Attached files
file | filename |
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EX-31.2 - EX-31.2 - MANAGED FUTURES PREMIER ENERGY FUND L.P. | y04566exv31w2.htm |
EX-32.2 - EX-32.2 - MANAGED FUTURES PREMIER ENERGY FUND L.P. | y04566exv32w2.htm |
EX-32.1 - EX-32.1 - MANAGED FUTURES PREMIER ENERGY FUND L.P. | y04566exv32w1.htm |
EX-31.1 - EX-31.1 - MANAGED FUTURES PREMIER ENERGY FUND L.P. | y04566exv31w1.htm |
EX-10.5.A - EX-10.5.A - MANAGED FUTURES PREMIER ENERGY FUND L.P. | y04566exv10w5wa.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR | ||
o | 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 000-25921
AAA CAPITAL ENERGY FUND L.P.
(Exact name of registrant as specified in its charter)
New York | 13-3986032 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
c/o Ceres Managed Futures LLC
522 Fifth Avenue 14th Floor
New York, New York 10036
(Address and Zip Code of principal executive offices)
522 Fifth Avenue 14th Floor
New York, New York 10036
(212) 296-1999
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None | ||
Securities registered pursuant to Section 12(g) of the Act: | Redeemable Units of Limited Partnership Interest | |
(Title of Class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this form 10-K [X].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Limited
Partnership Redeemable Units with an aggregate value of $217,414,351 were outstanding and held by
non-affiliates as of the last business day of the registrants most recently completed second
calendar month.
As of
February 28, 2011, 21,055.5271 Limited Partnership Redeemable Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
[None]
PART I
Item 1. | Business. |
(a) General Development of Business. AAA Capital Energy Fund L.P. (the Partnership)
is a limited partnership organized on January 5, 1998 under the partnership laws of the State of
New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio
of commodity interests generally including commodity options and commodity futures contracts on
U.S. exchanges and certain foreign exchanges. The Partnership, through its investment in
the Master (defined herein), may trade commodity futures and options contracts of any kind. In
addition, the Partnership, through its investment in the Master, may enter into swap contracts on
energy-related products. The commodity interests that are traded by
the Partnership, through its investment in the Master, are volatile
and involve a high degree of market risk.
During the initial offering period (February 12, 1998 through March 15, 1998) the Partnership
sold 49,538 redeemable units of limited partnership interest (Redeemable
Units). The Partnership commenced trading on March 16, 1998. No
securities which represent an equity interest or any other interest in the Partnership trade on any
public market. The Partnership no longer offers Redeemable Units for sale. During 2008, the Special
limited partner (defined herein) donated Redeemable Units to the limited partners.
Redemptions of Redeemable Units and General Partner contributions and redemptions for the years
ended December 31, 2010, 2009 and 2008 are reported in the Statements of Changes in Partners
Capital on page 25 under Item 8. Financial Statements and Supplementary Data.
Ceres Managed Futures LLC(CMF), a Delaware limited liability company, acts as the general partner
(the General Partner) and commodity pool operator of the Partnership. The General Partner is
wholly owned by Morgan Stanley Smith Barney Holdings LLC (MSSB Holdings). Morgan Stanley, indirectly through various subsidiaries, owns
a majority equity interest in MSSB Holdings. Citigroup Global Markets Inc. (CGM), the commodity
broker and a selling agent for the Partnership, owns a minority equity interest in MSSB Holdings.
Citigroup Inc. (Citigroup), indirectly through various subsidiaries, wholly owns CGM. Prior to
July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly
owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets
Holdings Inc., the sole owner of which is Citigroup. As of December 31, 2010, all trading decisions
for the Partnership are made by the Advisor (defined below).
On September 1, 2001, the Partnership allocated substantially all of its capital to the AAA
Master Fund LLC, a New York limited liability company (the
Master). The Partnership purchased 128,539.1485 units of the Master with a fair value of
$128,539,149 (including unrealized appreciation of $7,323,329). The Master was formed in order to
permit commodity pools managed now or in the future by AAA Capital Management Advisors, Ltd.
(the Advisor) using the Energy Program Futures and
Swaps, the Advisors proprietary, discretionary trading program, to invest together in one trading
vehicle. A description of the trading activities and focus of the Advisor is included on page 7
under Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. In addition, the Advisor is a special limited partner (the Special Limited
Partner) of the Partnership.
Individual and pooled accounts currently managed by the Advisor,
including the Partnership, are permitted to be non-managing members
of the Master.
The General Partner and the Advisor believe that trading through this
master/feeder structure promotes efficiency and economy in the trading process. Expenses to
investors as a result of the investment in the Master are approximately the same and redemption
rights are not affected. The Masters commodity broker is CGM and its managing member (Managing Member) is CMF. The
Master may trade commodity futures and options contracts of any kind, but trades solely energy,
energy-related products and lumber. In addition, the Master may enter into swap contracts or trade
in energy-related products. The commodity interests that are traded
by the Master are volatile and involve a high degree of market risk.
For the period January 1, 2010 through December 31, 2010, the approximate average market
sector allocation for the Partnership was 100% energy.
At December 31, 2010 and 2009, the Partnership owned approximately 24.4% and 23.3%,
respectively of the Master. It is the Partnerships intention to continue to invest substantially
all of its assets in the Master. The performance of the Partnership is directly affected by the
performance of the Master.
The Masters trading of futures, forwards, swaps and options contracts, if applicable, on
commodities is done primarily on U.S. commodity exchanges and foreign commodity
exchanges. It engages in such trading through a commodity brokerage account maintained with CGM.
2
The General Partner has agreed to make capital contributions, if necessary, so that its
general partnership interest will be equal to the greater of (i) 1% of the partners contributions
to the Partnership or (ii) $25,000. The Partnership will be liquidated upon the first to occur of
the following: December 31, 2018; the net asset value per Redeemable Unit decreases to less than
$400 per Reedemable Unit as of the close of any business day; the aggregate net assets of the Partnership decline to
less than $1,000,000; or under certain other circumstances as defined in the
limited partnership agreement of the Partnership (the Limited Partnership Agreement).
Under the Limited Partnership Agreement, the General Partner has sole responsibility for the
administration of the business and affairs of the Partnership, but may delegate trading discretion
to one or more trading advisors.
The General Partner has entered into a management agreement (the Management Agreement) with
the Advisor who will make all commodity trading decisions for the Partnership. The Advisor is not
responsible for the organization or operation of the Partnership.
The Partnership is obligated to pay the Advisor a monthly management fee equal to 1/6 of 1%
(2% per year) of month-end Net Assets allocated to the Advisor. Month-end Net Assets, for the
purpose of calculating management fees, are Net Assets, as defined in the Limited Partnership
Agreement, prior to the reduction of the current months profit share allocation accrual, the
monthly management fee and any redemption or distributions as of the end of such month. The
Management Agreement may be terminated upon notice by either party.
In addition, the Advisor is a Special Limited Partner of the Partnership and receives a
quarterly profit share allocation to its capital account in the Partnership in the form of units of
the Partnership, the value of which shall be equal to 20% of New Trading Profits, as defined in the
Management Agreement, earned on behalf of the Partnership during each calendar quarter and are
issued as Special Limited Partner Units.
The Partnership entered into a customer agreement (the Customer Agreement) which provides
that the Partnership pay CGM brokerage commissions at $18 per round turn for futures, $5 per round
turn for swap transactions and $9 per side for options. The brokerage commissions were inclusive of
applicable floor brokerage fees. All exchange, clearing, user,
give-up, and National Futures Association (NFA) fees, (collectively
the clearing fees) are borne by the Master and allocated to the Partnership through its
investment in the Master. The Partnership pays CGM brokerage commissions at the above rates based
on its proportional share of the Masters trades. The brokerage commissions may be increased or
decreased at any time at CGMs discretion upon written notice to the Partnership. CGM will pay a
portion of its brokerage commissions to financial advisors who have sold Redeemable Units. The
Partnerships assets not held in the Masters account at CGM are held in the Partnerships account
at CGM. The Partnerships assets are deposited by CGM in segregated bank accounts to the extent
required by Commodity Futures Trading Commission regulations. Cash margin requirements are
maintained by the Master. CGM will pay the Partnership interest on its allocable share of 80% of
the average daily equity maintained in cash in the Masters account during each month at a 30-day
U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on
3-month U.S. Treasury bills maturing in 30 days from the date on which such weekly rate is
determined. The Customer Agreement may be terminated
upon notice by either party.
(b) Financial Information about Segments. The Partnerships business consists
of only one segment, speculative trading of commodity interests. The Partnership does not engage in
sales of goods or services. The Partnerships net income (loss) from operations for the years ended
December 31, 2010, 2009, 2008, 2007 and 2006 are set forth under Item 6. Selected Financial
Data. The Partnerships Capital as of December 31, 2010, was $231,421,521.
(c) Narrative Description of Business.
See Paragraphs (a) and (b) above.
(i) through (xii) Not applicable.
(xiii) The Partnership has no employees.
3
(d) Financial Information About Geographic Areas. The Partnership does not engage in
sales of goods or services or own any long-lived assets, and therefore this item is not applicable.
(e) Available Information. The Partnership does not have an Internet
address. The Partnership will provide paper copies of its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these
reports free of charge upon request.
(f) Reports to Security Holders. Not applicable.
(g) Enforceability of Civil Liabilities Against Foreign Persons. Not applicable.
(h) Smaller Reporting Companies. Not applicable.
Item 1A | Risk Factors. |
As a result of leverage, small changes in the price of the Partnerships positions may result in
major losses.
The trading of commodity interests is speculative, volatile and involves a high degree of
leverage. A small change in the market price of a commodity interest contract can produce major
losses for the Partnership. Market prices can be influenced by, among other things, changing supply
and demand relationships, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events, weather and climate conditions, insects
and plant disease, purchases and sales by foreign countries and changing interest rates.
An investor may lose all of their investment.
Due to the speculative nature of trading commodity interests, an investor could lose all of
their investment in the Partnership.
The Partnership will pay substantial fees and expenses regardless of profitability.
Regardless of its trading performance, the Partnership will incur fees and expenses, including
brokerage commissions and management fees. Commissions and fees will be paid to the Advisor even if the Partnership
experiences a net loss for the full year.
An investors ability to redeem or transfer units is limited.
An investors ability to redeem units is limited and no market exists for the units.
Conflicts of interest exist.
The Partnership is subject to numerous conflicts of interest including those that arise from
the facts that:
1. | The General Partner and the Partnerships/Masters commodity broker are affiliates; |
2. | The Advisor, the Partnerships/Masters commodity broker and their principals and affiliates may trade in commodity interests for their own accounts; and |
3. | An investors financial advisor will receive ongoing compensation for providing services to the investors account. |
Investing in units might not provide the desired diversification of an investors overall
portfolio.
The Partnership will not provide any benefit of diversification of an investors overall
portfolio unless it is profitable and produces returns that are independent from stock and bond
market returns.
Past performance is no assurance of future results.
The Advisors trading strategies may not perform as they have performed in the past. The
Advisor has from time to time incurred substantial losses in trading on behalf of clients.
4
An investors tax liability may exceed cash distributions.
Investors are taxed on their share of the Partnerships income, even though the Partnership
does not intend to make any distributions.
Regulatory changes could restrict the Partnerships operations.
Regulatory changes could adversely affect the Partnership by restricting its markets or
activities, limiting its trading and/or increasing the taxes to which investors are subject.
Pursuant to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed
into law on July 21, 2010, the Commodity Futures Trading Commission (CFTC) and the Securities and
Exchange Commission (the SEC) may promulgate rules to regulate swaps dealers, require that swaps
be traded on an exchange or swap execution facilities, mandate additional reporting and disclosure
requirements and require that derivatives (such as those traded by the Partnership) be moved into
central clearinghouses. These rules, if promulgated, may negatively impact the manner in which
swap contracts are traded and/or settled and limit trading by speculators (such as the Partnership)
in futures and over-the-counter markets.
Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net
long or net short positions which any person may hold or control in particular futures and options
on futures. The trading instructions of an advisor may have to be modified, and positions held by
the Partnership may have to be liquidated in order to avoid exceeding these limits. Such
modification or liquidation could adversely affect the operations and profitability of the
Partnership by increasing transaction costs to liquidate positions and foregoing potential profits.
Item 2. | Properties. |
The Partnership does not own or lease any properties. The General Partner operates out of
facilities provided by MSSB Holdings.
Item 3. | Legal Proceedings. |
This section describes the major pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which CGM or its subsidiaries is a party or to which any
of their property is subject. There are no material legal proceedings pending against the
Partnership or the General Partner.
CGM is a New York corporation with its principal place of business at 388 Greenwich St., New
York, New York 10013. CGM is registered as a broker-dealer and futures commission merchant
(FCM), and provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. CGM and its affiliates also provide investment banking and
other financial services for clients worldwide.
There have been no material administrative, civil or criminal actions within the past five
years against CGM or any of its individual principals and no such actions are currently pending,
except as follows.
Credit-Crisis-Related Litigation and Other Matters
Citigroup and CGM continue to cooperate fully in response to subpoenas and requests for
information from the SEC, FINRA, the Federal Housing Finance Agency, state attorneys general, the
Department of Justice and subdivisions thereof, bank regulators, and other government agencies and
authorities, in connection with various formal and informal inquiries concerning Citigroups
subprime and other mortgage-related conduct and business activities, as well as other business
activities affected by the credit crisis. These business activities include, but are not limited
to, Citigroups sponsorship, packaging, issuance, marketing, servicing and underwriting of MBS and
CDOs and its origination, sale or other transfer, servicing, and foreclosure of residential
mortgages.
Subprime Mortgage-Related Litigation and Other Matters
The SEC, among other regulators, is investigating Citigroups subprime and other
mortgage-related conduct and business activities, as well as other business activities affected by
the credit crisis, including an ongoing inquiry into Citigroups structuring and sale of CDOs.
Citigroup is cooperating fully with the SECs inquiries.
On July 29, 2010, the SEC announced the settlement of an investigation into certain of
Citigroups 2007 disclosures concerning its subprime-related business activities. On October 19,
2010, the United States District Court for the District of Columbia entered a Final Judgment
approving the settlement, pursuant to which Citigroup agreed to pay a $75 million civil penalty and
to maintain certain disclosure policies, practices and procedures for a three-year period.
Additional information relating to this action is publicly available in court filings under the
docket number 10 Civ. 1277 (D.D.C.) (Huvelle, J.).
The Federal Reserve Bank, the OCC and the FDIC, among other federal and state authorities, are
investigating issues related to the conduct of certain mortgage servicing companies, including
Citigroup affiliates, in connection with mortgage foreclosures. Citigroup is cooperating fully with
these inquiries.
Certain of these regulatory matters assert claims for substantial or indeterminate
damages. Some of these matters already have been resolved, either through settlements or
court proceedings, including the complete dismissal of certain complaints or the rejection
of certain claims following hearings.
In the course of its business, CGM, as a major futures commission merchant and broker-dealer,
is a party to various civil actions, claims and routine regulatory investigations and proceedings
that the General Partner believes do not have a material effect on the business of CGM.
Item 4. | [Removed and Reserved] |
5
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
(a) | Market Information. The Partnership has issued no stock. There is no public market for the Redeemable Units. |
(b) | Holders. The number of holders of Redeemable Units as of December 31, 2010 was 644. |
(c) | Dividends. The Partnership did not declare a distribution in 2010 or 2009. The Partnership does not intend to declare distributions in the foreseeable future. |
(d) | Securities Authorized for Issuance Under Equity Compensation Plans. None. |
(e) | Performance Graph. Not applicable. |
(f) | Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities. There were no additional subscriptions of Redeemable Units for the twelve months ended December 31, 2010, 2009 and 2008. |
(g) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers. |
The following chart sets forth the purchases of Redeemable Units by the Partnership.
