effective November 30, 2008, the Board of Directors of the Managing Owner of the Registrant determined that, the Registrant’s units of beneficial interest are no longer to be publicly offered and are only to be available on a private placement basis to “accredited investors” pursuant to Regulation D under the Securities Act of 1933. This change in the manner in which the Registrant’s Units are offered has no material impact to current investors as there is no change in the fees and expenses and redemption terms of the Units or any change in the management and investment strategy and reporting provided to investors of the Registrant. The only change is in the method by which the Registrant’s Units will be available, and the increased suitability standard of persons subscribing for Units. Because the Registrant’s Units are available on a private placement basis, new subscriptions must be made by persons that are “accredited investors” as defined in Regulation D under the Securities Act of 1933. Current investors that are not “accredited investors” are not required to redeem their current Units, but are not able to purchase additional Units.

Initially, the Units for each Series were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Interest. The Subscription Minimum of $30,000,000 for Registrant was reached during the Initial Offering Period permitting all of Series G, H, I and J to commence trading operations. Registrant completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443, which was fully allocated to the Trading Vehicles. Series H and I Units were fully redeemed as of April 30, 2007 and Series G’s Units as of December 31, 2007. Until the subscription maximum for Registrant is reached, Registrant’s Units will continue to be offered on a monthly basis at the then current Net Asset Value per Unit.

The Trading Advisors and the Trading Vehicles

Effective December 1, 2005, Registrant contributed its net assets to WMT III Series G/J Trading Vehicle LLC (“G/J Trading Vehicle”), WMT III Series H/J Trading Vehicle LLC (“H/J Trading Vehicle”) and WMT III Series I/J Trading Vehicle LLC (“I/J Trading Vehicle”) and, together with the G/J Trading Vehicle and the H/J Trading Vehicle, the “Trading Vehicles”), Delaware limited liability companies, and received a voting membership interest in each Trading Vehicle. The Trading Vehicles were formed to function as aggregate trading vehicles for its members. Registrant and Series G were the sole members of G/J Trading Vehicle. Registrant, Series H and Futures Strategic Trust were the sole members of H/J Trading Vehicle. Registrant and Series I were the sole members of I/J Trading Vehicle. Preferred was the Managing Owner of Registrant and each Series and had been delegated administrative authority over the operations of the Trading Vehicles. The Trading Vehicles engaged in the speculative trading of futures, forward and option contracts. All references herein to Registrant’s relationship with the Trading Advisors (as defined below) shall, unless the context states otherwise, refer to Registrant’s relationship with the Trading Advisors through the Trading Vehicles. The financial statements of the Trading Vehicles, including the condensed schedules of investments, are included in Registrant’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

Each Trading Vehicle had its own independent commodity trading advisor that made such Trading Vehicle’s trading decisions. Each of G/J Trading Vehicle, H/J Trading Vehicle and I/J Trading Vehicle entered into advisory agreements with Graham Capital Management, LP (“Graham”), Bridgewater Associates, Inc. (“Bridgewater”) and Eagle Trading Systems Inc. (“Eagle”), respectively (the “Trading Advisors”), to make the trading decisions for each respective Trading Vehicle. Graham traded 100% of the assets of G/J Trading Vehicle pursuant to Graham’s Global Diversified Program at 150% Leverage, which was a technical, systematic, global macro program. Bridgewater traded 100% of the assets of H/J Trading Vehicle pursuant to Bridgewater’s Aggressive Pure Alpha Futures Only – A No Benchmark program, which was a fundamental, systematic, global macro program. Eagle traded 100% of the assets of I/J Trading Vehicle pursuant to Eagle’s Momentum Program, which was a technical, systematic, global macro program. The advisory agreements could have been terminated for various reasons, including at the discretion of the Trading Vehicles. The Trading Vehicles were allocated 100% of the proceeds from the initial and continuous offering of Registrant to the Trading Advisors.

 

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G/J Trading Vehicle paid Graham a monthly management fee equal to  ¹/12 of 2.5% (2.5% annually) of such Trading Vehicle’s Net Asset Value. H/J Trading Vehicle paid Bridgewater a monthly management fee equal to  ¹/12 of 3.0% (3.0% annually) of such Trading Vehicle’s Net Asset Value. I/J Trading Vehicle paid Eagle a monthly management fee equal to  ¹/12 of 2.0% (2.0% annually) of such Trading Vehicle’s Net Asset Value. Each Trading Vehicle also paid the Trading Advisors an incentive fee of 20% of New High Net Trading Profits (as defined in the applicable Advisory Agreement) generated by such Trading Vehicle. Incentive fees accrued monthly and were paid quarterly in arrears.

Effective May 1, 2007, Registrant withdrew as a member of the H/J Trading Vehicle and the I/J Trading Vehicle and re-allocated the assets to managed accounts in the name of Registrant (“Managed Accounts”). The assets that Registrant allocated to the I/J Trading Vehicle were re-allocated to a managed account managed by Eagle pursuant to its Momentum Program. The assets that Registrant withdrew from the H/J Trading Vehicle were re-allocated to a managed account managed by Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program. The H/J Trading Vehicle and I/J Trading Vehicle were dissolved effective as of April 30, 2007.

Effective December 31, 2007, Registrant withdrew as a member of the G/J Trading Vehicle and re-allocated assets to a managed account managed by Graham pursuant to its Global Diversified Program at 150% Leverage. The G/J Trading Vehicle was dissolved effective as of December 31, 2007.

Effective July 1, 2009, Registrant entered into trading advisory agreements with GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus (1.5x) Program.