(d) Maximum Number | |||||||||||||||||
(or Approximate | |||||||||||||||||
(c) Total Number | Dollar Value) of | ||||||||||||||||
of Redeemable Units | Redeemable Units that | ||||||||||||||||
(a) Total Number | (b) Average | Purchased as Part | May Yet Be | ||||||||||||||
of Redeemable | Price Paid per | of Publicly Announced | Purchased Under the | ||||||||||||||
Period | Units Purchased* | Redeemable Unit** | Plans or Programs | Plans or Programs | |||||||||||||
October 1, 2010 October 31, 2010 |
413.3692 | $ | 10,323.67 | N/A | N/A | ||||||||||||
November 1, 2010 November 30, 2010 |
259.9001 | $ | 10,377.33 | N/A | N/A | ||||||||||||
December 1, 2010 December 31, 2010 |
826.7336 | $ | 10,172.06 | N/A | N/A | ||||||||||||
1,500.0029 | $ | 10,249.41 | N/A | N/A | |||||||||||||
* | Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnerships business in connection with effecting redemptions for limited partners. | |
** | Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day. |
6
Item 6. | Selected Financial Data. |
Net realized and unrealized trading gains (losses), interest income, net income (loss),
increase (decrease) in net asset value per unit and net asset value per unit for the years ended
December 31, 2010, 2009, 2008, 2007 and 2006 and total assets at December 31, 2010, 2009, 2008,
2007 and 2006 were as follows:
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Net realized and unrealized
trading gains (losses) net of
expenses allocated from Master and
brokerage commissions (including
clearing fees) of $3,312,893, $3,318,932, $4,118,393, $3,026,804 and
$3,610,119, respectively |
$ | (15,279,173 | ) | $ | 31,443,146 | $ | 130,274,917 | $ | 27,234,329 | $ | 61,630,927 | |||||||||
Interest income allocated from Master |
166,148 | 142,784 | 1,194,256 | 6,743,998 | 9,819,323 | |||||||||||||||
$ | (15,113,025 | ) | $ | 31,585,930 | $ | 131,469,173 | $ | 33,978,327 | $ | 71,450,250 | ||||||||||
Net income (loss) before allocation
to Special Limited Partner |
$ | (20,473,281 | ) | $ | 25,336,190 | $ | 125,747,278 | $ | 28,681,741 | $ | 65,331,807 | |||||||||
Allocation to Special Limited Partner |
| (5,141,561 | ) | (24,914,378 | ) | (4,492,189 | ) | (11,102,497 | ) | |||||||||||
Net income (loss) after allocation
to Special Limited Partner |
$ | (20,473,281 | ) | $ | 20,194,629 | $ | 100,832,900 | $ | 24,189,552 | $ | 54,229,310 | |||||||||
Increase (decrease) in net asset
value per unit |
$ | (824.28 | ) | $ | 697.34 | $ | 3,239.79 | $ | 655.84 | $ | 1,064.98 | |||||||||
Net asset value per unit |
$ | 10,172.06 | $ | 10,996.34 | $ | 10,299.00 | $ | 7,059.21 | $ | 6,403.37 | ||||||||||
Total assets |
$ | 241,527,323 | $ | 285,980,036 | $ | 310,559,773 | $ | 242,063,671 | $ | 259,688,401 | ||||||||||
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
The Partnership, through its investment in the Master, seeks to achieve capital appreciation
through speculative trading, directly or indirectly, in commodity interests, including, commodity
futures and commodity option contracts traded on United States exchanges and certain foreign
exchanges and swaps. The Partnership, through its investment in the Master, intends to trade only
energy and energy-related products, as well as the Goldman Sachs Commodity Index (an index future
comprised of energy and other products), traded on the Chicago Mercantile Exchange, but is
authorized to trade commodity futures, swaps and options contracts of any kind. The Partnership has
invested substantially all of its capital in the Master. The Advisor is authorized to trade forward
contracts on behalf of the Partnership and the Master but does not currently intend to do so
(certain swaps that the Advisor trades are, however, the substantial economic equivalent of forward
contracts).
The General Partner/Managing Member manages all business of the Partnership/Master. The
General Partner has delegated its responsibility for the investment of the Partnerships assets to
the Advisor. The Partnership has invested these assets in the Master. The General Partner employs a
team of approximately 40 professionals whose primary emphasis is on attempting to maintain quality
control among the advisors to the partnerships operated or managed by the General Partner. A
full-time staff of due diligence professionals uses proprietary technology and on-site evaluations
to monitor new and existing futures money managers. The accounting and operations staff provides
processing of trading activity and reporting to limited partners and regulatory authorities. In
selecting the Advisor for the Partnership/Master, the General Partner considered past performance,
trading style, volatility of markets traded and fee requirements.
Responsibilities of the General Partner/Managing Member include:
| due diligence examinations of the Advisor; |
| selection, appointment and termination of the Advisor; |
| negotiation of the Management Agreement; and |
| monitoring the activity of the Advisor. |
7
In addition, the General Partner/Managing Member prepares the books and records and provides
the administrative and compliance services that are required by law or regulation from time to time
in connection with operation of the Partnership/Master. These services include the preparation of
required books and records and reports to limited partners, government agencies and regulators;
computation of net asset value; calculation of fees; effecting subscriptions, redemptions and
limited partner communications; and preparation of offering documents and sales literature.
The
General Partner/Managing Member seeks the best prices and services available in its
commodity futures brokerage transactions.
AAA Capital Management Advisors, Ltd.
The
Partnerships assets allocated to the Advisor for trading is not invested in commodity
interests directly. The Advisors allocation of the Partnerships assets is currently invested in
the Master. The Advisor trades the Masters, and thereby the Partnerships, assets in accordance
with its Energy Program Futures and Swaps.
The Master currently trades energy futures contracts and options on energy futures contracts
on domestic and international exchanges, as well as the Goldman Sachs Commodity Index (an index
future comprised of energy and other products) traded on the Chicago Mercantile Exchange. The
Master also currently engages in swap transactions involving crude
oil and other energy-related
products. References herein to energy and energy related products include all of the foregoing.
The Advisor generally bases its trading decisions on fundamental factors, namely supply and
demand for a particular group or type of commodity. The Advisor attempts to buy undervalued
commodities and sell overvalued commodities, often but not always simultaneously. The Advisor uses
options to attempt either to reduce or define risks.
The Advisor is aware of price trends but does not trade upon trends. The Advisor often takes
profits in positions with specific trends even though that trend may still be intact or perhaps
even strong. The Advisor occasionally establishes positions that are countertrend.
Effective risk management is a crucial aspect of the Advisors trading program. Account size,
expectation, volatility of the market traded and the nature of other positions taken are all
factors in determining the amount of equity committed to each trade. The Master is the Advisors
largest account.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only assets are its
investment in the Master and cash. The Master does not engage in the sale of goods or services.
Because of the low margin deposits normally required in commodity trading, relatively small price
movements may result in substantial losses to the Partnership, through its investment in the
Master. While substantial losses could lead to a material decrease in liquidity, no such
illiquidity occurred during the year ended December 31, 2010.
To
minimize the risk relating to low margin deposits, the Master follows certain trading
policies, including:
(i) | The Master invests its assets only in commodity interests that the Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisor believes will permit it to enter and exit trades without noticeably moving the market. |
(ii) | The Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Masters net assets allocated to the Advisor. |
(iii) | The Master may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged. |
(iv) | The Master does not employ the trading technique commonly known as pyramiding, in which the speculator uses unrealized profits on existing positions as margin for the purchases or sale of additional positions in the same or related commodities. |
8
(v) | The Master does not utilize borrowings other than short-term borrowings if the Master takes delivery of any cash commodities. |
(vi) | The Advisor may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Master. Spreads and Straddles describe commodity futures trading strategies involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets. |
(vii) | The Master will not permit the churning of its commodity trading account. The term churning refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, driven by the desire to generate commission income. |
From January 1, 2010 through December 31, 2010, the Partnerships average margin to equity
ratio (i.e., the percentage of assets on deposit required for margin) was approximately 14.4%. The
foregoing margin to equity ratio takes into account cash held in the Partnerships name, as well as
the allocable value of the positions and cash held on behalf of the Partnership in the name of the
Master.
In the normal course of business, the Partnership, through its investment in the Master, is
party to financial instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments include forwards,
futures, options and swaps, whose values are based upon an underlying asset, index or reference
rate, and generally represent future commitments to exchange currencies or cash balances, or to
purchase or sell other financial instruments at specified terms at specified future dates, or, in
the case of derivative commodity interests, to have a reasonable possibility to be settled in cash,
through physical delivery or with another financial instrument. These instruments may be traded on
an exchange or over-the-counter (OTC). Exchange-traded instruments are standardized and include
futures, certain forwards and certain option contracts. OTC contracts are negotiated between
contracting parties and include forwards and certain options. Specific market movements of the
commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser
of an option may lose the entire premium paid for the option. The writer, or seller, of an option
has unlimited risk. Each of these instruments is subject to various risks similar to those relating
to the underlying financial instruments including market and credit risk. In general, the risks
associated with OTC contracts are greater than those associated with exchange-traded instruments
because of the greater risk of default by the counterparty to an OTC contract.
The risk to the limited partners that have purchased interests
in the Partnership is limited to the amount of their capital contributions
to the Partnership and their share of the Partnerships assets and undistributed profits.
This limited liability is a consequence of the organization of
the Partnership as a limited partnership under applicable law.
Market risk is the potential for changes in the value of the financial instruments traded by
the Partnership/Master due to market changes, including interest and foreign exchange rate
movements and fluctuations in commodity or security prices. Market risk is directly impacted by the
volatility and liquidity in the markets in which the related underlying assets are traded. The
Partnership/Master is exposed to a market risk equal to the value of futures and forward contracts
purchased and unlimited liability on such contracts sold short.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to
perform according to the terms of a contract. The Partnerships/Masters risk of loss in the event
of a counterparty default is typically limited to the amounts recognized in the Statements of
Financial Condition and not represented by the contract or notional amounts of the instruments. The
Partnerships/Masters risk of loss is reduced through the use of legally enforceable master
netting agreements with counterparties that permit the Partnership/Master to offset unrealized
gains and losses and other assets and liabilities with such counterparties upon the occurrence of
certain events. The Partnership/Master has credit risk and concentration risk as the sole
counterparty or broker with respect to the Partnerships/Masters assets is CGM or a CGM affiliate.
Credit risk with respect to exchange-traded instruments is reduced to the extent that through CGM,
the Partnerships/Masters counterparty is an exchange or clearing organization.
The
Advisor will concentrate the Partnerships/Masters trading in energy-related markets.
Concentration in a limited number of commodity interests may subject the Partnerships/Masters
account to greater volatility than if a more diversified portfolio of contracts were traded on
behalf of the Partnership/Master.
As both a buyer and seller of options, the Master pays or receives a premium at the outset and
then bears the risk of unfavorable changes in the price of the contract underlying the option.
Written options expose the Master to potentially unlimited liability; for purchased options the
risk of loss is limited to the premiums paid. Certain written put options permit cash settlement
and do not require the option holder to own the reference asset. The Master does not consider these
contracts to be guarantees.
9
The General Partner/Managing Member monitors and attempts to control the
Partnerships/Masters risk exposure on a daily basis through financial, credit and risk management
monitoring systems, and accordingly, believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership/Master may be subject. These
monitoring systems generally allow the General Partner/Managing Member to statistically analyze
actual trading results with risk adjusted performance indicators and correlation statistics. In
addition, on-line monitoring systems provide account analysis of futures, forwards and options
positions by sector, margin requirements, gain and loss transactions and collateral positions. (See
also Item 8. Financial Statements and Supplementary Data for further information on
financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity futures and swaps trading, the Master knows of no
trends, demands, commitments, events or uncertainties which will result in or which are reasonably
likely to result in the Masters liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its discretion, cause the
Partnership to cease trading operations and liquidate all open positions under certain
circumstances including a decrease in net asset value per Redeemable Unit to less than $400 as of
the close of business on any business day.
(b) Capital Resources.
(i) The Partnership has made no material commitments for capital expenditures.
(ii) The Partnerships capital consists of the capital contributions of the partners as
increased or decreased by gains or losses on trading and by expenses, interest income, redemptions
of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be
predicted. Market movements in commodities are dependent upon fundamental and technical factors
which the Advisor may or may not be able to identify, such as changing supply and demand
relationships, weather, government, agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest rates. Partnership
expenses consist of, among other things, commissions, advisory fees and administrative fees. The
level of these expenses is dependent upon the level of trading and the ability of the Advisor to
identify and take advantage of price movements in the commodity markets, in addition to the level
of Net Assets maintained. In addition, the amount of interest income payable by CGM is dependent
upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given period. A limited partner
may require the Partnership to redeem their Redeemable Units at their net asset value as of the
last day of a month on three business days notice to the General Partner. There is no fee charged
to limited partners in connection with redemptions. Redemptions generally are funded out of the
Partnerships cash holdings. For the year ended December 31, 2010, 2,871.0299 Redeemable Units were
redeemed totaling $29,872,324 and 49.7338 General Partner unit equivalents were
redeemed totaling $524,997. For the year ended December 31, 2009, 2,177.9080 Redeemable Units were redeemed totaling
$23,620,701, 1,389.5644 Redeemable Units of Special Limited Partnership Interest were
redeemed totaling $15,224,202 and 537.8824 General Partner unit equivalents were redeemed totaling $5,999,845. For the year ended December 31, 2008, 5,682.3887 Redeemable Units were redeemed totaling
$47,287,192 and 1,773.3087 Redeemable Units of Special Limited Partnership Interest were
redeemed totaling $17,007,106.
Redeemable Units were sold to persons and entities who are accredited investors as that term
is defined in rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the
Securities Act).
(c) Results of Operations.
For the year ended December 31, 2010 the net asset value per unit decreased 7.5% from
$10,996.34 to $10,172.06. For the year ended December 31, 2009 the net asset value per unit
increased 6.8% from $10,299.00 to $10,996.34. For the year ended December 31, 2008 the net asset
value per unit increased 45.9% from $7,059.21 to $10,299.00.
The Partnership, through its investment in the Master, experienced a net
trading loss of $10,999,130 before brokerage commissions and related fees for the year ended December 31, 2010.
Losses were primarily attributable to the trading of commodity futures in NYMEX Crude Oil, NYMEX
Natural Gas and Brent Crude Oil and were partially offset by gains in NYMEX Energy Swaps, NYMEX
Heating Oil, NYMEX Gasoline, Unleaded Gasoline, IPE Gas Oil and Lumber.
The net trading gain (or loss) realized from the Partnerships investment in the Master is disclosed
on page 24 under Item 8. Financial Statements and
Supplementary Data.
The Partnership had a difficult time as the changes in the Natural Gas markets were
seismic in their scope and with respect to trading throughout the curve. Despite the
difficulties in Natural Gas; Crude Oil and refined products performed well throughout
the latter half of 2010 to absorb some of the losses in the Natural Gas portfolio.
Crude Oil in general tended to trade like a financial asset for the majority of 2010 as
it was highly correlated with Gold as two ways to play a falling U.S. dollar and
weak global equity prices. This made trading more difficult as it increased crude oil's volatility and overshadowed fundamental factors. Overall, profits were made in Crude as well as most of the refined products such as Heating Oil, Gasoil and RBOB (Gasoline) throughout the second half of the year. The Partnership in general was traded much more dynamically as positions were held for shorter periods of time and trading was very diversified across directional, spread, calendar and volatility positions, which helped performance. Natural Gas trading became more directional in nature during the second half of the year as the traditional calendar and spread trading opportunities that persisted in the market were not very compelling and the movements in the market were extremely volatile. The shift in trading style and the ability to diversify their Natural Gas exposure across all sub-strategies was beneficial to performance as longer-term positioning in Natural Gas was extremely difficult. Despite these changes the exposure of the portfolio is still expressed throughout the front-end and the back end of the curve with a majority of the exposure within the first 36 months. Gains in the back end of the curve were modest throughout the year and the shift to more near-term opportunities is something that will be consistent in the Fund's Natural Gas portfolio.
The Partnership, through its investment in the Master, experienced a
net trading gain of $35,672,914 before brokerage commissions and
related fees for the year ended December 31,
2009. Gains were primarily attributable to the trading of commodity
10
futures in NYMEX Energy Swaps, NYMEX Heating Oil, NYMEX Gasoline, NYMEX Natural Gas,
Unleaded Gasoline, Brent Crude Oil and Grains and were partially offset by losses in IPE Gas Oil,
RBOB Gasoline and NYMEX Crude Oil.
2009 was a volatile year for the financial markets. The U.S. stock market entered 2009 reeling
from the financial turmoil of 2008. The results of the sub-prime fallout, bank bailouts, auto
industry bankruptcies, and capitulating economic data overwhelmed not just stock prices, but fueled
extraordinarily high levels of risk aversion. The markets recovery was driven by stability in the
banking sector and a rapid recovery in global markets. By mid-year 2009, the market hit a bottom in
March, banks were seeking to return TARP bailout money and leading indicators were recovering. The
Partnership realized gains as directional trends in the first three quarters sufficiently offset
losses recorded in December.
The Partnership recorded gains primarily in natural gas as prices tumbled in the first quarter
of 2009. In January, natural gas prices dropped more than 25% on reduced economic activity on
natural gas, benefiting short positions on the front end of the price curve. The position was
reduced in February as prices stabilized on cold weather. The downward trend continued in March on
bearish fundamentals and demand for natural gas continued to suffer, adding profits to the
portfolio. While the bearish trend across the petroleum complex became range bound. In the crude
oil market, contango spread widened to historic levels indicating that the excess supply in the
market was being pushed into storage.
In the second quarter of 2009, the Partnership realized modest gains evenly split between
natural gas and petroleum. Performance with the natural gas book was mixed. April gains came from
the Partnerships long option/volatility positions and short winter/long summer spread positions
along the forward gas curve. Profits were partially given back in May in both petroleum and natural
gas.
Oil market activity during summer was impressive. Lead by the refined products, oil prices
sold off sharply early in the month with NYMEX crude falling from $73.38/barrel on June 30th to as
low as $58.32 by July 13th. Majority of the Julys return was derived from the oil side of the
Partnerships market position. The Partnership realized modest return in the month as gains in
trading petroleum markets were offset by losses in the refined products. In particular, while there
were very slight returns in distillate markets, refined products performance overall was weighed
down by losses in gasoline.
December proved to be a tough month in the energy markets. Mean reversion lead to a flattening
of the crude volatility curve and persistent downward pressure in the long dated crude option
volatility value. The epic cold weather across major global markets also worked against the
Partnerships positions in natural gas and petroleum trading books. Small losses were recorded in
the fourth quarter of 2009 as a result.
Interest income on 80% of the Partnerships average daily equity allocated to it by the Master
was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in
30 days. Interest income allocated from the Master for the
three and twelve months ended December 31, 2010 increased by
$34,957 and $23,364, respectively, as
compared to the corresponding periods in 2009. The increase in interest income is primarily due to
higher U.S. Treasury Bill rates for the Partnership during the three and twelve months ended
December 31, 2010, as compared to the corresponding periods in 2009. Interest earned by the
Partnership will increase the net asset value of the Partnership.
Brokerage commissions are based on the number of trades executed by the Advisor and the
Partnerships ownership percentage of the Master. Brokerage commissions and fees for the three and twelve months
ended December 31, 2010 decreased by $316,050 and $6,039, respectively, as compared to the
corresponding periods in 2009. The decrease in brokerage commissions and fees is primarily due to a decrease
in the number of trades during the three and twelve months ended December 31, 2010 as compared to
the corresponding periods in 2009.
Management fees are calculated as a percentage of the Partnerships net asset value as of the
end of each month and are affected by trading performance and redemptions. Management fees for the
three and twelve months ended December 31, 2010 decreased by
$224,651 and $822,776, respectively, as
compared to the corresponding periods in 2009. The decrease in management fees is due to a decrease
in average net assets during the three and twelve months ended December 31, 2010 as compared to the
corresponding periods in 2009.
Special Limited Partner profit share allocations (incentive fees) are based on the new trading
profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement
between the Partnership, the General Partner and the Advisor. There were no profit share
allocations earned for the three and twelve months ended December 31, 2010.
There were no profit share allocations earned for the three months ended December 31, 2009.
The profit share allocations earned for the twelve months ended December 31, 2009 were
$5,141,561. The Advisor will not be paid incentive fees until the Advisor recovers the net loss
incurred and earns additional new trading profits for the Partnership.
11
The Partnership pays professional fees, which generally include legal and accounting expenses.
Professional fees for the years ended December 31, 2010 and 2009 were $138,088 and $195,332,
respectively.
The Partnership pays other expenses, which generally include filing, reporting and data processing
fees. Other expenses for the years ended December 31, 2010 and 2009 were $23,877 and 33,341,
respectively.
The Partnership, through its investment in the Master, experienced a net
trading gain of $135,361,295 before brokerage commissions and related fees for the year ended December 31, 2008.
Gains were primarily attributable to the trading of NYMEX Crude Oil, NYMEX Energy Swaps, NYMEX
Heating Oil, NYMEX Natural Gas, Corn and IPE Gas Oil and were partially offset by losses in IPE
Brent Crude Oil, NYMEX Gasoline, NYMEX Unleaded Gas, and OTC Energy Swaps.
The Partnership posted gains for the year as profits accumulated from the Partnerships
trading in the petroleum complex and natural gas. The strategy realized most of the profits in the
energy sector by capturing both the bullish and the bearish trends. In the earlier part of the
year, crude oil pushed towards a historic high of $147 per barrel and in the latter part, the trend
suddenly reversed and a strong negative trend emerged with crude oil dropping to about $32 per
barrel. Trading in spreads between petroleum products was also beneficial to the second half of the
year. Natural gas also contributed to profits as prices plunged from $14 to about $5.
Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase
the risks involved in commodity trading, but also increase the possibility of profit. The
profitability of the Master and the Partnership depends on the Advisors ability to forecast
changes in energy and energy-related commodities. Such price changes are influenced by, among other
things, changing supply and demand relationships, weather, governmental, agricultural, commercial
and trade programs and policies, national and international political and economic events and
changes in interest rates. To the extent that the Advisor correctly makes such forecasts, the
Master and the Partnership expect to increase capital through operations.
In allocating substantially all of the assets of the Partnership to the Master, the General
Partner considered the Advisors past performance, trading style, volatility of markets traded and
fee requirements. The General Partner may modify or terminate the allocation of assets to the
Advisor at any time.
(d) | Off-Balance Sheet Arrangements. None. |
(e) | Contractual Obligations. None. |
(f) | Operational Risk. |
The Partnership, through its investment in the Master, is directly exposed to market risk and
credit risk, which arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment with increasing
transaction volumes and an expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk the risk of financial and opportunity loss and legal liability
attributable to operational problems, such as inaccurate pricing of transactions, untimely trade
execution, clearance and/or settlement, or the inability to process large volumes of transactions.
The Partnership/Master is subject to increased risks with respect to their trading activities in
emerging market securities, where clearance, settlement, and custodial risks are often greater than
in more established markets.
Technological Risk the risk of loss attributable to technological limitations or hardware
failure that constrain the Partnerships/Masters ability to gather, process, and communicate information
efficiently and securely, without interruption, to customers and in the markets where the
Partnership/Master participates.
Legal/Documentation Risk the risk of loss attributable to deficiencies in the documentation
of transactions (such as trade confirmations) and customer relationships (such as master netting
agreements) or errors that result in noncompliance with applicable legal and regulatory
requirements.
Financial Control Risk the risk of loss attributable to limitations in financial systems and
controls. Strong financial systems and controls ensure that assets are safeguarded, that
transactions are executed in accordance with managements authorization, and that financial
information utilized by management and communicated to external parties, including the
Partnerships Redeemable Unit holders, creditors, and regulators, is free of material errors.
12
(g) | Critical Accounting Policies. |
Partnerships Investments. The Partnership values its investment in the Master at its net
asset value per unit as calculated by the Master. The Master values its investments as described in
note 2 of the Masters notes to the annual financial statements as of December 31, 2010.
Partnerships and Masters Fair Value Measurements. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date under current market conditions. The fair value
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable
inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in
its entirety falls shall be determined based on the lowest level input that is significant to the
fair value measurement in its entirety. Management has concluded that based on available
information in the marketplace, the Masters Level 1 assets and liabilities are actively
traded.
Accounting principles generally accepted
in the United States of America (GAAP) also requires the need to use judgment in determining if a formerly active market has
become inactive and in determining fair values when the market has become inactive. Management has
concluded that based on available information in the marketplace, there has not been a significant
decrease in the volume and level of activity in the Partnerships Level 2 assets and liabilities.
The Partnership will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such items on a gross basis rather than on a net basis), and makes disclosures regarding the level of disaggregation
and the inputs and valuation techniques used to measure
fair value for measurements that fall within either Level 2 or Level 3 of the fair value
hierarchy as required under GAAP.
The Partnership values investments in the Master where there are no other rights or
obligations inherent within the ownership interest held by the Partnership based on the end of the
day net asset value of the Master (Level 2). The value of the Partnerships investment in the
Master reflects its proportional interest in the Master. As of and for the years ended December 31,
2010 and 2009, the Partnership did not hold any derivative instruments that are based on
unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair value
using unobservable inputs through the application of managements assumptions and internal
valuation pricing models (Level 3).
The Master considers prices for exchange-traded commodity futures, forwards and options
contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1).
The values of non exchange-traded forwards, swaps and certain options contracts for which market
quotations are not readily available are priced by broker-dealers who derive fair values for those
assets from observable inputs (Level 2). As of and for the years ended December 31, 2010 and 2009,
the Master did not hold any derivative instruments for which market quotations are not readily
available and which are priced by broker-dealers who derive fair values for those assets from
observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the
application of managements assumptions and internal valuation pricing models (Level 3).
Futures Contracts. The Master trades futures and exchange-cleared swap contracts. Exchange-cleared swaps
are swaps that are traded as futures. A futures contract is a
firm commitment to buy or sell a specified quantity of investments, currency or a standardized
amount of a deliverable grade commodity, at a specified price on a specified future date, unless
the contract is closed before the delivery date or if the delivery quantity is something where
physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in
cash. Payments (variation margin) may be made or received by the Master each business day,
depending on the daily fluctuations in the value of the underlying contracts, and are recorded as
unrealized gains or losses by the Master. When the contract is closed, the Master records a
realized gain or loss equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. Transactions in futures contracts require
participants to make both initial margin deposits of cash or other assets and variation margin
deposits, through the futures broker, directly with the exchange on which the contracts are traded.
Realized gains (losses) and changes in unrealized gains (losses) on futures contracts are included
in the Statements of Income and Expenses.
Options. The Master may purchase and write (sell) both
exchange-listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not
requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial
instrument at a specified price during a specified time period. The option premium is the total
price paid or received for the option contract. When the Master writes an option, the premium
received is recorded as a liability in the Statements of Financial Condition and marked to market
daily. When the Master purchases an option, the premium paid is recorded as an asset in the
Statements of Financial Condition and marked to market daily. Realized gains (losses) and changes
in unrealized gains (losses) on options contracts are included in the Statements of Income and
Expenses.
Brokerage Commissions. Commission charges to open and close futures and exchange-traded swap
contracts are expensed at the time the positions are opened. Commission charges on option contracts
are expensed at the time the position is established and when the option contract is closed.
13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Master is a speculative commodity pool. The market sensitive instruments held by the
Master are acquired for speculative trading purposes, and all or substantially all of the
Partnerships assets are subject to the risk of trading loss through its investment in the Master.
Unlike an operating company, the risk of market sensitive instruments is integral, not incidental,
to the Masters and the Partnerships main line of business.
The risk to the limited partners that have purchased interests in the Partnership is limited
to the amount of their capital contributions to the Partnership and their share of the Partnerships
assets and undistributed profits. This limited liability is a consequence of the organization of
the Partnership as a limited partnership under applicable law.
Market movements result in frequent changes in the fair market value of the Masters open
positions and, consequently, in its earnings and cash flow. The Masters and the Partnerships
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 results among the Masters open positions and the liquidity of the
markets in which it trades.
The Master rapidly acquires and liquidates both long and short positions in a wide range of
different markets. Consequently, it is not possible to predict how a particular future market
scenario will affect performance, and the Masters past performance is not necessarily indicative
of its future results.
Value at Risk is a measure of the maximum amount which the Master could reasonably be expected
to lose in a given market sector. However, the inherent uncertainty of the Masters speculative
trading and the recurrence in the markets traded by the Master of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the indicated Value at
Risk or the Masters experience to date (i.e., risk of ruin). In light of the foregoing as well
as the risks and uncertainties intrinsic to all future projections, the inclusion of the
quantification included in this section should not be considered to constitute any assurance or
representation that the Masters losses in any market sector will be limited to Value at Risk or by
the Masters attempts to manage its market risk.
Quantifying the Partnerships Trading Value at Risk
The following quantitative disclosures regarding the Masters and the Partnerships 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 and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act)). All quantitative disclosures in this section are deemed
to be forward-looking statements for purposes of the safe harbor except for statements of
historical fact (such as the terms of particular contracts and the number of market risk sensitive
instruments held during or at the end of the reporting period).
The Masters and the Partnerships risk exposure in the various market sectors traded by the
Advisor is quantified below in terms of Value at Risk. Due to the Masters mark-to-market
accounting, any loss in the fair value of the Masters open positions is directly reflected in the
Masters earnings (realized or unrealized).
Exchange maintenance margin requirements have been used by the Master 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 intervals. The maintenance margin levels are established by dealers and exchanges using
historical price studies as well as an assessment of current market volatility (including the
implied volatility of the options on a given futures contract) and economic fundamentals to provide
a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance
margin has been used rather than the more generally available initial margin, because initial
margin includes a credit risk component which is not relevant to Value at Risk.
In the case of market sensitive instruments which are not
exchange-traded (almost exclusively
currencies in the case of the Master), the margin requirements for the equivalent futures positions
have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers margins have been used.
14
The fair value of the Masters futures and forward positions does not have any optionality
component. However, the Advisor does trade commodity options. The Value at Risk associated with
options is reflected in the following table as the margin requirement attributable to the
instrument underlying each option. Where this instrument is a futures contract, the futures margin,
and where this instrument is a physical commodity, the futures-equivalent maintenance margin has
been used. This calculation is conservative in that it assumes that the fair value of an option
will decline by the same amount as the fair value of the underlying instrument, whereas, in fact,
the fair values of the options traded by the Master in almost all cases fluctuate to a lesser
extent than those of the underlying instruments.
In quantifying the Masters 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 added to determine each trading categorys
aggregate Value at Risk. The diversification effects resulting from the fact that the Masters
positions are rarely, if ever, 100% positively correlated have not been reflected.
The Masters Trading Value at Risk in Different Market Sectors
Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments.
The following tables indicate the trading Value at Risk associated with the Masters open
positions by market category as of December 31, 2010 and 2009, and the highest, lowest and average
value at any point during the years. All open position trading risk exposures of the Master have
been included in calculating the figures set forth below. As of December 31, 2010, the Masters
total capitalization was $980,369,638 and the Partnership owned approximately 24.4% of the Master.
The Partnership invests substantially all of its assets in the Master. The Masters Value at Risk as of December 31, 2010 was as follows:
December 31, 2010
% of Total | High | Low | Average | |||||||||||||||||
Market Sector | Value at Risk | Capitalization | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Energy |
$ | 51,518,525 | 5.26 | % | $ | 143,609,109 | $ | 51,518,525 | $ | 94,568,057 | ||||||||||
Lumber |
93,600 | 0.01 | 126,800 | 22,200 | 57,792 | |||||||||||||||
Total |
$ | 51,612,125 | 5.27 | % | ||||||||||||||||
* | Annual average of month-end Values at Risk |
As of December 31, 2009, the Masters total capitalization was $1,229,195,192 and the
Partnership owned approximately 23.3% of the Master. The Partnership invests substantially all of its assets in the Master. The Masters Value at Risk as of December 31, 2009 was as follows:
December 31, 2009
% of Total | High | Low | Average | |||||||||||||||||
Market Sector | Value at Risk | Capitalization | Value at Risk | Value at Risk | Value at Risk* | |||||||||||||||
Energy |
$ | 133,905,240 | 10.89 | % | $ | 352,329,038 | $ | 4,405,231 | $ | 166,882,818 | ||||||||||
Total |
$ | 133,905,240 | 10.89 | % | ||||||||||||||||
* | Annual average of month-end Values at Risk |
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Master is typically many times the
applicable margin requirement (margin requirements generally range between 2% and 15% of contract
face value) as well as many times the capitalization of the Master. The magnitude of the Masters
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 unusual, but historically
recurring from time to time could cause the Master to incur severe losses over a short period of
time. The foregoing Value at Risk table as well as the past performance of the Partnership give
no indication of this risk of ruin.