Registrant pays Graham a monthly management fee equal to  ¹/12 of 2.5% (2.5% annually) of the assets allocated to Graham for trading and an incentive fee of 20% of the “New High Net Trading Profits” achieved by Graham with respect to the assets allocated to it. Registrant pays Eagle a monthly management fee equal to  ¹/12 of 2.0% (2.0% annually) of the assets allocated to Eagle for trading and an incentive fee of 20% of the New High Net Trading Profits achieved by Eagle with respect to the assets allocated to it. Registrant pays Ortus a monthly management fee equal to  ¹/12 of 2.0% (2.0% annually) of the assets allocated to Ortus for trading and an incentive fee of 20% of the New High Net Profits achieved by Ortus with respect to the assets allocated to it. Registrant pays GLC a monthly management fee equal to  ¹/12 of 2.0% (2.0% annually) of the assets allocated to GLC for trading and an incentive fee of 20% of the “New High Net Trading Profits” achieved by GLC with respect to the assets allocated to it. Registrant pays Krom a monthly management fee equal to  ¹/12 of 2.0% (2.0% annually) of the assets allocated to Krom for trading and an incentive fee of 20% of the New High Net Trading Profits achieved by Krom with respect to the assets allocated to it. Registrant pays Crabel a monthly management fee equal to  ¹/12 of 1.0% (1.0% annually) of the assets allocated to Crabel for trading and an incentive fee of 25% of the New High Net Profits achieved by Crabel with respect to the assets allocated to it.

Competition

The Managing Owner and its affiliates have formed, and may continue to form, various entities to engage in the speculative trading of futures, forward and options contracts which have certain of the same investment policies as Registrant.

Registrant is an open-end fund, which solicits the sale of additional Limited Interests on a monthly basis until the maximum amount of Limited Interests being offered by Registrant have been sold. As such, Registrant may compete with other entities, whether or not formed by the Managing Owner, to attract new participants. In addition, to the extent that the Trading Advisor recommends similar or identical trades to Registrant and other accounts that it manages, Registrant may compete with those accounts for the execution of the same or similar trades, as well as with other market participants.

Employees

Registrant has no employees. Management and administrative services for Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3, 4, 5 and 6 to

 

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Registrant’s financial statements included in its annual report for the year ended December 31, 2008 (“Registrant’s 2008 Annual Report”), which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

Critical Accounting Policies

Preparation of the financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the application of appropriate accounting rules and guidance. Applying these policies requires the Managing Owner to make judgments, estimates and assumptions in connection with the preparation of Registrant’s financial statements. Actual results may differ from the estimates used.

The Managing Owner has evaluated Registrant’s financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For a further discussion of Registrant’s significant accounting policies, see Note 2 to Registrant’s financial statements for the year ended December 31, 2008, which was included in the annual report on Form 10-K for the fiscal year ended December 31, 2008.

The valuation of Registrant’s investments that are not traded on a United States (“US”) or internationally recognized futures exchange is a critical accounting policy. The market values of futures (exchange traded) contracts is verified by Registrant’s administrator, which obtains valuation data from third party data providers such as Bloomberg, Reuters, and or Super Derivatives and compares those prices with Registrant’s clearing broker. The market value of currency swap and forward (non-exchange traded) contracts is extrapolated on a forward basis from the spot prices quoted as of 4 pm on the last business day of the reporting period. All values assigned by the administrator and confirmed by the Managing Owner are final and conclusive as to all of Registrant’s Unitholders. As such, if actual results vary from estimates used, they are not anticipated to have a material impact on the financial statements and related disclosures.

Registrant records all investments at fair value in its financial statements, with changes in fair value reported as a component of Trading Profits (Losses) in the Condensed Statements of Operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price. Registrant considers prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps, and certain option contracts for which market quotations are not readily available are priced by Super Derivatives, Bloomberg, Reuters, and/or other third party data providers who derive fair values for those assets from observable inputs (Level 2). Level 3 inputs reflect Registrant’s assumptions that it believes market participants would use in pricing the asset or liability. Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or Registrant’s proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data.

Of its unrealized gains at September 30, 2009, $2,587,846 or 29.50% of Registrant’s investments are classified as Level 1 and $6,183,701 or 70.50% as Level 2. Of its unrealized gains (losses) at December 31, 2008, $660,900 or (61.37)% of Registrant’s investments are classified as Level 1 and $(1,737,730) or 161.37% as Level 2. There are no Level 3 investments on September 30, 2009 or December 31, 2008.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance clarifying the application of Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures.” The additional guidance provides for how the fair value of a financial asset or liability is determined when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances that indicate a transaction is not orderly. The guidance was effective for interim and annual periods after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and is to be applied prospectively. The Registrant adopted the guidance effective January 1, 2009. As required, the Registrant also adopted guidance relating to recognition and presentation of other-than-temporary impairments, effective January 1, 2009. The adoption of these pronouncements did not have an impact on the Registrant’s financial statements.

In March 2008, the FASB issued accounting guidance which established among other things, the disclosure requirements for derivative instruments and for hedging activities. The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Registrant’s adoption of the guidance effective January 1, 2009 did not have a material impact on the Registrant’s financial statements, other than enhanced disclosures as discussed under Note 2.

 

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Effective for the quarter ending June 30, 2009, Registrant adopted ASC Topic 855, “Subsequent Events” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC Topic 855 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The adoption of ASC Topic 855 did not have a material impact on Registrant’s financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is effective for the Registrant on January 1, 2010. The Managing Owner is evaluating the impact of adopting SFAS 167 and its impact on the Registrant’s financial statements.

Effective July 1, 2009, Registrant adopted ASC Topic 105, “Generally Accepted Accounting Principles.” ASC Topic 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification did not change U.S. GAAP but reorganizes the existing literature into Topics. References for FASB guidance throughout this document have been updated for the Codification.