Materiality as used in this section, Qualitative and Quantitative 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
the Masters market sensitive instruments.
15
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Masters market risk exposures except
for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how
the Master manages its primary market risk exposures constitute forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Masters
primary market risk exposures as well as the strategies used and to be used by the General Partner
and the Advisor for managing such exposures are subject to numerous uncertainties, contingencies
and risks, any one of which could cause the actual results of the Masters risk control 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 management strategies of the Master. There can be no
assurance that the Masters current market exposure and/or risk management strategies will not
change materially or that any such strategies will be effective in either the short or long term.
Investors must be prepared to lose all or substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Master as of December 31, 2010 by
market sector.
Energy. Energy-related products, such as crude oil, heating oil, gasoline and natural
gas, constitute the principal market exposure of the Master. The Master has substantial market
exposure to gas and oil price movements, often resulting from political developments in the Middle
East. Political developments in other countries or regions can also materially impact upon the
prices of energy products, as could changing supply and demand relationships, weather,
governmental, commercial and trade programs and policies, and other significant economic events.
Energy prices can be volatile and substantial profits and losses have been and are expected to
continue to be experienced in these markets.
The Master engages in swap transactions in crude oil and other energy-related products. In
this connection, the Master contracts with its counterparty to exchange a stream of payments
computed by reference to a notional amount and the price of the energy product that is the subject
of the swap.
Swap contracts are not guaranteed by an exchange or clearinghouse. CGM does not engage in swap
transactions as a principal.
The Master usually enters into swaps on a net basis, i.e., the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the agreement, with the Master
receiving or paying, as the case may be, only the net amount of the two payments. Swaps do not
involve the delivery of underlying assets or principal. Accordingly, the risk of loss with respect
to swaps is limited to the net amount of payments that the Master is contractually obligated to
make. If the counterparty to a swap defaults, the Masters risk of loss consists of the net amount
of payments that the Master is contractually entitled to receive.
The Master may also enter into spot transactions to purchase or sell commodities with CGM, or
one of its affiliates, as principal. Such spot transactions provide for two-day settlement and are
not margined. Such transactions may be entered into in connection with exchange for physical
transactions. Like the swap contract market, the spot market is a principals market so there is no
clearinghouse guarantee of performance. Instead, the Master is subject to the risk of inability of,
or refusal by, a counterparty to perform with respect to the underlying contract.
Other Commodity Interests. The Master primarily emphasizes the trading of energy
products, but may also trade some portion of its assets in other commodity interests, including,
but not limited to, commodity interest contracts on the Goldman Sachs Commodity Index (an index
future comprised primarily of energy products). Commodity interest prices can be affected by
numerous factors, including political developments, weather conditions, seasonal effects and other
factors which affect supply and demand for the underlying commodity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and attempts to
control the Partnerships, through its investment in the
Master, risk exposure on a daily basis through financial, credit and risk management monitoring
systems and accordingly, believes that it has effective procedures for evaluating and limiting the
credit and market risks to which the Master may be subject.
16
The General Partner monitors the Masters performance and the concentration of its open
positions, and consults with the Advisor concerning the Masters overall risk profile. If the
General Partner felt it necessary to do so, the General Partner could require the Advisor to close
out individual positions as well as enter programs traded on behalf of the Master. However, any
such intervention would be a highly unusual event. The General Partner primarily relies on the
Advisors own risk control policies while maintaining a general supervisory overview of the
Masters market risk exposures.
The Advisor applies its own risk management policies to its trading. The Advisor often follows
diversification guidelines, margin limits and stop loss points to exit a position. The Advisors
research of risk management often suggests ongoing modifications to its trading programs.
As part of the General Partners risk management, the General Partner periodically meets with
the Advisor to discuss its risk management and to look for any material changes to the Advisors
portfolio balance and trading techniques. The Advisor is required to notify the General Partner of
any material changes to its programs.
17
Item 8. Financial Statements and Supplementary Data.
AAA Capital Energy Fund L.P.
The following financial statements and related items of the Partnership are filed under
this Item 8: Oath or Affirmation, Managements Report on Internal Control over Financial Reporting,
Reports of Independent Registered Public Accounting Firms, for the years ended December 31, 2010,
2009, and 2008; Statements of Financial Condition at December 31, 2010 and 2009; Statements of
Income and Expenses for the years ended December 31, 2010, 2009, and 2008; Statements of Changes in
Partners Capital for the years ended December 2010, 2009, and 2008; and Notes to Financial
Statements.
18
To the Limited
Partners of
AAA Capital Energy Fund L.P.
AAA Capital Energy Fund L.P.
To the best of the knowledge and belief of the undersigned, the
information contained herein is accurate and complete.
By: | Walter Davis |
President and Director
Ceres Managed Futures LLC
General Partner,
AAA Capital Energy Fund L.P.
Ceres Managed Futures LLC
522 Fifth Avenue
14th Floor
New York, N.Y. 10036
212-296-1999
522 Fifth Avenue
14th Floor
New York, N.Y. 10036
212-296-1999
19
Managements
Report on Internal Control Over
Financial Reporting
Financial Reporting
The management of AAA Capital Energy Fund L.P. (the
Partnership), Ceres Managed Futures LLC, is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a - 15(f) and
15d 15(f) under the Securities Exchange Act of 1934
and for our assessment of internal control over financial
reporting. The Partnerships internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America. The Partnerships internal
control over financial reporting includes those policies and
procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Partnership;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of the Partnership are being made only in
accordance with authorizations of management and directors of
the Partnership; and
(iii) provide reasonable assurance regarding prevention or
timely detection and correction of unauthorized acquisition, use
or disposition of the Partnerships assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
The management of AAA Capital Energy Fund L.P. has assessed
the effectiveness of the Partnerships internal control
over financial reporting as of December 31, 2010. In making
this assessment, management used the criteria set forth in the
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, management concluded that the
Partnership maintained effective internal control over financial
reporting as of December 31, 2010 based on the criteria
referred to above.
Walter Davis President and Director Ceres Managed Futures LLC General Partner, AAA Capital Energy Fund L.P. |
Jennifer Magro Chief Financial Officer and Director Ceres Managed Futures LLC General Partner, AAA Capital Energy Fund L.P. |
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
AAA Capital Energy Fund L.P.:
AAA Capital Energy Fund L.P.:
We have audited the accompanying statements of financial condition of AAA Capital Energy Fund L.P.
(the Partnership) as of December 31, 2010 and 2009, and the related statements of income and
expenses, and changes in partners capital for the years then ended. These financial statements are
the responsibility of the Partnerships management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements of the Partnership for the
year ended December 31, 2008 were audited by other auditors whose report, dated March 26, 2009,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Partnership is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Partnerships internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such 2010 and 2009 financial statements present fairly, in all material respects,
the financial position of AAA Capital Energy Fund L.P. as of December 31, 2010 and 2009, and the
results of its operations and its changes in partners capital for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
New York, New York
March 23, 2011
21
Report of Independent Registered Public Accounting Firm
To the Partners of
AAA Capital Energy Fund L.P.:
AAA Capital Energy Fund L.P.:
In our opinion, the accompanying statement of income and expenses, and statement of changes in
partners capital present fairly, in all material respects, the financial position of AAA Capital
Energy Fund L.P. (formerly known as Smith Barney AAA Energy Fund L.P.) at December 31, 2008 and the
results of its operations for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Partnership
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnerships
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express opinions on these financial statements and
on the Partnerships internal control over financial reporting based on our integrated audit. We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
New York, New York
March 26, 2009
22
AAA Capital
Energy Fund L.P.
Statements of Financial Condition
December 31, 2010 and 2009
Statements of Financial Condition
December 31, 2010 and 2009
2010 | 2009 | |||||||
Assets:
|
||||||||
Investment in Master, at fair value (Note 1)
|
$ | 241,344,162 | $ | 285,810,508 | ||||
Cash (Note 3c)
|
183,161 | 169,528 | ||||||
Total assets
|
$ | 241,527,323 | $ | 285,980,036 | ||||
Liabilities and Partners Capital:
|
||||||||
Liabilities:
|
||||||||
Accrued expenses:
|
||||||||
Brokerage commissions (Note 3c)
|
$ | 1,145,338 | $ | 1,337,299 | ||||
Management fees (Note 3b)
|
400,386 | 474,144 | ||||||
Professional fees
|
97,784 | 99,622 | ||||||
Other
|
52,710 | 56,471 | ||||||
Redemptions payable (Note 5)
|
8,409,584 | 1,720,377 | ||||||
Total liabilities
|
10,105,802 | 3,687,913 | ||||||
Partners Capital (Notes 1 and 5):
|
||||||||
General Partner, 242.9887 and 292.7225 unit equivalents
outstanding at December 31, 2010 and 2009, respectively
|
2,471,696 | 3,218,876 | ||||||
Special Limited Partner, 118.5047 Redeemable Units outstanding
at December 31, 2010 and 2009
|
1,205,437 | 1,303,118 | ||||||
Limited Partners, 22,389.2068 and 25,260.2367 Redeemable Units
outstanding at December 31, 2010 and 2009, respectively
|
227,744,388 | 277,770,129 | ||||||
Total partners capital
|
231,421,521 | 282,292,123 | ||||||
Total liabilities and partners capital
|
$ | 241,527,323 | $ | 285,980,036 | ||||
Net asset value per unit
|
$ | 10,172.06 | $ | 10,996.34 | ||||
See accompanying notes to financial statements.
23
AAA Capital
Energy Fund L.P.
Statements of Income and Expenses
for the years ended December 31, 2010, 2009 and 2008
Statements of Income and Expenses
for the years ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
Income:
|
||||||||||||
Net realized gains (losses) on closed contracts allocated from
Master
|
$ | (15,586,893 | ) | $ | 127,314,866 | $ | 89,348,243 | |||||
Change in net unrealized gains (losses) on open contracts
allocated from Master
|
4,587,763 | (91,641,952 | ) | 46,013,052 | ||||||||
Interest income allocated from Master
|
166,148 | 142,784 | 1,194,256 | |||||||||
Expenses allocated from Master
|
(967,150 | ) | (910,836 | ) | (967,985 | ) | ||||||
Total income (loss)
|
(11,800,132 | ) | 34,904,862 | 135,587,566 | ||||||||
Expenses:
|
||||||||||||
Brokerage commissions (Note 3c)
|
3,312,893 | 3,318,932 | 4,118,393 | |||||||||
Management fees (Note 3b)
|
5,198,291 | 6,021,067 | 5,437,800 | |||||||||
Professional fees
|
138,088 | 195,332 | 215,114 | |||||||||
Other
|
23,877 | 33,341 | 68,981 | |||||||||
Total expenses
|
8,673,149 | 9,568,672 | 9,840,288 | |||||||||
Net income (loss) before allocation to Special Limited Partner
|
(20,473,281 | ) | 25,336,190 | 125,747,278 | ||||||||
Allocation to Special Limited Partner (Note 3b)
|
| (5,141,561 | ) | (24,914,378 | ) | |||||||
Net income (loss) after allocation to Special Limited Partner
|
$ | (20,473,281 | ) | $ | 20,194,629 | $ | 100,832,900 | |||||
Net income (loss) per unit (Note 6)
|
$ | (824.28 | ) | $ | 697.34 | $ | 3,239.79 | |||||
Weighted average units outstanding
|
24,721.7604 | 27,376.2981 | 31,845.2438 | |||||||||
See accompanying notes to financial statements.
24
AAA Capital
Energy Fund L.P.
Statements of Changes in Partners Capital
for the years ended December 31, 2010, 2009 and 2008
Statements of Changes in Partners Capital
for the years ended December 31, 2010, 2009 and 2008
Special |
||||||||||||||||
Limited |
Limited |
General |
||||||||||||||
Partners | Partner | Partner | Total | |||||||||||||
Partners Capital at December 31, 2007
|
$ | 233,084,768 | $ | 392,861 | $ | 5,863,414 | $ | 239,341,043 | ||||||||
Subscriptions of 102.0000 Redeemable Units
|
1,006,658 | | | 1,006,658 | ||||||||||||
Redemptions of 5,682.3887 Redeemable Units
|
(47,287,192 | ) | | | (47,287,192 | ) | ||||||||||
Redemptions of 1,773.3087 Redeemable Units of Special Limited
Partnership Interest
|
| (17,007,106 | ) | | (17,007,106 | ) | ||||||||||
Allocation of net income (loss) for the year ended
December 31, 2008:
|
||||||||||||||||
Allocation of 2,752.7909 Redeemable Units to the Special Limited
Partner (Note 3b)
|
| 24,914,378 | | 24,914,378 | ||||||||||||
Net income (loss) available for pro rata distribution
|
95,781,197 | 2,360,717 | 2,690,986 | 100,832,900 | ||||||||||||
Partners Capital at December 31, 2008
|
282,585,431 | 10,660,850 | 8,554,400 | 301,800,681 | ||||||||||||
Redemptions of 2,177.9080 Redeemable Units
|
(23,620,701 | ) | | | (23,620,701 | ) | ||||||||||
Redemptions of 1,389.5644 Redeemable Units of Special Limited
Partnership Interest
|
| (15,224,202 | ) | | (15,224,202 | ) | ||||||||||
Redemptions of 537.8824 General Partner unit equivalents
|
| | (5,999,845 | ) | (5,999,845 | ) | ||||||||||
Allocation of net income (loss) for the year ended
December 31, 2009:
|
||||||||||||||||
Allocation of 472.9346 Redeemable Units to the Special Limited
Partner (Note 3b)
|
| 5,141,561 | | 5,141,561 | ||||||||||||
Net income (loss) available for pro rata distribution
|
18,805,399 | 724,909 | 664,321 | 20,194,629 | ||||||||||||
Partners Capital at December 31, 2009
|
277,770,129 | 1,303,118 | 3,218,876 | 282,292,123 | ||||||||||||
Redemptions of 2,871.0299 Redeemable Units
|
(29,872,324 | ) | | | (29,872,324 | ) | ||||||||||
Redemptions of 49.7338 General Partner unit equivalents
|
| | (524,997 | ) | (524,997 | ) | ||||||||||
Allocation of net income (loss) for the year ended
December 31, 2010:
|
||||||||||||||||
Net income (loss) available for pro rata distribution
|
(20,153,417 | ) | (97,681 | ) | (222,183 | ) | (20,473,281 | ) | ||||||||
Partners Capital at December 31, 2010
|
$ | 227,744,388 | $ | 1,205,437 | $ | 2,471,696 | $ | 231,421,521 | ||||||||
Net asset value per unit:
|
2008:
|
$ | 10,299.00 | ||
2009:
|
$ | 10,996.34 | ||
2010:
|
$ | 10,172.06 | ||
See accompanying notes to financial statements.
25
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
1. | Partnership Organization: |
AAA Capital Energy Fund L.P. (the Partnership)
is a limited partnership organized on January 5, 1998 under
the partnership laws of the State of New York to engage,
directly or indirectly, in the speculative trading of a
diversified portfolio of commodity interests, including
commodity options and commodity futures contracts on U.S.
exchanges and certain foreign exchanges. The Partnership,
through its investment in the Master (defined herein), may trade
commodity futures and options contracts of any kind. In
addition, the Partnership, through its investment in the Master,
may enter into swap contracts on energy-related products. The
commodity interests that are traded by the Partnership, through
its investment in the Master, are volatile and involve a high
degree of market risk. During the initial offering period
(February 12, 1998 through March 15, 1998), the
Partnership sold 49,538 redeemable units of limited partnership
interest (Redeemable Units). The Partnership
commenced trading on March 16, 1998. From March 16,
1998 to August 31, 2001, the Partnership engaged directly
in the speculative trading of a diversified portfolio of
commodity interests. The Partnership no longer offers Redeemable
Units for sale. During 2008, the Special Limited Partner
(defined herein) donated 102 Redeemable Units to the limited
partners.
Ceres Managed Futures LLC (CMF), a Delaware limited
liability company, acts as the general partner (the
General Partner) and commodity pool operator of the
Partnership. The General Partner is wholly owned by Morgan
Stanley Smith Barney Holdings LLC (MSSB Holdings).
Morgan Stanley, indirectly through various subsidiaries, owns a
majority equity interest in MSSB Holdings. Citigroup Global
Markets Inc. (CGM), the commodity broker and a
selling agent for the Partnership, owns a minority equity
interest in MSSB Holdings. Citigroup Inc.
(Citigroup), indirectly through various
subsidiaries, wholly owns CGM. Prior to July 31, 2009, the
date as of which MSSB Holdings became its owner, the General
Partner was wholly owned by Citigroup Financial Products Inc., a
wholly owned subsidiary of Citigroup Global Markets Holdings
Inc., the sole owner of which is Citigroup. As of
December 31, 2010, all trading decisions for the
Partnership are made by the Advisor (defined below).
On September 1, 2001, the Partnership allocated
substantially all of its capital to the AAA Master
Fund LLC, a New York limited liability company (the
Master). The Partnership purchased
128,539.1485 units of the Master with a fair value of
$128,539,149 (including unrealized appreciation of $7,323,329).
The Master was formed in order to permit commodity pools managed
now or in the future by AAA Capital Management Advisors, Ltd.
(the Advisor) using the Energy Program
Futures and Swaps, a proprietary, discretionary trading program,
to invest together in one trading vehicle. In addition, the
Advisor is a special limited partner (the Special Limited
Partner) (as described below) of the Partnership. The
General Partner and the Advisor believe that trading through
this master/feeder structure promotes efficiency and economy in
the trading process. Expenses to investors as a result of the
investment in the Master are approximately the same and
redemption rights are not affected. The Masters commodity
broker is CGM and its managing member is CMF. The Master may
trade commodity futures and options contracts of any kind, but
trades solely energy, energy-related products and lumber. In
addition, the Master may enter into swap contracts or trade in
energy-related products. The commodity interests that are traded
by the Master are volatile and involve a high degree of market
risk.
The financial statements of the Master, including the Condensed
Schedule of Investments, are included elsewhere in this report
and should be read together with the Partnerships
financial statements.
At December 31, 2010 and 2009, the Partnership owned
approximately 24.4% and 23.3%, respectively, of the Master. It
is the Partnerships intention to continue to invest
substantially all of its assets in the Master. The performance
of the Partnership is directly affected by the performance of
the Master.
The General Partner and each limited partner share in the
profits and losses of the Partnership, after the allocation to
the Special Limited Partner, in proportion to the amount of
partnership interest owned by each except that no limited
partner shall be liable for obligations of the Partnership in
excess of its initial capital contribution and profits, if any,
net of distributions.
26
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
The Partnership will be liquidated upon the first to occur of
the following: December 31, 2018; the net asset value per
Redeemable Unit decreases to less than $400 per Redeemable Unit
as of the close of any business day; the aggregate net assets of
the Partnership decline to less than $1,000,000; or under
certain other circumstances as defined in the limited
partnership agreement of the Partnership (the Limited
Partnership Agreement).
2. | Accounting Policies: |
a. | Use of Estimates. The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates. | |
b. | Statement of Cash Flows. The Partnership is not required to provide a Statement of Cash Flows. | |
c. | Partnerships Investments. The Partnership values its investment in the Master at its net asset value per unit as calculated by the Master. The Master values its investments as described in Note 2, Accounting Policies, on the attached Masters financial statements. |
Partnerships Fair Value
Measurements. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date under current market conditions. The
fair value hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to fair
values derived from unobservable inputs (Level 3). The
level in the fair value hierarchy within which the fair value
measurement in its entirety falls shall be determined based on
the lowest level input that is significant to the fair value
measurement in its entirety.
GAAP also requires the need to use judgment in determining if a
formerly active market has become inactive and in determining
fair values when the market has become inactive. Management has
concluded that based on available information in the
marketplace, there has not been a significant decrease in the
volume and level of activity in the Partnerships
Level 2 assets and liabilities.
The Partnership will separately present purchases, sales,
issuances, and settlements in their reconciliation of
Level 3 fair value measurements (i.e. to present such
items on a gross basis rather than on a net basis), and makes
disclosures regarding the level of disaggregation and the inputs
and valuation techniques used to measure fair value for
measurements that fall within either Level 2 or
Level 3 of the fair value hierarchy as required under GAAP.
The Partnership values investments in the Master where there are
no other rights or obligations inherent within the ownership
interest held by the Partnership based on the end of the day net
asset value of the Master (Level 2). The value of the
Partnerships investments in the Master reflects its
proportional interest in the Master. As of and for the years
ended December 31, 2010 and 2009, the Partnership did not
hold any derivative instruments that are based on unadjusted
quoted prices in active markets for identical assets
(Level 1) or priced at fair value using unobservable
inputs through the application of managements assumptions
and internal valuation pricing models (Level 3).
27
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Investment in Master
|
$ | 241,344,162 | $ | | $ | 241,344,162 | $ | | ||||||||
Total fair value
|
$ | 241,344,162 | $ | | $ | 241,344,162 | $ | | ||||||||
Quoted Prices |
||||||||||||||||
in Active |
Significant |
|||||||||||||||
Markets for |
Other |
Significant |
||||||||||||||
Identical |
Observable |
Unobservable |
||||||||||||||
Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Investment in Master
|
$ | 285,810,508 | $ | | $ | 285,810,508 | $ | | ||||||||
Total fair value
|
$ | 285,810,508 | $ | | $ | 285,810,508 | $ | | ||||||||
Masters Investments and Fair Value
Measurements. For disclosures regarding the
Masters investments and fair value measurements, see
Note 2, Accounting Policies, on the attached
Masters financial statements.
Brokerage Commissions. Commission charges to open and
close futures and exchange-traded swap contracts are expensed at
the time the positions are opened. Commission charges on option
contracts are expensed at the time the position is established
and when the option contract is closed.
d. | Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnerships income and expenses. |
GAAP provides guidance for how uncertain tax positions should be
recognized, measured, presented and disclosed in the financial
statements and requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the
Partnerships financial statements to determine whether the
tax positions are more-likely-than-not to be
sustained by the applicable tax authority. Tax positions with
respect to tax at the Partnership level not deemed to meet the
more-likely-than-not threshold would be recorded as
a tax benefit or expense in the current year. The General
Partner concluded that no provision for income tax is required
in the Partnerships financial statements.
The Partnership files U.S. federal and various state and
local tax returns. No income tax returns are currently under
examination. Generally, the 2007 through 2010 tax years remain
subject to examination by U.S. federal and most state tax
authorities. Management does not believe that there are any
uncertain tax positions that require recognition of a tax
liability.
e. | Subsequent Events. Management of the Partnership evaluates events that occur after the balance sheet date but before financial statements are filed. Management has assessed the subsequent events through the date of filing and determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements. |
f. | Net Income (Loss) per unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 6, Financial Highlights. |
28
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
3. | Agreements: |
a. | Limited Partnership Agreement: |
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make
trading decisions for the Partnership. The General Partner has
agreed to make capital contributions, if necessary, so that its
general partnership interest will be equal to the greater of
(i) 1% of the partners contributions to the
Partnership or (ii) $25,000.
b. | Management Agreement: |
The General Partner, on behalf of the Partnership, has entered
into a management agreement with the Advisor (the
Management Agreement), a registered commodity
trading advisor. The Partnership is obligated to pay the Advisor
a monthly management fee equal to
1/6
of 1% (2% per year) of month-end Net Assets allocated to the
Advisor. Month-end Net Assets, for the purpose of calculating
management fees are Net Assets, as defined in the Limited
Partnership Agreement, prior to the reduction of the current
months profit share allocation accrual, the monthly
management fee and any redemption or distributions as of the end
of such month. The Management Agreement may be terminated upon
notice by either party.
In addition, the Advisor is a Special Limited Partner of the
Partnership and receives a quarterly profit share allocation to
its capital account in the Partnership in the form of units of
the Partnership, the value of which shall be equal to 20% of New
Trading Profits, as defined in the Management Agreement, earned
on behalf of the Partnership during each calendar quarter and
are issued as Special Limited Partner Units.
In allocating substantially all of the assets of the Partnership
to the Master, the General Partner considered the Advisors
past performance, trading style, volatility of markets traded
and fee requirements. The General Partner may modify or
terminate the allocation of assets to the Advisor at any time.
c. | Customer Agreement: |
The Partnership entered into a customer agreement (the
Customer Agreement) which provides that the
Partnership pay CGM brokerage commissions at $18 per round turn
for futures, $5 per round turn for swap transactions and $9 per
side for options. The brokerage commissions were inclusive of
applicable floor brokerage fees. All exchange, clearing, user,
give-up, and
National Futures Association fees (collectively, the
clearing fees) are borne by the Master and allocated
to the Partnership through its investment in the Master. The
Partnership pays CGM brokerage commissions at the above rates
based on its proportional share of the Masters trades. The
brokerage commissions may be increased or decreased at any time
at CGMs discretion upon written notice to the Partnership.
CGM will pay a portion of its brokerage commissions to financial
advisors who have sold Redeemable Units. The Partnerships
assets not held in the Masters account at CGM are held in
the Partnerships account at CGM. The Partnerships
assets are deposited by CGM in segregated bank accounts to the
extent required by Commodity Futures Trading Commission
regulations. Cash margin requirements are maintained by the
Master. CGM will pay the Partnership interest on its allocable
share of 80% of the average daily equity maintained in cash in
the Masters account during each month at a
30-day
U.S. Treasury bill rate determined weekly by CGM based on
the average non-competitive yield on
3-month
U.S. Treasury bills maturing in 30 days from the date
on which such weekly rate is determined. The Customer Agreement
may be terminated upon notice by either party.
29
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
4. | Trading Activities: |
The Partnerships pro-rata share of the results of the
Masters trading activities are shown in the Statements of
Income and Expenses.
The customer agreements between the Partnership and CGM and the
Master and CGM give the Partnership and the Master,
respectively, the legal right to net unrealized gains and losses
on open futures and exchange-cleared swaps contracts. The Master
nets, for financial reporting purposes, the unrealized gains and
losses on open futures and exchange-cleared swaps contracts on
the Statements of Financial Condition.
Brokerage commissions are based on the number of trades executed
by the Advisor and the Partnerships ownership percentage
of the Master.
For disclosures regarding the Masters trading activities,
see Note 4, Trading Activities, on the attached
Masters financial statements.
5. | Distributions and Redemptions: |
Distributions of profits, if any, will be made at the sole
discretion of the General Partner and at such times as the
General Partner may decide. A limited partner may require the
Partnership to redeem its Redeemable Units at their net asset
value as of the last day of a month on three business days
notice to the General Partner. There is no fee charged to
limited partners in connection with redemptions.
6. | Financial Highlights: |
Changes in the net asset value per unit for the years ended
December 31, 2010, 2009 and 2008 were as follows:
2010 | 2009 | 2008 | ||||||||||
Net realized and unrealized gains (losses)*
|
$ | (606.96 | ) | $ | 1,104.17 | $ | 4,192.14 | |||||
Interest income
|
6.76 | 5.16 | 36.89 | |||||||||
Expenses and allocation to Special Limited Partner**
|
(224.08 | ) | (411.99 | ) | (989.24 | ) | ||||||
Increase (decrease) for year
|
(824.28 | ) | 697.34 | 3,239.79 | ||||||||
Net asset value per unit, beginning of year
|
10,996.34 | 10,299.00 | 7,059.21 | |||||||||
Net asset value per unit, end of year
|
$ | 10,172.06 | $ | 10,996.34 | $ | 10,299.00 | ||||||
* | Includes brokerage commissions and clearing fees allocated from Master. | |
** | Excludes brokerage commissions, clearing fees allocated from Master and includes allocation to Special Limited Partner. |
30
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
2010 | 2009 | 2008 | ||||||||||
Ratios to average net assets:
|
||||||||||||
Net investment income (loss) before allocation to Special
Limited Partner ***
|
(3.7 | )% | (3.5 | )% | (3.7 | )% | ||||||
Operating expenses
|
3.7 | % | 3.6 | % | 4.1 | % | ||||||
Allocation to Special Limited Partner
|
| % | 1.8 | % | 9.5 | % | ||||||
Total expenses and allocation to Special Limited Partner
|
3.7 | % | 5.4 | % | 13.6 | % | ||||||
Total return:
|
||||||||||||
Total return before allocation to Special Limited Partner
|
(7.5 | )% | 8.7 | % | 57.9 | % | ||||||
Allocation to Special Limited Partner
|
| % | (1.9 | )% | (12.0 | )% | ||||||
Total return after allocation to Special Limited Partner
|
(7.5 | )% | 6.8 | % | 45.9 | % | ||||||
*** | Interest income allocated from Master less total expenses. |
The above ratios may vary for individual investors based on the
timing of capital transactions during the year. Additionally,
these ratios are calculated for the limited partner class using
the limited partners share of income, expenses and average
net assets.
7. | Financial Instrument Risks: |
In the normal course of business, the Partnership, through its
investment in the Master, is party to financial instruments with
off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These
financial instruments may include forwards, futures, options and
swaps, whose values are based upon an underlying asset, index,
or reference rate, and generally represent future commitments to
exchange currencies or cash balances, or to purchase or sell
other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity
instruments, to have a reasonable possibility to be settled in
cash, through physical delivery or with another financial
instrument. These instruments may be traded on an exchange or
over-the-counter
(OTC). Exchange traded instruments are standardized
and include futures and certain forwards and options contracts.
OTC contracts are negotiated between contracting parties and
include forwards and certain options. Specific market movements
of commodities or futures contracts underlying an option cannot
accurately be predicted. The purchaser of an option may lose the
entire premium paid for the option. The writer, or seller, of an
option has unlimited risk. Each of these instruments is subject
to various risks similar to those related to the underlying
financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater
than those associated with exchange-traded instruments because
of the greater risk of default by the counterparty to an OTC
contract.
The risk to the limited partners that have purchased interests
in the Partnership is limited to the amount of their capital
contributions to the Partnership and their share of the
Partnerships assets and undistributed profits. This
limited liability is a consequence of the organization of the
Partnership as a limited partnership under applicable law.
Market risk is the potential for changes in the value of the
financial instruments traded by the Partnership/Master due to
market changes, including interest and foreign exchange rate
movements and fluctuations in commodity or security prices.
Market risk is directly impacted by the volatility and liquidity
in the markets in which the related underlying assets are traded
by the Partnership/Master. The Partnership/Master is exposed to
a market risk equal to the value of futures and forward
contracts purchased and unlimited liability on such contracts
sold short.
Credit risk is the possibility that a loss may occur due to the
failure of a counterparty to perform according to the terms of a
contract. The Partnerships/Masters risk of loss in
the event of a counterparty
31
AAA Capital
Energy Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
default is typically limited to the amounts recognized in the
Statements of Financial Condition and not represented by the
contract or notional amounts of the instruments. The
Partnerships/Masters risk of loss is reduced through
the use of legally enforceable master netting agreements with
counterparties that permit the Partnership/Master to offset
unrealized gains and losses and other assets and liabilities
with such counterparties upon the occurrence of certain events.
The Partnership/Master has credit risk and concentration risk as
the sole counterparty or broker with respect to the
Partnerships/Masters assets is CGM or a CGM
affiliate. Credit risk with respect to exchange-traded
instruments is reduced to the extent that through CGM, the
Partnerships/Masters counterparty is an exchange or
clearing organization.
The Advisor will concentrate the
Partnerships/Masters trading in energy related
markets. Concentration in a limited number of commodity
interests may subject the Partnerships/Masters
account to greater volatility than if a more diversified
portfolio of contracts were traded on behalf of the
Partnership/Master.