On September 30, 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (“ASU 2009-12”). ASU 2009-12 provides guidance on measuring the fair value of certain alternative investments, and amends Accounting Standards Codification (“ASC”) Topic 820 to offer investors a practical means for measuring the fair value of investments in certain entities that calculate net asset value per share and require certain disclosures. ASU 2009-12 is effective for periods ending after December 15, 2009, and early adoption is permitted. The Managing Owner is evaluating the impact of adopting ASU 2009-12 and its impact on the Registrant’s financial statements.

Liquidity and Capital Resources

Registrant commenced operations on December 1, 2005 with gross proceeds of $31,024,443 allocated to commodities trading. Additional contributions raised through the continuous offering of limited interests (“Limited Interests”) and general interests (“General Interests” or “Managing Owner Interests” and, together with the Limited Interests, “Interests” or “Unitholders”) of beneficial ownership in Registrant for the period from December 1, 2005 (commencement of operations) to September 30, 2009 resulted in additional gross proceeds to Registrant of $126,807,910.

For Third Quarter 2009 and the nine months ended September 30, 2009 (“Year-To-Date 2009”), subscriptions of Limited Interests were $5,824,548 and $14,728,326, respectively. For Third Quarter 2008 and the nine months ended September 30, 2008 (“Year-To-Date 2008”), subscriptions of Limited Interests were $15,018,139 and $35,540,771 respectively.

For Third Quarter 2009 and Year-To-Date 2009, there were no subscriptions of General Interests. For Third Quarter 2008 and Year-To-Date 2008, subscriptions of General Interests were $136,000 and $311,039, respectively.

Interests in Registrant may be redeemed on a monthly basis, but if purchased prior to July 1, 2009, are subject to a redemption fee if redeemed within one year of the effective date of purchase for Class I shares. Redemptions of Limited Interests for Third Quarter 2009 and Year-To-Date 2009 were $6,482,241 and $20,535,358, respectively. Redemptions of Limited Interests for Third Quarter 2008 and Year-To-Date 2008 were $2,745,152 and $5,278,224, respectively.

 

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There were no redemptions of General Interests for Third Quarter 2009, Year-To-Date 2009, Third Quarter 2008 or Year-To-Date 2008.

At September 30, 2009, approximately 100% of Registrant’s net assets were allocated to commodities trading. A significant portion of Registrant’s net assets was held in cash, which was used as margin for trading in commodities. In as much as the sole business of Registrant is to trade in commodities, Registrant continues to own such liquid assets to be used as margin. The clearing brokers and bank credit Registrant with interest income on 100% of its average daily equity maintained in its accounts with the clearing brokers and bank during each month at competitive interest rates.

The commodities contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent Registrant from promptly liquidating its commodity futures positions.

Since Registrant’s business is to trade futures, forward and option contracts, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond Registrant’s experience to date and could ultimately lead to a loss of all or substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Registrant and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 9 to Registrant’s financial statements for the year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008 for a further discussion on the credit and market risks associated with Registrant’s futures, forward and option contracts.

Registrant does not have, nor does it expect to have, any capital assets.

Market Overview

Following is a market overview for Third Quarter 2009 and Third Quarter 2008:

Third Quarter 2009

The National Bureau of Economic Research is likely mark the third quarter of 2009 as the beginning of the recovery in the US economy. Gross Domestic Product data for the quarter will not be published until later in October, but based on other data released to date, it is clear that economic growth picked up nicely in the quarter. The stimulus packages made their full impact during the quarter and the cash-for-clunkers program gave a further boost to the economy. More importantly, the US housing market, which had been at the epicenter of the current downturn, showed tentative signs of building on the modest gains of the previous quarter, aided by the $8,000 first time homebuyer credit. The latest Case-Shiller Housing Index indicated that home prices and existing and new home sales both recorded decent gains during the quarter. However, the labor market remained in the doldrums. While the pace of job losses slowed, they continued at levels that almost matched the peak of the previous recession and the unemployment rate marched relentlessly up to 9.8%. The current downturn now ranks as the worst among all postwar recessions in terms of percentage job losses.

Despite the indications of economic recovery and the growing risk appetite, US Treasury yields rallied during the quarter on the back of weak and falling inflation figures, robust demand at auctions, and the Federal Reserve’s (the “Fed”) quantitative easing program. The 10-year yield fell to end the quarter at 3.31%. The Fed kept rates

 

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unchanged through the quarter. However, at its September meeting, the Federal Open Market Committee, while reiterating its support for near zero rate policy, offered a slightly hawkish nuance, reflecting the growing discomfort among the “hawks” at the Fed. The European Central Bank, the Bank of England and the Bank of Japan kept key rates unchanged through the quarter as well. As in the US, market participants feel that the worst appears to be over across the globe.

The US dollar experienced another losing quarter, with the Dollar Index declining approximately 4%. The increased appetite for risk and the growing global discomfort with the massive monetary and fiscal policy stimuli weighed on the dollar. The British pound was the only major currency to lose ground to the US dollar during the quarter, again reflecting the global unease with massive fiscal stimulus and quantitative easing. The euro finished the third quarter up approximately 4% on the dollar. More surprising was the near 7% gain in the Japanese yen, in a quarter in which risk assets surged and Japan’s economy remained weak in comparison to its developed market peers.

Coming on the heels of what was already the best quarter in over 10 years for the S&P 500, it was remarkable that the third quarter gain was as strong as the second quarter gain. In fact, the second and third quarter 2009 combined percentage change in the S&P 500 was the largest two quarter upswing since 1975 and the second largest in the entire postwar era. Financials led the way, but the rally was broad based. The gains in the other US indices were equally impressive, with the NASDAQ recording its largest two-quarter rise since the peak of the Dotcom Bubble in 2000. The Dow Jones Industrial Average, S&P 500 and NASDAQ rose approximately 15%, 15% and 16%, respectively, for the quarter. The third quarter was even better for Europe, where the gains exceeded those in the previous quarter. The STOXX 600, a broad measure of European equities, rose approximately 18% during the quarter. The CAC, FTSE 100, and DAX closed the quarter with near 20% gains. Asian markets rose as well, but the performance was more mixed. While the Korean Kospi jumped 20% and the Hang Seng registered a solid 14% gain, the Nikkei only managed a modest 2% rise. The Australian All Ordinaries Index posted a 20% increase.