As both a buyer and seller of options, the Master pays or
receives a premium at the outset and then bears the risk of
unfavorable changes in the price of the contract underlying the
option. Written options expose the Master to potentially
unlimited liability; for purchased options the risk of loss is
limited to the premiums paid. Certain written put options permit
cash settlement and do not require the option holder to own the
reference asset. The Master does not consider these contracts to
be guarantees.
The General Partner/managing member monitors and attempts to
control the Partnerships/Masters risk exposure on a
daily basis through financial, credit and risk management
monitoring systems, and accordingly, believes that it has
effective procedures for evaluating and limiting the credit and
market risks to which the Partnership/Master may be subject.
These monitoring systems generally allow the General
Partner/managing member to statistically analyze actual trading
results with risk-adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems
provide account analysis of futures and exchange cleared swaps,
forwards and options positions by sector, margin requirements,
gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the
inception date. However, due to the nature of the
Partnerships/Masters business, these instruments may
not be held to maturity.
32
Selected unaudited quarterly financial data for the Partnership for the years ended December
31, 2010 and 2009 are summarized below:
For the period from | For the period from | For the period from | For the period from | |||||||||||||
October 1, 2010 to | July 1, 2010 to | April 1, 2010 to | January 1, 2010 to | |||||||||||||
December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of brokerage commissions
and clearing fees
including interest
income |
$ | (3,318,389 | ) | $ | 1,497,345 | $ | (3,835,790 | ) | $ | (9,456,191 | ) | |||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | (4,549,800 | ) | $ | 189,934 | $ | (5,226,589 | ) | $ | (10,886,826 | ) | |||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | (4,549,800 | ) | $ | 189,934 | $ | (5,226,589 | ) | $ | (10,886,826 | ) | |||||
Increase (decrease)
in net asset value
per Redeemable Unit |
$ | (192.40 | ) | $ | 7.04 | $ | (211.63 | ) | $ | (427.29 | ) |
For the period from | For the period from | For the period from | For the period from | |||||||||||||
October 1, 2009 to | July 1, 2009 to | April 1, 2009 to | January 1, 2009 to | |||||||||||||
December 31, 2009 | September 30, 2009 | June 30, 2009 | March 31, 2009 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of brokerage
commissions and
clearing fees
including interest
income |
$ | 1,007,923 | $ | 8,112,874 | $ | 1,935,687 | $ | 20,529,446 | ||||||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | (503,234 | ) | $ | 6,572,341 | $ | 360,511 | $ | 18,906,572 | |||||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | (503,234 | ) | $ | 5,266,586 | $ | 296,847 | $ | 15,134,430 | |||||||
Increase (decrease)
in net asset value
per Redeemable Unit |
$ | (22.25 | ) | $ | 191.51 | $ | 4.69 | $ | 523.39 |
33
To the Members
of
AAA Master Fund LLC
AAA Master Fund LLC
To the best of the knowledge and belief of the undersigned, the
information contained herein is accurate and complete.
By: |
Walter Davis President and Director Ceres Managed Futures LLC Managing Member, AAA Master Fund LLC |
Ceres Managed Futures LLC
522 Fifth Avenue
14th Floor
New York, N.Y. 10036
212-296-1999
522 Fifth Avenue
14th Floor
New York, N.Y. 10036
212-296-1999
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members of
AAA Master Fund LLC:
AAA Master Fund LLC:
We have audited the accompanying statements of financial condition of AAA Master Fund LLC (the
Company), including the condensed schedules of investments, as of December 31, 2010 and 2009, and
the related statements of income and expenses, and changes in members capital for the years then
ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. The
financial statements of the Company for the year ended December 31, 2008 were audited by other
auditors whose report, dated March 26, 2009, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such 2010 and 2009 financial statements present fairly, in all material respects,
the financial position of AAA Master Fund LLC as of December 31, 2010 and 2009, and the results of
its operations and its changes in members capital for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
New York, New York
March 23, 2011
35
Report of Independent Auditors
To the Members of
AAA Master Fund LLC:
AAA Master Fund LLC:
In our opinion, the accompanying statement of income and expenses and statement of changes in
members capital present fairly, in all material respects, the financial position of AAA Master
Fund LLC (formerly known as Citigroup AAA Master Fund LLC) at December 31, 2008, and the
results of its operations for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
New York, New York
March 26, 2009
36
AAA Master
Fund LLC
Statements of Financial Condition
December 31, 2010 and 2009
Statements of Financial Condition
December 31, 2010 and 2009
2010 | 2009 | |||||||
Assets:
|
||||||||
Equity in trading account:
|
||||||||
Cash (Note 3c)
|
$ | 786,204,916 | $ | 778,736,469 | ||||
Cash margin (Note 3c)
|
84,669,985 | 112,350,862 | ||||||
Options purchased, at fair value (cost $561,437,849 and
$885,211,273, respectively)
|
363,802,239 | 741,495,723 | ||||||
Total assets
|
$ | 1,234,677,140 | $ | 1,632,583,054 | ||||
Liabilities and Members Capital:
|
||||||||
Liabilities:
|
||||||||
Net unrealized depreciation on open futures and exchange-cleared
swap contracts
|
$ | 6,571,110 | $ | 50,857,890 | ||||
Options premium received, at fair value (premium $354,410,825
and $435,825,576, respectively)
|
239,504,355 | 352,233,900 | ||||||
Accrued expenses:
|
||||||||
Professional fees
|
290,824 | 296,072 | ||||||
Redemptions payable
|
7,941,213 | | ||||||
Total liabilities
|
254,307,502 | 403,387,862 | ||||||
Members Capital:
|
||||||||
Members Capital, 103,223.2146 and 123,710.6078 Units
outstanding at December 31, 2010 and 2009, respectively
|
980,369,638 | 1,229,195,192 | ||||||
Total liabilities and members capital
|
$ | 1,234,677,140 | $ | 1,632,583,054 | ||||
Net asset value per unit
|
$ | 9,497.57 | $ | 9,936.05 | ||||
See accompanying notes to financial statements.
37
AAA Master
Fund LLC
Condensed Schedule of Investments
December 31, 2010
Condensed Schedule of Investments
December 31, 2010
Number of |
% of Members |
|||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures and Exchange-Cleared Swap Contracts Purchased
|
||||||||||||
Energy
|
49,880 | $ | (76,588,395 | ) | (7.75 | )% | ||||||
Total futures and exchange-cleared swap contracts purchased
|
(76,588,395 | ) | (7.75 | ) | ||||||||
Futures and Exchange-Cleared Swap Contracts Sold
|
||||||||||||
Energy
|
||||||||||||
NYMEX HH Swap Feb 11 Dec 14
|
24,098 | 119,170,628 | 12.06 | |||||||||
Other
|
27,946 | (49,185,903 | ) | (4.98 | ) | |||||||
Lumber
|
72 | 32,560 | 0.00 | * | ||||||||
Total futures and exchange-cleared swap contracts sold
|
70,017,285 | 7.08 | ||||||||||
Options Purchased
|
||||||||||||
Energy
|
||||||||||||
Call
|
||||||||||||
NYMEX Crude Oil E Jun 11 Dec 12
|
3,098 | 50,475,970 | 5.11 | |||||||||
NYMEX LT Crude Oil Feb 11 Dec 13
|
9,371 | 97,741,150 | 9.89 | |||||||||
Other
|
17,005 | 46,219,048 | 4.67 | |||||||||
Call options purchased
|
194,436,168 | 19.67 | ||||||||||
Put
|
||||||||||||
NYMEX Natural Gas E Feb 11 May 14
|
17,363 | 82,281,218 | 8.33 | |||||||||
Other
|
20,468 | 87,084,853 | 8.81 | |||||||||
Put options purchased
|
169,366,071 | 17.14 | ||||||||||
Total options purchased
|
363,802,239 | 36.81 | ||||||||||
Options Premium Received
|
||||||||||||
Energy
|
||||||||||||
Call
|
||||||||||||
NYMEX Heating Oil Feb 11 Jun 11
|
5,580 | (64,361,900 | ) | (6.51 | ) | |||||||
NYMEX LT Crude Oil Feb 11 Dec 16
|
9,485 | (62,747,240 | ) | (6.35 | ) | |||||||
Other
|
21,649 | (52,266,589 | ) | (5.29 | ) | |||||||
Call options premium received
|
(179,375,729 | ) | (18.15 | ) | ||||||||
Put
|
||||||||||||
Other
|
21,624 | (60,128,626 | ) | (6.08 | ) | |||||||
Put options premium received
|
(60,128,626 | ) | (6.08 | ) | ||||||||
Total options premium received
|
(239,504,355 | ) | (24.23 | ) | ||||||||
Total fair value
|
$ | 117,726,774 | 11.91 | % | ||||||||
* | Due to rounding. |
See accompanying notes to financial statements.
38
AAA Master
Fund LLC
Condensed Schedule of Investments
December 31, 2009
Condensed Schedule of Investments
December 31, 2009
Number of |
% of Members |
|||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures and Exchange-Cleared Swap Contracts Purchased
|
||||||||||||
Energy
|
76,309 | $ | (83,380,536 | ) | (6.78 | )% | ||||||
Total futures and exchange-cleared swap contracts purchased
|
(83,380,536 | ) | (6.78 | ) | ||||||||
Futures and Exchange-Cleared Swap Contracts Sold
|
||||||||||||
Energy
|
68,230 | 32,522,646 | 2.65 | |||||||||
Total futures and exchange-cleared swap contracts sold
|
32,522,646 | 2.65 | ||||||||||
Options Purchased
|
||||||||||||
Energy
|
||||||||||||
Call
|
||||||||||||
NYMEX LT Crude Oil Feb 10 Dec 12
|
10,366 | 130,224,950 | 10.59 | |||||||||
NYMEX Natural Gas E Feb 10 Oct 14
|
23,072 | 135,333,168 | 11.01 | |||||||||
Other
|
8,589 | 115,880,958 | 9.43 | |||||||||
Call options purchased
|
381,439,076 | 31.03 | ||||||||||
Put
|
||||||||||||
NYMEX Crude Oil E Dec 10 Dec 16
|
13,074 | 127,745,250 | 10.39 | |||||||||
NYMEX LT Crude Oil Feb 10 Dec 13
|
10,761 | 73,976,480 | 6.02 | |||||||||
NYMEX Natural Gas E Feb 10 May 14
|
9,735 | 116,193,705 | 9.45 | |||||||||
Other
|
8,960 | 42,141,212 | 3.43 | |||||||||
Put options purchased
|
360,056,647 | 29.29 | ||||||||||
Total options purchased
|
741,495,723 | 60.32 | ||||||||||
Options Premium Received
|
||||||||||||
Energy
|
||||||||||||
Call
|
||||||||||||
NYMEX Heating Oil Feb 10 Dec 10
|
6,014 | (61,856,584 | ) | (5.03 | ) | |||||||
NYMEX Natural Gas E Feb 10 Oct 14
|
18,423 | (77,041,748 | ) | (6.27 | ) | |||||||
Other
|
19,042 | (109,221,068 | ) | (8.89 | ) | |||||||
Call options premium received
|
(248,119,400 | ) | (20.19 | ) | ||||||||
Put
|
||||||||||||
Other
|
21,738 | (104,114,500 | ) | (8.47 | ) | |||||||
Put options premium received
|
(104,114,500 | ) | (8.47 | ) | ||||||||
Total options premium received
|
(352,233,900 | ) | (28.66 | ) | ||||||||
Total fair value
|
$ | 338,403,933 | 27.53 | % | ||||||||
See accompanying notes to financial statements.
39
AAA Master
Fund LLC
Statements of Income and Expenses
for the years ended December 31, 2010, 2009 and 2008
Statements of Income and Expenses
for the years ended December 31, 2010, 2009 and 2008
2010 | 2009 | 2008 | ||||||||||
Income:
|
||||||||||||
Net gains (losses) on trading of commodity interests:
|
||||||||||||
Net realized gains (losses) on closed contracts
|
$ | (66,599,159 | ) | $ | 550,277,218 | $ | 383,464,674 | |||||
Change in net unrealized gains (losses) on open contracts
|
21,681,514 | (395,771,479 | ) | 187,955,527 | ||||||||
Gain (loss) from trading, net
|
(44,917,645 | ) | 154,505,739 | 571,420,201 | ||||||||
Interest income
|
718,246 | 661,850 | 5,262,752 | |||||||||
Total income (loss)
|
(44,199,399 | ) | 155,167,589 | 576,682,953 | ||||||||
Expenses:
|
||||||||||||
Clearing fees
|
3,163,655 | 3,343,809 | 3,223,638 | |||||||||
Professional fees
|
739,340 | 628,350 | 848,543 | |||||||||
Total expenses
|
3,902,995 | 3,972,159 | 4,072,181 | |||||||||
Net income (loss)
|
$ | (48,102,394 | ) | $ | 151,195,430 | $ | 572,610,772 | |||||
Net income (loss) per unit (Note 6)
|
$ | (431.84 | ) | $ | 1,064.36 | $ | 3,494.47 | |||||
Weighted average units outstanding
|
111,118.5200 | 139,419.9283 | 172,420.9234 | |||||||||
See accompanying notes to financial statements.
40
AAA Master
Fund LLC
Statements of Changes in Members Capital
for the years ended December 31, 2010, 2009 and 2008
Statements of Changes in Members Capital
for the years ended December 31, 2010, 2009 and 2008
Members |
||||
Capital | ||||
Members Capital at December 31, 2007
|
$ | 999,453,536 | ||
Net income (loss)
|
572,610,772 | |||
Subscriptions of 26,018.8922 Units
|
176,599,395 | |||
Redemptions of 59,881.8271 Units
|
(404,833,765 | ) | ||
Distribution of interest income to feeder funds
|
(5,198,839 | ) | ||
Members Capital at December 31, 2008
|
1,338,631,099 | |||
Net income (loss)
|
151,195,430 | |||
Subscriptions of 18,789.6645 Units
|
178,448,063 | |||
Redemptions of 45,884.9809 Units
|
(438,417,550 | ) | ||
Distribution of interest income to feeder funds
|
(661,850 | ) | ||
Members Capital at December 31, 2009
|
1,229,195,192 | |||
Net income (loss)
|
(48,102,394 | ) | ||
Subscriptions of 3,852.9008 Units
|
37,495,753 | |||
Redemptions of 24,340.2940 Units
|
(237,500,667 | ) | ||
Distribution of interest income to feeder funds
|
(718,246 | ) | ||
Members Capital at December 31, 2010
|
$ | 980,369,638 | ||
Net asset value per unit:
|
2008:
|
$ | 8,876.52 | ||
2009:
|
$ | 9,936.05 | ||
2010:
|
$ | 9,497.57 | ||
See accompanying notes to financial statements.
41
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
1. | General: |
AAA Master Fund LLC, (the Master) is a limited
liability company formed under the New York Limited Liability
Company Law. The Masters purpose is to engage in the
speculative trading of a diversified portfolio of commodity
interests including futures contracts, options, swaps and
forward contracts. The Master may trade commodity futures and
option contracts of any kind but intends initially to trade
solely energy and energy related products. The commodity
interests that are traded by the Master are volatile and involve
a high degree of market risk. The Master is authorized to sell
an unlimited number of units of member interest
(Units).
Ceres Managed Futures LLC, a Delaware limited liability company,
acts as the managing member (the Managing Member)
and commodity pool operator of the Master. The Managing Member
is wholly owned by Morgan Stanley Smith Barney Holdings LLC
(MSSB Holdings). Morgan Stanley, indirectly through
various subsidiaries, owns a majority equity interest in of MSSB
Holdings. Citigroup Global Markets Inc. (CGM), the
commodity broker for the Master, owns a minority equity interest
in MSSB Holdings. Citigroup Inc. (Citigroup),
indirectly through various subsidiaries, wholly owns CGM. Prior
to July 31, 2009, the date as of which MSSB Holdings became
its owner, the Managing Member was wholly owned by Citigroup
Financial Products Inc., a wholly owned subsidiary of Citigroup
Global Markets Holdings Inc., the sole owner of which is
Citigroup. As of December 31, 2010, all trading decisions
for the Master are made by the Advisor (defined below).