Crude oil had a basically flat quarter, ending the period up approximately 1%. Rising economic optimism and dollar weakness were offset by reports of plentiful crude inventory and continued soft demand. Natural gas surged approximately 26%, but the bottom line masks the drama during the quarter. Natural gas suffered an 18% decline in August and fell to a seven-year low in early September. However, it recovered sharply in September on the back of stronger economic data, lower-than-expected inventory reports, expectations of lower winter temperatures, and short covering. Heating oil ended the quarter with an approximate 5% gain. Reformulated gasoline had a weak quarter, declining approximately 9%, as demand recovery remained elusive.

As the economic recovery gained ground in the third quarter, incipient fears of soaring inflation down the road spurred the demand for gold even as flight-to-safety demand dwindled during the third quarter. The yellow metal posted an approximate 9% gain in the third quarter. Also, reserve diversification by China and others may well be supporting gold. Silver surged up approximately 22% with the twin engines of investment demand and industrial demand firing. Base metals witnessed overall gains across the board in the quarter as global industrial production, especially auto production, turned up smartly. Copper and zinc finished up the quarter with both realizing overall gains greater than 20%.

Pork bellies, which had suffered a collapse in the second quarter following the ban on US pork products emanating from H1N1 Influenza (Swine Flu) fears, recovered sharply in the third quarter, registering an approximate 50% increase as some countries lifted the ban. Cotton prices continued their upward march during the quarter, rising approximately 15%. Wheat and soybeans fell sharply as initial fears of bad weather did not pan out and the USDA planting reports indicated solid harvests. Soybeans, wheat and corn posted losses of 24%, 10%, and 1%, respectively. Sugar continued its parabolic rise in the third quarter, skyrocketing approximately 43% following a 32% surge in the second quarter. The worst drought in more than two decades in India, the world’s largest consumer of sugar and the biggest swing factor in global markets, propelled sugar to its highest level since 1981. Hopes of stronger consumer spending fueled by the global economic recovery lifted cocoa prices by over 25% in the quarter. Coffee also registered a solid quarter, gaining approximately 7%.

Third Quarter 2008

Clearly, the financial crisis gripping the nation is resonating throughout all corners of the economy and the effects will be felt for some time to come. Consumers have already cut back spending dramatically but more retrenchment can be expected in response to worsening job and income prospects as well as the growing wealth destruction that has taken place in recent months. There is no longer any doubt that the economy is mired in a recession; the only

 

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question is how deep and long it will be. Economists are crossing their fingers that the downturn will be no worse than the last two mild recessions in 1990-91 and 2001. However, many believe that conditions will be at least as bad as they were during the worst post-war recessions, which occurred in 1980-81 and 1973-74. The credit crisis got worse with each passing day, despite huge Federal Reserve liquidity additions, a $700 billion bailout package and numerous other measures. The “broker dealer,” as once known, basically ceased to exist as Goldman Sachs, Merrill Lynch, Morgan Stanley and others changed structure to essentially become “banks”. The economic data flow in the US can only be described as feeble and promises to get even weaker. In the US, housing, employment and manufacturing data were all anemic throughout the third quarter of 2008 with many indications of worse to come.

A strengthening US dollar throughout the quarter added to demand for US Treasuries as well as flight-to-safety support. After seeing their largest monthly yield declines since February in the month of August, Treasury yields saw further erosion in September. The benchmark 10-Year Note saw its yield fall approximately 20 basis points during the quarter and the 2-Year yield dipped by roughly 70 basis points as the yield curve experienced a severe steepening. Central banks kept rates unchanged throughout the third quarter but in early October they collaboratively cut key rates in response to the global credit crisis. During the quarter, the Federal Reserve, Bank of England, European Central Bank and others injected huge amounts of liquidity into the markets.

Currencies: The Dollar Index, which measures the US unit against a basket of other currencies, ended the quarter up overall and up 3.7% for the year. Among the majors, the euro and pound were particularly weak in September as the UK and the Eurozone experienced severe economic problems to go along with a burgeoning credit crisis. The British pound slipped to a 2-year low against the US dollar as the UK suffered recessionary-like conditions, including a 12.4% year-to-date drop in housing prices. The euro scored an all-time high in July, but from the peak it was all downhill as the euro slumped badly in August and September to close out the quarter near $1.41. The yen suffered far less fallout from the global credit crisis. It showed particular strength against both the euro and pound while gaining modestly to the dollar. The Australian dollar was pressured versus the yen as carry trades were unwound. The New Zealand dollar experienced a similar fate.

Energies: Crude posted steep losses in September down more than 13% within the Dow Jones AIG Index and over 31% for the quarter. Crude was pummeled by intense selling, the ongoing feature throughout the period. In addition, a firming US dollar, a significant slowing in global demand and above-quota OPEC output weighed on sentiment, which more than offset the geopolitical events surrounding Iran, Nigeria, Russia, Venezuela and the Middle East. Combined gasoline, heating oil and jet fuel demand is down more than 7% compared to last September. Natural gas followed suit and ended the quarter much lower.