On September 1, 2001 (date Master commenced trading), AAA
Capital Energy Fund L.P. (AAA) allocated
substantially all of its capital and Orion Futures
Fund L.P. (Orion) allocated a portion of its
capital to the Master. The partnerships purchased 133,712.5867
Units with a fair value of $133,712,587 (including unrealized
appreciation of $7,755,035). On July 1, 2002, AAA Capital
Energy Fund L.P. II (AAA II) allocated
substantially all of its capital to the Master and purchased
64,945.0387 Units with cash equal to $94,925,000. On
October 1, 2005, Tactical Diversified Futures
Fund L.P. (Tactical Diversified) allocated a
portion of its capital to the Master and purchased 13,956.1190
Units with cash equal to $50,000,000. On July 1, 2005,
Institutional Futures Portfolio L.P. (Institutional
Portfolio) allocated a portion of its capital to the
Master and purchased 2,386.2338 Units with cash equal to
$7,000,000. On July 1, 2006, Legion Strategies, LTD
(Legion LTD) allocated a portion of its capital to
the Master and purchased 793.9501 Units with cash equal to
$4,000,000. On October 1, 2006, Energy Advisors Portfolio
L.P. (Energy Advisors) allocated a portion of its
capital to the Master and purchased 723.8213 Units with cash
equal to $3,315,000. On March 1, 2007, Global Futures Fund
Ltd. (Global Futures) allocated a portion of its
capital to the Master and purchased 344.5961 Units with cash
equal to $1,614,644. On April 1, 2009, Orion Futures Fund
(Cayman) Ltd. (Orion Cayman) allocated a portion of its
capital to the Master and purchased 84.1311 Units with cash
equal to $800,000. On January 31, 2010, Tactical
Diversified redeemed its entire investment in the Master for
cash equal to $40,267,084. On December 31, 2010, Legion LTD
redeemed its entire investment in the Master for cash equal to
$7,941,213. The Master was formed to permit commodity pools
managed now or in the future by AAA Capital Management Advisors,
Ltd. (the Advisor) using the Energy
Program Futures and Swaps, a proprietary,
discretionary trading program, to invest together in one trading
vehicle.
Prior to Legion LTDs full redemption in December 31, 2010,
the Masters investors consisted of AAA, AAA II,
Institutional Portfolio, Energy Advisors, Global Futures, Legion
LTD, Orion and Orion Cayman. The Master operates under a
structure where its investors consist of AAA, AAA II,
Institutional Portfolio, Energy Advisors, Global Futures, Legion
LTD, Orion and Orion Cayman (each a Member,
collectively the Funds), each of which owned
approximately 24.4%, 41.4%, 1.9%, 0.8%, 1.7%, 0.8%, 28.7% and
0.3% of the Master at December 31, 2010, respectively. AAA,
AAA II, Tactical Diversified, Institutional Portfolio, Energy
Advisors, Global Futures, Legion LTD, Orion and Orion Cayman
owned approximately 23.3%, 40.3%, 6.6%, 2.1%, 0.8%, 2.3%, 1.1%,
23.2% and 0.3% of the Master at December 31, 2009,
respectively.
The Master will be liquidated under certain circumstances as
defined in the limited liability company agreement of the Master
(the Limited Liability Company Agreement).
42
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
2. | Accounting Policies: |
a. | Use of Estimates. The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates. | |
b. | Statement of Cash Flows. The Master is not required to provide a Statement of Cash Flows. | |
c. | Masters Investments. All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses. | |
Masters Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. GAAP also requires the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, the Masters Level 1 assets and liabilities are actively traded. | ||
The Master will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e. to present such items on a gross basis rather than on a net basis), and makes disclosures regarding the level of disaggregation and the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP. | ||
The Master considers prices for exchange-traded commodity futures, forwards and options contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of non exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2). As of and for the years ended December 31, 2010 and December 31, 2009, the Master did not hold any derivative instruments for which market quotations are not readily available and which are priced by broker-dealers who derive fair values for those assets from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through the application of managements assumptions and internal valuation pricing models (Level 3). The gross presentation of the fair value of the Masters derivatives by instrument type is shown in Note 4, Trading Activities. |
43
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
Significant |
||||||||||||||||
Quoted Prices in |
Other |
Significant |
||||||||||||||
Active Markets for |
Observable |
Unobservable |
||||||||||||||
Identical Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Options purchased
|
$ | 363,802,239 | $ | 363,802,239 | $ | | $ | | ||||||||
Total assets
|
363,802,239 | 363,802,239 | | | ||||||||||||
Liabilities
|
||||||||||||||||
Futures and Exchange-Cleared Swaps
|
$ | 6,571,110 | $ | 6,571,110 | $ | | $ | | ||||||||
Options premium received
|
239,504,355 | 239,504,355 | | | ||||||||||||
Total liabilities
|
246,075,465 | 246,075,465 | | | ||||||||||||
Total fair value
|
$ | 117,726,774 | $ | 117,726,774 | $ | | $ | | ||||||||
Significant |
||||||||||||||||
Quoted Prices in |
Other |
Significant |
||||||||||||||
Active Markets for |
Observable |
Unobservable |
||||||||||||||
Identical Assets |
Inputs |
Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Options purchased
|
$ | 741,495,723 | $ | 741,495,723 | $ | | $ | | ||||||||
Total assets
|
741,495,723 | 741,495,723 | | | ||||||||||||
Liabilities
|
||||||||||||||||
Futures and Exchange-Cleared Swaps
|
$ | 50,857,890 | $ | 50,857,890 | $ | | $ | | ||||||||
Options premium received
|
352,233,900 | 352,233,900 | | | ||||||||||||
Total liabilities
|
403,091,790 | 403,091,790 | | | ||||||||||||
Total fair value
|
$ | 338,403,933 | $ | 338,403,933 | $ | | $ | | ||||||||
d. | Futures Contracts. The Master trades futures contracts and exchange-cleared swaps. Exchange-cleared swaps are swaps that are traded as futures. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (variation margin) may be made or received by the Master each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses. | |
e. | Options. The Master may purchase and write (sell), both exchange listed and over-the-counter, options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Master purchases an option, the premium paid is recorded as an asset in the |
44
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
Statements of Financial Condition and marked to market daily. Realized gains (losses) and changes in unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses. |
f. | Income and Expenses Recognition. All of the income and expenses and realized and unrealized gains and losses on trading of commodity interests are determined on each valuation day and allocated pro rata among the Funds at the time of such determination. |
g. | Income Taxes. Income taxes have not been provided as each member is individually liable for the taxes, if any, on its share of the Masters income and expenses. | |
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Masters financial statements to determine whether the tax positions are more-likely-than-not to be sustained by the applicable tax authority. Tax positions with respect to tax at the Master level not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Managing Member concluded that no provision for income tax is required in the Masters financial statements. | ||
The Master files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. Generally, the 2007 through 2010 tax years remain subject to examination by U.S. federal and most state tax authorities. Management does not believe that there are any uncertain tax positions that require recognition of a tax liability. | ||
h. | Subsequent Events. Management of the Master evaluates events that occur after the balance sheet date but before financial statements are filed. Management has assessed the subsequent events through the date of filing and determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements. |
i. | Net Income (Loss) per Unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 6, Financial Highlights. |
3. | Agreements: |
a. | Limited Liability Company Agreement: | |
The Managing Member administers the business affairs of the Master including selecting one or more advisors to make trading decisions for the Master. | ||
b. | Management Agreement: | |
The Managing Member, on behalf of the Master, has entered into a management agreement (the Management Agreement) with the Advisor, a registered commodity trading advisor. The Advisor is not affiliated with the Managing Member or CGM and is not responsible for the organization or operation of the Master. The Management Agreement provides that the Advisor has sole discretion in determining the investment of the assets of the Master. All management fees in connection with the Management Agreement shall be borne by the Funds. The Management Agreement may be terminated upon notice by either party. | ||
c. | Customer Agreement: | |
The Master has entered into a customer agreement (the Customer Agreement) with CGM whereby CGM provides services which include, among other things, the execution of transactions for the Masters account in accordance with orders placed by the Advisor. All floor brokerage, |
45
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
exchange, clearing, user, give-up and National Futures Association fees (collectively the clearing fees) are borne by the Master consistent with contractual agreements. All other fees (management fees, administrative fees, incentive fees, brokerage commissions and offering costs) shall be borne by the Funds. All of the Masters cash is deposited by CGM in segregated bank accounts, to the extent required by Commodity Futures Trading Commission regulations. At December 31, 2010 and 2009, the amounts of cash held by the Master for margin requirements was $84,669,985 and $112,350,862, respectively. The Customer Agreement may be terminated by either party. All commissions in connection with the Customer Agreement shall be borne by the Funds. |
4. | Trading Activities: |
The Master was formed for the purpose of trading contracts in a
variety of commodity interests, including derivative financial
instruments and derivative commodity instruments. The results of
the Masters trading activities are shown in the Statements
of Income and Expenses.
The Customer Agreement between the Master and CGM gives the
Master the legal right to net unrealized gains and losses on
open futures and exchange-cleared swap contracts. The Master
nets, for financial reporting purposes, the unrealized gains and
losses on open futures and exchange-cleared swap contracts on
the Statements of Financial Condition.
All of the commodity interests owned by the Master are held for
trading purposes. The average number of futures and
exchange-cleared swap contracts traded for the years ended
December 31, 2010 and 2009, based on a monthly calculation,
were 131,212 and 146,533, respectively. The average number of
options contracts traded for the years ended December 31,
2010 and 2009, based on a monthly calculation, were 183,892 and
171,426, respectively. In prior year, the average contracts were
based on a quarterly and not a monthly calculation. The amounts
for the year ended December 31, 2009 have been revised
accordingly.
46
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
The following tables indicate the gross fair values of
derivative instruments of futures and exchange-cleared swaps and
options contracts as separate assets and liabilities as of
December 31, 2010 and 2009.
December 31, 2010 | ||||
Assets
|
||||
Futures and Exchange-Cleared Swap Contracts
|
||||
Energy
|
$ | 253,480,029 | ||
Lumber
|
38,390 | |||
Total unrealized appreciation on open futures and
exchange-cleared swap contracts
|
$ | 253,518,419 | ||
Liabilities
|
||||
Futures and Exchange-Cleared Swap Contracts
|
||||
Energy
|
$ | (260,083,699 | ) | |
Lumber
|
(5,830 | ) | ||
Total unrealized depreciation on open futures and
exchange-cleared swap contracts
|
$ | (260,089,529 | ) | |
Net unrealized depreciation on open futures and exchange-cleared
swap contracts
|
$ | (6,571,110 | )* | |
Assets
|
||||
Options Purchased
|
||||
Energy
|
$ | 363,802,239 | ||
Options purchased
|
$ | 363,802,239 | ** | |
Liabilities
|
||||
Options Premium Received
|
||||
Energy
|
$ | (239,504,355 | ) | |
Options premium received
|
$ | (239,504,355 | )*** | |
* | This amount is in Net unrealized depreciation on open futures and exchange-cleared swap contracts on the Statements of Financial Condition. | |
** | This amount is in Options purchased, at fair value on the Statements of Financial Condition. | |
*** | This amount is in Options premium received, at fair value on the Statements of Financial Condition. |
47
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
December 31, 2009 | ||||
Assets
|
||||
Futures and Exchange-Cleared Swap Contracts
|
||||
Energy
|
$ | 274,140,959 | ||
Total unrealized appreciation on open futures and
exchange-cleared swap contracts
|
$ | 274,140,959 | ||
Liabilities
|
||||
Futures and Exchange-Cleared Swap Contracts
|
||||
Energy
|
$ | (324,998,849 | ) | |
Total unrealized depreciation on open futures and
exchange-cleared swap contracts
|
$ | (324,998,849 | ) | |
Net unrealized depreciation on open futures and exchange-cleared
swap contracts
|
$ | (50,857,890 | )* | |
Assets
|
||||
Options Purchased
|
||||
Energy
|
$ | 741,495,723 | ||
Options purchased
|
$ | 741,495,723 | ** | |
Liabilities
|
||||
Options Premium Received
|
||||
Energy
|
$ | (352,233,900 | ) | |
Options premium received
|
$ | (352,233,900 | )*** | |
* | This amount is in Net unrealized depreciation on open futures and exchange-cleared swap contracts on the Statements of Financial Condition. | |
** | This amount is in Options purchased, at fair value on the Statements of Financial Condition. | |
*** | This amount is in Options premium received, at fair value on the Statements of Financial Condition. |
The following tables indicate the trading gains and losses, by
market sector, on derivative instruments for the years ended
December 31, 2010 and 2009.
December 31, 2010 |
December 31, 2009 |
|||||||
Sector
|
Gain (loss) from trading | Gain (loss) from trading | ||||||
Currencies
|
$ | (1,876,020 | ) | $ | | |||
Energy
|
(43,137,992 | ) | 154,505,739 | |||||
Lumber
|
96,367 | | ||||||
Total
|
$ | (44,917,645 | )**** | $ | 154,505,739 | **** | ||
**** | This amount is in Gain (loss) from trading, net on the Statements of Income and Expenses. |
5. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors and they
become non-managing members on the first day of the month after
their subscription is processed. A non-managing member may
withdraw all or part of their capital contribution and
undistributed profits, if any, from the Master in multiples of
the net asset value per Unit of Member Interest as of the end of
any day (the Redemption Date) after a request
for redemption has been made to the Managing Member at least
3 days in advance of the Redemption Date. The Units
are classified as a liability when the non-managing member
elects to redeem and informs the Master.
48
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
6. | Financial Highlights: |
Changes in the net asset value per unit for the years ended
December 31, 2010, 2009 and 2008 were as follows:
2010 | 2009 | 2008 | ||||||||||
Net realized and unrealized gains (losses)*
|
$ | (431.69 | ) | $ | 1,064.16 | $ | 3,469.13 | |||||
Interest income
|
6.64 | 4.82 | 30.48 | |||||||||
Expenses**
|
(6.79 | ) | (4.62 | ) | (5.14 | ) | ||||||
Increase (decrease) for the year
|
(431.84 | ) | 1,064.36 | 3,494.47 | ||||||||
Distribution of interest income to feeder funds
|
(6.64 | ) | (4.83 | ) | (30.09 | ) | ||||||
Net asset value per unit, beginning of year
|
9,936.05 | 8,876.52 | 5,412.14 | |||||||||
Net asset value per unit, end of year
|
$ | 9,497.57 | $ | 9,936.05 | $ | 8,876.52 | ||||||
* | Includes clearing fees. | |
** | Excludes clearing fees. |
Ratio to average net assets:
|
||||||||||||
Net investment income (loss)***
|
(0.3 | )% | (0.3 | )% | 0.1 | % | ||||||
Operating expenses
|
0.4 | % | 0.3 | % | 0.4 | % | ||||||
Total return
|
(4.4 | )% | 12.0 | % | 64.6 | % | ||||||
*** | Interest income less total expenses. |
The above ratios may vary for individual investors based on the
timing of capital transactions during the year. Additionally,
these ratios are calculated for the non-managing member class
using the non-managing members share of income, expenses
and average net assets.
7. | Financial Instrument Risks: |
In the normal course of business, the Master is party to
financial instruments with off-balance sheet risk, including
derivative financial instruments and derivative commodity
instruments. These financial instruments may include forwards,
futures, options and swaps whose values are based upon an
underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash
balances, to purchase or sell other financial instruments at
specific terms at specified future dates, or, in the case of
derivative commodity instruments, to have a reasonable
possibility to be settled in cash, through physical delivery or
with another financial instrument. These instruments may be
traded on an exchange or
over-the-counter
(OTC). Exchange-traded instruments are standardized
and include futures and certain forwards and option contracts.
OTC contracts are negotiated between contracting parties and
include certain forwards and option contracts. Each of these
instruments is subject to various risks similar to those related
to the underlying financial instruments including market and
credit risk. In general, the risks associated with OTC contracts
are greater than those associated with exchange-traded
instruments because of the greater risk of default by the
counterparty to an OTC contract.
Market risk is the potential for changes in the value of the
financial instruments traded by the Master due to market
changes, including interest and foreign exchange rate movements
and fluctuations in commodity or security prices. Market risk is
directly impacted by the volatility and liquidity in the markets
in which the related underlying assets are traded. The Master is
exposed to a market risk equal to the value of futures and
forward contracts purchased and unlimited liability on such
contracts sold short.