Agriculturals: With steady declines in both price and open interest during the month of September, as well as all of the third quarter, the agricultural futures markets were prime examples of the widespread deleveraging seen across all markets. The deterioration in values came despite occasional weather concerns, which typically are the impetus for late summer rallies. For the quarter, corn, soybeans, wheat and cotton saw high-to-low declines in value from 37% to 30%. Corn and wheat lost roughly $3.00 per bushel each and soybeans lost over $6.00. Cotton also dropped significantly. The longer-term implications of the recent price plunge will be played out first in farmers’ springtime planting decisions. In addition to the normal, net profit calculations, banking considerations will play a major role in next season’s production potential. Understandably, the ongoing tight credit markets will cause bankers to shy away from lending money to farmers wishing to grow high-input-cost crops, regardless of profit potential.

Indices: Global equities suffered from a total lack of confidence as related to the credit crisis, which got worse instead of better throughout the quarter, despite herculean efforts from central banks and various government agencies. US stocks were hit with massive fund liquidations, partially due to margin needs but also due to large redemption levels that picked up speed with each passing session. After managing very modest gains in August, despite a sharp month-end slide, all the major US indices were lower in September. The Dow Jones Industrial Average, S&P 500 and NASDAQ fell over 4%, 9% and 9% respectively for the quarter. Financial stocks, including banks, brokers and insurance companies were particularly weak, as were retail issues and energy stocks. The markets failed to react to the much-debated and delayed $700 billion Treasury “rescue” plan. US stocks were clearly hurt by the credit crisis in Europe.

Europe saw similar performance as their financial crisis was equally, if not more, dire than that in the US. The UK in particular has seen rigorous credit issues as the DJ Stoxx 600 lost approximately 12% during the third quarter due to staggering financial sector events. The German DAX, the French CAC and London’s FTSE all ended the quarter with losses. The Russian stock market was particularly weak, forcing trading halts on numerous occasions.

 

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Asia posted the weakest equity performance of the three major regions during the quarter and it has subsequently experienced massive liquidation from international funds despite the fact that Japan and the region in general have less exposure to the global credit crisis. The Nikkei lost nearly 2,000 points and Korea’s Kospi fell over 14% throughout the period. Hong Kong was extremely weak and Shanghai extended a yearlong slide. Australian equities could not ward off the credit crisis and ended the quarter lower.

Metals: After a brief run in mid-July and a sell-off through the second week in of September, late quarter gains were not enough to offset losses as gold finished down over 5% for the period. Silver was down a hefty 29% for the third quarter. Base metals were sold heavily across the markets in September, to an even greater degree than in July and August, and all metals within the GSCI Commodity Index finished down for the quarter. Increasing exchange warehouse inventories as well as slowing global demand patterns weighted on metals. A firmer US dollar did not help the cause, neither did the general outflow of capital from commodities.

Softs and Livestock: Individual soft commodity fundamentals were similarly overwhelmed by capital outflows and fund liquidation pressures in September. Cocoa had managed gains in August but this was not the case in September. Sugar extended its August losses into September. Supplies hold ample and Brazilian sugar exports have accelerated. Coffee lost nearly 17% for the quarter.

Live hogs fell almost 4.5% and cattle 4.9%. Hogs were again hurt by increased slaughter levels and sluggish demand. Both markets saw slaughter increases related to higher feed costs and, like many agricultural commodities, were pressured by financing difficulties for farmers.

Sector Performance

Due to the nature of Registrant’s trading activities, a period-to-period comparison of its trading results is not meaningful. However, a discussion of Registrant’s trading results for the major sectors in which Registrant traded for Third Quarter 2009 and Third Quarter 2008 is presented below.

Third Quarter 2009

Currencies: (+) Registrant experienced a majority of its gains in the Australian dollar, Japanese yen and Swiss franc. The majority of losses were experienced in the euro, Canadian and New Zealand dollars.

Energies: (-) Registrant experienced gains in Brent crude and gas oil. The majority of losses were experienced in crude, heating oil, reformulated gasoline and heating oil.

Grains: (+) Registrant experienced gains in wheat and corn. The majority of losses were experienced in soybeans, rapeseed and cotton.

Indices: (+) Registrant experienced a majority of its gains in the CAC, DAX, FTSE, Hang Seng, Nasdaq and S&P 500. Losses were incurred in the Nikkei.

Interest Rates: (-) Registrant experienced a majority of its gains in German Bobl, German Bonds and Japanese Government Bond. The majority of losses were experienced in Australian Bonds, German Bund, Euribor Liffe and US Treasuries.

Meats: (-) Registrant experienced losses in live cattle and hogs.

Metals: (+) Registrant experienced gains in gold, copper, aluminum and copper. Losses were incurred in nickel, palladium and tin.

Softs: (+) Registrant experienced gains in sugar, cocoa and coffee.

 

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Third Quarter 2008

Currencies: (-) Registrant experienced a majority of its gains in the Canadian dollar, Swiss franc and Singapore dollar. The majority of losses were incurred in the Australian dollar, British pound and euro.

Energies: (-) Registrant experienced gains in crude oil and natural gas. Losses were incurred in brent crude, gas oil, gasoline and heating oil.

Grains: (-) Registrant experienced gains in cotton. The majority of losses were experienced in corn, wheat, soybeans and bean oil.

Indices: (+) Registrant experienced a majority of its gains in the Hang Seng, Nikkei and NASDAQ indices. The majority of losses were experienced in the S&P 500, DAX and Russell 2000.

Interest Rates: (+) Registrant experienced a majority of its gains in US Treasury Notes, German Bobl and Australian bonds. The majority of losses were experienced in Short Sterling, German Bund and London Gilts.

Meats: (+) Registrant experienced gains in live cattle.

Metals: (-) Registrant experienced gains in zinc and aluminum. The majority of losses were experienced in gold, silver, copper and lead.

Softs: (-) Registrant experienced losses in coffee, cocoa and sugar.

Results of Operations

The net asset value (“Net Asset Value”) per Interest of Class I as of September 30, 2009 was $129.41, an increase of 7.33% from the December 31, 2008 Net Asset Value per Interest of $120.57 and an increase of 3.34% from the June 30, 2009 Net Asset Value per Interest of $125.23. The Net Asset Value per Interest of Class I as of September 30, 2008 was $112.69, an increase of 6.92% from the December 31, 2007 Net Asset Value per Interest of $105.40 and a decrease of 8.51% from the June 30, 2008 Net Asset Value per Interest of $123.17.

The Net Asset Value per Interest of Class II as of September 30, 2009 was $134.53, an increase of 9.03% from the December 31, 2008 Net Asset Value per Interest of $123.39 and an increase of 3.90% from the June 30, 2009 Net Asset Value per Interest of $129.48. The Net Asset Value per Interest of Class II as of September 30, 2008 was $114.77, an increase of 8.52% from the December 31, 2007 Net Asset Value per Interest of $105.76 and a decrease of 8.03% from the June 30, 2008 Net Asset Value per Interest of $124.79.

Past performance is not necessarily indicative of future results.

Registrant’s trading gains before commissions and related fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $7,543,000 and $17,972,000, respectively. Registrant’s trading gains (losses) before commissions and related fees during Third Quarter 2008 and Year-To-Date 2008 were approximately $(8,762,000) and $12,444,000, respectively.

Registrant’s average net asset level increased during Third Quarter 2009 and Year-To-Date 2009 in comparison to Third Quarter 2008 and Year-To-Date 2008 primarily due to positive trading performance and subscriptions. Registrant’s average net asset level increased during Third Quarter 2008 and Year-To-Date 2008 in comparison to Third Quarter 2007 and Year-To-Date 2007 primarily due to the effect of additional subscriptions.

Interest income is earned on the average daily equity maintained with the clearing broker or bank at competitive interest rates. Therefore, interest income varies monthly according to interest rates, trading performance, contributions and redemptions. Interest income during Third Quarter 2009 and Year-To-Date 2009 was approximately $0 and $21,000, respectively, a decrease of approximately $729,000 and $1,299,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to declining interest rates which more than offset the increases in average net asset levels discussed above. Interest income during Third Quarter 2008 and Year-To-Date 2008 was approximately $729,000 and $1,320,000, respectively, a decrease of approximately $72,000 and $1,105,000, respectively, as compared to Third Quarter 2007 and Year-To-Date 2007, primarily due to declining interest rates which more than offset the increases in average net asset levels discussed above.

 

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Commissions and other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the Trading Advisor executes, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions and other transaction fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $212,000 and $457,000, respectively, an increase of approximately $108,000 and $229,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to increased average net asset levels discussed above. Commissions and other transaction fees during the Third Quarter 2008 and Year-To-Date 2008 were approximately $104,000 and $228,000, respectively, an increase of approximately $51,000 as compared to Third Quarter 2007 primarily due to increased average net asset levels discussed above and a decrease of approximately $13,000 as compared to Year-To-Date 2007, primarily due to the replacement in May 2007 of a futures based trading advisor (Bridgewater) with a foreign exchange based trading advisor (Ortus) that incurs lower trading costs.

Management fees to the Trading Advisors are calculated on the net assets in the managed accounts at the end of each month and, therefore, affected by monthly trading performance, contributions and redemptions. Management fees to the Trading Advisors during Third Quarter 2009 and Year-To-Date 2009 were approximately $636,000 and $1,983,000, respectively, an increase of approximately $18,000 and $276,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to increased average net assets levels discussed above. Management fees to the Trading Advisors during Third Quarter 2008 and Year-To-Date 2008 were approximately $618,000 and $1,707,000, respectively, an increase of approximately $211,000 and $459,000, respectively, as compared to Third Quarter 2007 and Year-To-Date 2007, primarily due to increased average net asset levels discussed above.

Registrant pays the Managing Owner a management fee calculated on Registrant’s Net Asset Value at the beginning of each month, and therefore, such fee is affected by monthly trading performance, contributions and redemptions. Management fees to the Managing Owner during Third Quarter 2009 and Year-To-Date 2009 were approximately $157,000 and $463,000, respectively, an increase of approximately $11,000 and $77,000, respectively, as compared to Third Quarter 2008 and Year-To-Date 2008, primarily due to increased average net asset levels discussed above. Management fees to the Managing Owner during Third Quarter 2008 and Year-To-Date 2008 were approximately $146,000 and $386,000, respectively, an increase of approximately $52,000 and $117,000, respectively, as compared to Third Quarter 2007 and Year-To-Date 2007, primarily due to increased average net asset levels discussed above.

Incentive fees, which are based on the “New High Net Trading Profits” (as defined in the Advisory Agreements) generated by the Trading Advisors, are accrued monthly and are ultimately determined as of the close of business on the last business day of each calendar quarter. Incentive fees during Third Quarter 2009 and Year-To-Date 2009 were approximately $972,000 and $2,415,000, respectively. Incentive fees during Third Quarter 2008 and Year-To-Date 2008 were approximately $200,000 and $3,727,000, respectively.

Through June 30, 2009, Registrant paid a service fee (“Service Fee”) with respect to Class I Units, monthly in arrears, equal to  ¹/12 of 2% (2% per annum) of the Net Asset Value per Unit of the outstanding Class I Units as of the beginning of the month. The service fee was paid directly by Registrant to the selling agent, Kenmar Securities Inc. (“Selling Agent”), an affiliate of the Managing Owner. The Selling Agent was responsible for paying all service fees owed to the correspondent selling agents, who were entitled to receive from the Selling Agent an initial service fee equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased and, commencing with the 13th month after the purchase of a Class I Unit, an ongoing monthly service fee equal to  ¹/12th of 2% (2% per annum) of the Net Asset Value per Unit as of the beginning of the month of the Class I Units sold by them. Beginning July 1, 2009, Registrant (rather than the Selling Agent) pays its Service Fee on Class I Units directly to the correspondent selling agents, who are entitled to receive from Registrant an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased. Commencing with the 13 ^th month after the purchase of a Class I Unit, the correspondent selling agent will now receive directly from Registrant (rather than the Selling Agent) an ongoing monthly commission equal to  ¹/12 of 2% (2% per annum) of the Net Asset Value per Class I Unit as of the beginning of each month of the Class I Units sold by them. All Unitholders will also pay the Selling Agent a monthly sales commission (“Sales Commission”) equal to  ¹/12 of 1% (1% annually) of the Net Asset Value of the outstanding Units as of the beginning of each month. Service Fees and Sales Commissions during the Third Quarter 2009 were approximately $604,000 and $314,000, respectively, an increase of approximately $97,000 and $21,000, respectively, as compared to Third Quarter 2008 and during Year-To-Date 2009 were approximately $1,725,000 and $926,000, respectively, an increase of approximately $364,000 and $153,000, respectively, as compared to

 

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Year-To-Date 2008, primarily due to increased average net asset levels discussed above. Service Fees and Sales Commissions during the Third Quarter 2008 were approximately $507,000 and $293,000, respectively, an increase of approximately $156,000 and $105,000, respectively, as compared to Third Quarter 2007, and during Year-To-Date 2008 were approximately $1,361,000 and $773,000, respectively, an increase of approximately $352,000 and $235,000, respectively, as compared to Year-To-Date 2007, primarily due to increased average net asset levels discussed above.

Operating expenses include accounting, audit, tax and legal fees as well as printing and postage costs related to reports sent to Limited Owners. Operating expenses during Third Quarter 2009 and Year-To-Date 2009 were approximately $238,000 and $558,000, respectively. Operating expenses during Third Quarter 2008 and Year-To-Date 2008 were approximately $220,000 and $573,000, respectively.

Offering costs are advanced by the Managing Owner and subject to reimbursement by Registrant, subject to certain limitations. For a further discussion of these payments, see Registrant’s financial statements for the fiscal year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008. Offering costs reimbursed by Registrant to the Managing Owner during Third Quarter 2009 and Year-To-Date 2009 were approximately $155,000 and $376,000, respectively, an increase of approximately $124,000 as compared to Third Quarter 2008, primarily due to increased average net asset levels discussed above and a decrease of $139,000, as compared to Year-To-Date 2008, primarily due to a one-time accounting adjustment in April 2008 which more than offset the increase in average net asset levels discussed above. Offering costs reimbursed by Registrant to the Managing Owner during the Third Quarter 2008 and Year-To-Date 2008 were approximately $31,000 and $515,000, respectively, a decrease of approximately $63,000 as compared to Third Quarter 2007 due to changes in the accounting treatment and calculation of Offering costs further detailed in the Registrant’s notes to its financial statements and an increase of approximately $246,000 as compared to Year-To-Date 2007, primarily due to a one-time charge of approximately $307,000 to offering cost in April 2008 as a further result of changes to the Registrant’s accounting treatment of Offering costs.

Inflation

Inflation has had no material impact on the operations or on the financial condition of Registrant from inception through September 30, 2009.

Off-Balance Sheet Arrangements and Contractual Obligations

As of September 30, 2009, Registrant had not utilized special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers, such as our accountants, undertake in performing services which are in the best interests of Registrant. While Registrant’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on Registrant’s financial position.

Registrant’s contractual obligations are with the Managing Owner, the Trading Advisors and commodity brokers. Management fees payable by Registrant to the Trading Advisors and the Managing Owner are calculated as a fixed percentage of Registrant’s Net Asset Value. Incentive fees payable to the Trading Advisors are at a fixed rate, calculated as a percentage of each Managed Account’s “New High Net Trading Profits”. As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and “New High Net Trading Profits” are not known until a future date. Commissions payable to commodity brokers are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. For a further discussion of Registrant’s contractual obligations, see Notes 1, 3, 4, 5 and 7 to Registrant’s financial statements for the year ended December 31, 2008, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Introduction

Past Results Not Necessarily Indicative of Future Performance

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

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

Registrant 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 futures market scenario will affect performance, and Registrant’s past performance is not necessarily indicative of its future results.

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

Standard of Materiality

Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of Registrant’s market sensitive instruments.

Quantifying Registrant’s Trading Value at Risk

Quantitative Forward-Looking Statements

The following quantitative disclosures regarding Registrant’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. as amended (the “Exchange Act”)).

Registrant’s risk exposure in the various market sectors traded by the Trading Advisor is quantified below in terms of Value at Risk. Due to Registrant’s mark-to-market accounting, any loss in the fair value of Registrant’s open positions is directly reflected in Registrant’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).

Exchange maintenance margin requirements have been used by Registrant 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. The maintenance margin levels are established by dealers, exchanges and data services using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

 

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In the case of market sensitive instruments that are not exchange-traded (almost exclusively currencies in the case of Registrant), the margin requirements for the approximate estimated equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, estimated dealers’ margins and/or data services have been used.

In quantifying Registrant’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that Registrant’s positions are rarely, if ever, 100% positively correlated have not been reflected.

Registrant’s Trading Value at Risk in Different Market Sectors

The following table presents the trading value at risk associated with Registrant’s open positions by market sector at September 30, 2009 and December 31, 2008. All open position trading risk exposures of Registrant have been included in calculating the figure set forth below. At September 30, 2009 and December 31, 2008, Registrant had total capitalizations of approximately $128 million and $124 million, respectively.

 

		September 30, 2009						December 31, 2008
Market Sector		Value at Risk			% of Total Capitalization			Value at Risk			% of Total Capitalization
Interest rates		$	3,556,536		2.83	%		$	491,911		0.40	%
Currencies		$	9,230,684		7.35	%		$	5,897,741		4.74	%
Commodities		$	4,799,131		3.82	%		$	920,502		0.74	%
Stock indices		$	4,524,587		3.60	%		$	123,644		0.09	%
Total		$	22,110,938		17.60	%		$	7,433,798		5.97	%

The following table presents the average trading value at risk of Registrant’s open positions by market sector for Third Quarter 2009 and Year-To-Date 2009 based upon Registrant’s total average capitalization of approximately $125 million and $123 million, respectively.

 

		Third Quarter 2009						Year-To-Date 2009
Market Sector		Value at Risk			% of Total Capitalization			Value at Risk			% of Total Capitalization
Interest rates		$	2,635,505		2.10	%		$	1,888,814		1.53	%
Currencies		$	8,271,401		6.59	%		$	6,679,452		5.41	%
Commodities		$	4,217,169		3.36	%		$	2,435,568		1.97	%
Stock indices		$	4,140,372		3.30	%		$	2,932,222		2.37	%
Total		$	19,264,447		15.35	%		$	13,936,056		11.28	%

Material Limitations on Value at Risk as an Assessment of Market Risk

The notional value of the market sector instruments held by Registrant is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 15% of the face value) as well as many times the total capitalization of Registrant. The magnitude of Registrant’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions, although unusual, but historically recurring from time to time, could cause Registrant to incur severe losses over a short period of time. The foregoing Value at Risk table, as well as the past performance of Registrant give no indication of this “risk of ruin.”

Non-Trading Risk

Registrant has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding Registrant’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how Registrant manages its primary market risk

 

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exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Registrant’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner and the Trading Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of Registrant’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 Registrant. There can be no assurance that Registrant’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in Registrant.

Based on average trading value at risk during the Third Quarter 2009, Registrant experienced an increase in its value at risk, relative to capitalization levels, as compared with the value at risk at December 31, 2008. The increase was across all sectors in the Registrant. The largest increases were in the stock index, commodities, currencies and interest rate sectors, respectively.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The means by which the Managing Owner and the Trading Advisors, severally, attempt to manage the risk of Registrant’s open positions is essentially the same in all market categories traded.

The Trading Advisor attempts to minimize market risk exposure by applying its own risk management trading policies that include the diversification of trading assets into various market sectors. Additionally, the Trading Advisor has an oversight committee broadly responsible for evaluating and overseeing the Trading Advisor’s trading policies. The oversight committee meets periodically to discuss and analyze issues such as liquidity, position size, capacity, performance cycles, and new product and market strategies.

The Managing Owner attempts to minimize market risk exposure by requiring the Trading Advisors to abide by various trading limitations and policies. The Managing Owner monitors compliance with these trading limitations and policies which include, but are not limited to, limiting the amount of margin or premium required for any one commodity or all commodities combined and generally limiting transactions to contracts which are traded in sufficient volume to permit the taking and liquidating of positions. Additionally, the Managing Owner shall automatically terminate the Trading Advisor if the Net Asset Value of Registrant declines by 40% during any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that Registrant will liquidate its positions, and eventually dissolve, if Registrant experiences a decline in the net asset value of 50% in any year or since the commencement of trading activities. In each case, the decline in Net Asset Value is after giving effect for contributions, distributions and redemptions. The Managing Owner may impose additional restrictions (through modifications of such trading limitations and policies) upon the trading activities of the Trading Advisors as it, in good faith, deems to be in the best interest of Registrant.

Qualitative Disclosures Regarding Non-Trading Risk Exposure

At September 30, 2009, Registrant’s primary exposure to non-trading market risk resulted from foreign currency balances held in Euro, British Pound, Japanese Yen, Australian Dollar, Swiss Franc and Canadian Dollar. As discussed above, these balances, as well as any risk they represent, are immaterial.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Registrant’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed by Registrant in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to Registrant’s management, including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration (who, in these capacities, function as the Principal Executive Officers and Principal Financial Officer, respectively, of Registrant), as appropriate to allow for timely decisions regarding required disclosure.

 

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In designing and evaluating Registrant’s disclosure controls and procedures, the Managing Owner recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can prove absolute assurance that all control issues and instances of fraud, if any, within Registrant have been detected.

The Managing Owner’s management, under the supervision and with the participation of certain officers of the Managing Owner (including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration), has evaluated the effectiveness of Registrant’s disclosure controls and procedures as of the end of such period and concluded that, Registrant’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in Registrant’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during Third Quarter 2009 that have materially affected, or are reasonably likely to materially affect, Registrant’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

There are no legal proceedings pending by or against Registrant or the Managing Owner, or to which Registrant or Managing Owner was a party during the period covered by this Report.

 

Item 1.A.

Risk Factors

There have been no changes from risk factors as previously disclosed in Registrant’s Form 10-K for the fiscal year ended December 31, 2008.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Registrant’s Units are sold to persons who are accredited investors as the term is defined in Rule 501(a) of Regulation D. The aggregate proceeds of securities sold during Third Quarter 2009 was 39,857.577 Units amounting to $4,989,548 for Class I and 6,443.792 Units amounting to $835,000 for Class II.

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 4.

Submission of Matters to a Vote of Security Holders

None

 

Item 5.

Other Information

None

 

Item 6.

Exhibits:

 

		31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
		31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)

 

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		32.1		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
		32.2		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WORLD MONITOR TRUST III – SERIES J
By:		Kenmar Preferred Investments Corp.,
		its managing owner
By:		/S/    KENNETH A. SHEWER				Date: November 16, 2009
Name:		Kenneth A. Shewer
Title:		Co-Chief Executive Officer
		(Principal Executive Officer)
By:		/S/    DAVID K. SPOHR				Date: November 16, 2009
Name:		David K. Spohr
Title:		Senior Vice President and
		Director of Fund Administration
		(Principal Financial/Accounting Officer)

 

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