Credit risk is the possibility that a loss may occur due to the
failure of a counterparty to perform according to the terms of a
contract. The Masters risk of loss in the event of
counterparty default is typically limited to the amounts
recognized in the Statements of Financial Condition and not
represented by the
49
AAA Master
Fund LLC
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
contract or notional amounts of the instruments. The
Masters risk of loss is reduced through the use of legally
enforceable master netting agreements with counterparties that
permit the Master to offset unrealized gains and losses and
other assets and liabilities with such counterparties upon the
occurrence of certain events. The Master has credit risk and
concentration risk as the sole counterparty or broker with
respect to the Masters assets is CGM or a CGM affiliate.
Credit risk with respect to exchange-traded instruments is
reduced to the extent that through CGM, the Masters
counterparty is an exchange or clearing organization.
The Advisor will concentrate the Masters trading in energy
related markets. Concentration in a limited number of commodity
interests may subject the Masters account to greater
volatility than if a more diversified portfolio of contracts
were traded on behalf of the Master.
As both a buyer and seller of options, the Master pays or
receives a premium at the outset and then bears the risk of
unfavorable changes in the price of the contract underlying the
option. Written options expose the Master to potentially
unlimited liability; for purchased options the risk of loss is
limited to the premiums paid. Certain written put options permit
cash settlement and do not require the option holder to own the
reference asset. The Master does not consider these contracts to
be guarantees.
The Managing Member monitors and attempts to control the
Masters risk exposure on a daily basis through financial,
credit and risk management monitoring systems and, accordingly,
believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Master may be
subject. These monitoring systems generally allow the Managing
Member to statistically analyze actual trading results with
risk-adjusted performance indicators and correlation statistics.
In addition, on-line monitoring systems provide account analysis
of futures and exchange-cleared swaps, forwards and options
positions by sector, margin requirements, gain and loss
transactions and collateral positions.
The majority of these instruments mature within one year of the
inception date. However, due to the nature of the Masters
business, these instruments may not be held to maturity.
50
Selected unaudited quarterly financial data for the AAA Master for the years ended December
31, 2010 and 2009 are summarized below:
For the period from | For the period from | For the period from | For the period from | |||||||||||||
October 1, 2010 to | July 1, 2010 to | April 1, 2010 to | January 1, 2010 to | |||||||||||||
December 31, 2010 | September 30, 2010 | June 30, 2010 | March 31, 2010 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of clearing fees
including interest
income |
$ | (10,965,983 | ) | $ | 9,078,896 | $ | (11,793,850 | ) | $ | (33,682,117 | ) | |||||
Net income (loss) |
$ | (11,165,250 | ) | $ | 8,893,472 | $ | (11,973,145 | ) | $ | (33,857,471 | ) | |||||
Increase (decrease)
in net asset value
per unit |
$ | (107.86 | ) | $ | 81.89 | $ | (111.98 | ) | $ | (293.89 | ) |
For the period from | For the period from | For the period from | For the period from | |||||||||||||
October 1, 2009 to | July 1, 2009 to | April 1, 2009 to | January 1, 2009 to | |||||||||||||
December 31, 2009 | September 30, 2009 | June 30, 2009 | March 31, 2009 | |||||||||||||
Net realized and
unrealized trading
gains (losses) net
of clearing fees
including interest
income |
$ | 9,738,633 | $ | 39,593,130 | $ | 11,578,159 | $ | 90,913,858 | ||||||||
Net income (loss) |
$ | 9,596,868 | $ | 39,460,830 | $ | 11,401,249 | $ | 90,736,483 | ||||||||
Increase (decrease)
in net asset value
per unit |
$ | 61.37 | $ | 289.49 | $ | 79.60 | $ | 633.90 |
51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
PricewaterhouseCoopers LLP (PwC) was previously the principal accountant for the Partnership
through July 22, 2009. On July 22, 2009, PwC was dismissed as principal accountant and on July 23,
2009 Deloitte & Touche LLP (Deloitte) was engaged as the independent registered public accounting
firm. The decision to change accountants was approved by the General Partner of the Partnership.
In connection with the audit of the fiscal year ended December 31, 2008, and through July 22,
2009, there were no disagreements with PwC, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference thereto in their report on
the financial statements for the corresponding year.
The audit report of PwC on the financial statements of the Partnership as of and
for the year ended December 31, 2008, did not contain any adverse opinion or disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope, or accounting principle.
Item 9A. Controls and Procedures.
The Partnerships disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Partnership on the reports that it files or submits under the
Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported
within the time periods expected in the Securities and Exchange Commissions (the SEC) rules and
forms. Disclosure controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by the Partnership in the reports it files is accumulated and
communicated to management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) of the General Partner, to allow for timely decisions regarding required disclosure
and appropriate SEC filings.
Management is responsible for ensuring that there is an adequate and effective process for
establishing, maintaining and evaluating disclosure controls and procedures for the Partnerships
external disclosures.
The General Partners CEO and CFO have evaluated the effectiveness of the Partnerships
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2010 and, based on that evaluation, the CEO and CFO have concluded that at
that date the Partnerships disclosure controls and procedures were effective.
The Partnerships internal control over financial reporting is a process under the supervision
of the General Partners CEO and CFO to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance with GAAP. These
controls include policies and procedures that:
| pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Partnership; | ||
| provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnerships receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and | ||
| provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnerships assets that could have a material effect on the financial statements. |
The report included in Item 8. Financial Statements and Supplementary Data. includes
managements report on internal control over financial reporting (Managements Report).
There were no changes in the Partnerships internal control over financial reporting during
the fiscal quarter ended December 31, 2010 that materially affected, or are reasonably likely to
materially affect, the Partnerships internal control over financial reporting.
Item 9B. Other Information.
None.
52
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The Partnership has no officers, directors or employees and its affairs are managed by its General
Partner. Investment decisions are made by the Advisors.
The officers and directors of the General Partner are Walter Davis (President and Chairman of
the Board of Directors), Jennifer Magro (Chief Financial Officer and Director), Michael McGrath
(Director), Douglas J. Ketterer (Director), Ian Bernstein (Director), Harry Handler (Director),
Patrick T. Egan (Director) and Alper Daglioglu (Director). Each director of the General Partner holds office until the
earlier of his or her death, resignation or removal. Vacancies on the board of directors may be
filled by either (i) the majority vote of the remaining directors or (ii) Morgan Stanley Smith
Barney Holdings LLC, as the sole member of the General Partner. The officers of the General
Partner are designated by the General Partners board of directors. Each officer will hold office
until his or her successor is designated and qualified or until his or her death, resignation or
removal.
Walter
Davis, age 46, is President and Chairman of the Board of Directors of the General
Partner (since June 2010). Mr. Davis was registered as an associated person of the General Partner
and listed as a principal in June 2010. Mr. Davis is responsible for the oversight of the General
Partners funds and accounts. Prior to the combination of Demeter Management LLC (Demeter) and the General Partner
effective December 1, 2010, Mr. Davis served as Chairman of the Board of Directors and President of
Demeter, a registered commodity pool operator. Mr. Davis was a principal and associated person of
Demeter from May 2006 to December 2010 and July 2006 to December 2010, respectively. Mr. Davis was
an associated person of Morgan Stanley DW Inc., a financial services firm, from August 2006 to
April 2007, when, because of the merger of Morgan Stanley DW Inc. into Morgan Stanley & Co. Incorporated (MS & Co.), a global financial
services firm, he became an associated person of MS & Co. (due to the transfer of his original
registration as an associated person of Morgan Stanley DW Inc.). Prior to becoming an associated
person in August 2006, Mr. Davis was responsible for overseeing the sales and marketing of MS &
Co.s managed futures funds to high net worth and institutional investors on a global basis. Mr.
Davis withdrew as an associated person of MS & Co. in June 2009. Mr. Davis has been an associated
person of Morgan Stanley Smith Barney LLC since June 2009. Morgan Stanley Smith Barney LLC is
registered as a broker-dealer with FINRA, an investment adviser with the SEC and a futures
commission merchant with the CFTC. Mr. Davis is a Managing Director of Morgan Stanley Smith Barney
LLC and the Director of Morgan Stanley Smith Barney LLCs Managed Futures Department. Prior to
joining Morgan Stanley in September 1999, Mr. Davis worked for Chase Manhattan Banks Alternative
Investment Group from January 1992 until September 1999, where his principal duties included
marketing managed futures funds to high net worth investors, as well as developing and structuring
managed futures funds. Throughout his career, Mr. Davis has been involved with the development,
management and marketing of a diverse array of commodity pools, hedge funds and other alternative
investment vehicles. Mr. Davis received an MBA in Finance and International Business from the
Columbia University Graduate School of Business in 1992 and a BA in Economics from the University
of the South in 1987.
Jennifer Magro, age 39, is Chief Financial Officer and Director of the General Partner (since
October 2006 and May 2005, respectively). Ms. Magro was listed as a principal in June 2005. Ms.
Magro served as Vice President and Secretary of the General Partner from August 2001 to December
2010 and June 2010 to December 2010, respectively. She was also a Managing Director of Citi
Alternative Investments (CAI), a division of Citigroup that administered its hedge fund and fund
of funds business, and was Chief Operating Officer of CAIs Hedge Fund Management Group from
October 2006 to July 2009. Ms. Magro is responsible for the financial, administrative and
operational functions of the General Partner. She is also responsible for the accounting and
financial and regulatory reporting of the General Partners managed futures funds. From March 1999
to July 2009, Ms. Magro was responsible for the accounting and financial and regulatory reporting
of Citigroups managed futures funds. She had similar responsibilities with CAIs Hedge Fund
Management Group (from October 2006 to July 2009). Prior to joining the General Partner in January
1996, Ms. Magro was employed by Prudential Securities Inc., a securities brokerage services
company, (from July 1994) as a staff accountant whose duties included the calculation of net asset
values for commodity pools and real estate investment products. Ms. Magro received a BS in
Accounting from the State University of New York, Oswego in 1993.
Michael McGrath, age 41, has been a Director of the General Partner since June 2010. Mr.
McGrath was listed as a principal in June 2010. Mr. McGrath was a principal and Director of
Demeter from May 2006 until Demeters combination with the General Partner in December 2010. Mr.
McGrath is a Managing Director of Morgan Stanley Smith Barney LLC and currently serves as the Head
of Alternative Investments for the Global Wealth Management Group of Morgan Stanley Smith Barney
LLC. He also serves on
53
the Management Committee of the Global Wealth Management Group. Prior to his current role,
Mr. McGrath served as the Director of Product Management for the Consulting Services Group in
Morgan Stanley as well as the Chief Operating Officer for Private Wealth Management North America
and Private Wealth Management Latin America (the Americas) and the Director of Product Development
for Morgan Stanleys Global Wealth Management Group. Mr. McGrath served as a Managing Director of
Morgan Stanley from May 2004 until May 2009, when Mr. McGrath became a Managing Director of Morgan
Stanley Smith Barney LLC. Mr. McGrath joined Morgan Stanley from Nuveen Investments, a publicly
traded investment management company headquartered in Chicago, Illinois, where he worked from July
2001 to May 2004. At Nuveen Investments, Mr. McGrath served as a Managing Director and oversaw the
development of alternative investment products catering to high net worth investors. Mr. McGrath
received his BA degree from Saint Peters College in 1990, and currently serves on the schools
Board of Regents. He received his MBA in Finance from New York University in 1996.
Douglas J. Ketterer, age 45, has been a Director of the General Partner since December 2010.
Mr. Ketterer was listed as a principal in December 2010. Mr. Ketterer was a principal of Demeter
from October 2003 until Demeters combination with the General Partner in December 2010. Mr.
Ketterer is a Managing Director and Head of the U.S. Private Wealth Management Group within Morgan
Stanley Smith Barney LLC. Mr. Ketterer joined MS & Co. in March 1990 and has served in many roles
in the corporate finance/investment banking, asset management, and wealth management divisions of
the firm; most recently as Chief Operating Officer, Wealth Management Group and Head of the
Products Group with responsibility for a number of departments (including, among others, the
Alternative Investments Group, Consulting Services Group, Annuities & Insurance Department and
Retirement & Equity Solutions Group) which offered products and services through MS & Co.s Global
Wealth Management Group. Mr. Ketterer received his MBA from New York Universitys Leonard N. Stern
School of Business and his BS in Finance from the University at Albanys School of Business.
Ian Bernstein, age 48, is a Director of the General Partner. Mr. Bernstein has been a
Director, and listed as a principal of the General Partner since December 2010. Mr. Bernstein held
various positions, including Managing Director, within the Capital Markets group at Morgan Stanley
DW Inc. from October 1984 to April 2007, when Morgan Stanley DW Inc. was merged into, its
institutional affiliate, MS & Co. and became the Global Wealth Management Division of MS & Co. Mr.
Bernstein first served as a Managing Director with MS & Co. in March 2004, prior to its merger with
Morgan Stanley DW Inc. Since June 1, 2009, Mr. Bernstein has served as a Managing Director of
Capital Markets at Morgan Stanley Smith Barney LLC, a new broker-dealer formed as a result of a
joint venture between Citigroup and Morgan Stanley. The respective retail business of MS & Co. and
Citigroup (formerly known as Smith Barney) was contributed to Morgan Stanley Smith Barney LLC. Mr.
Bernstein has continued as Managing Director of both Morgan Stanley Smith Barney LLC, the retail
broker-dealer, and MS & Co., the institutional broker-dealer, up to the present. Mr. Bernstein
received his MBA from New York Universitys Leonard N. Stern School of Business in 1988, and his BA
from the University of Buckingham in 1980.
Harry Handler, age 51, has been a Director of the General Partner since December 2010. Mr.
Handler became registered as an associated person of the General Partner and listed as a principal
in December 2010. Mr. Handler was a principal and associated person of Demeter from May 2005 until
Demeters combination with the General Partner in December 2010, and from April 2006 until December
2010, respectively. He has been an associate member of the NFA since August 1985. Mr. Handler was
an associated person of Morgan Stanley DW Inc., a financial services firm, from February 1984 to
April 2007, when, because of the merger of Morgan Stanley DW Inc. into MS & Co., he became an
associated person of MS & Co. due to the transfer of his original registration as an associated
person of Morgan Stanley DW Inc. Mr. Handler withdrew as an associated person of MS & Co. in June
2009. Mr. Handler has been an associated person of Morgan Stanley Smith Barney LLC since June
2009. Mr. Handler serves as an Executive Director at Morgan Stanley Smith Barney LLC in the Global
Wealth Management Group. Mr. Handler works in the Capital Markets Division and is responsible for
Electronic Equity and Securities Lending. Additionally, Mr. Handler serves as Chairman of the
Global Wealth Management Groups Best Execution Committee. In his prior position, Mr. Handler was
a Systems Director in Information Technology, in charge of Equity and Fixed Income Trading Systems
along with the Special Products, such as Unit Trusts, Managed Futures, and Annuities. Prior to his
transfer to the Information Technology Area, Mr. Handler managed the Foreign Currency and Precious
Metals Trading Desk of Dean Witter, a financial services firm and predecessor company to Morgan
Stanley, from July 1982 until January 1984. He also held various positions in the Futures Division
where he helped to build the Precious Metals Trading Operation at Dean Witter. Before joining Dean
Witter, Mr. Handler worked at Mocatta Metals, a precious metals trading firm and futures broker
that was sold to Standard Charted Bank in the 1980s, as an Assistant to the Chairman from March
1980 until June 1982. His roles at Mocatta Metals included positions on the Futures Order Entry
Desk and the Commodities Exchange Trading Floor. Additional work included building a computerized
Futures Trading System and writing a history of the company. Mr. Handler
54
graduated on the Deans List from the University of Wisconsin-Madison with a BA degree and a
double major in History and Political Science.
Patrick T. Egan, age 41, has been a Director of the General Partner since December 2010. Mr.
Egan became registered as an associated person of the General Partner and listed as a principal in
December 2010. Mr. Egan has been an associate member of the NFA since December 1997. He has been
an associated person of Morgan Stanley Smith Barney LLC since November 2010. Mr. Egan was an
associated person of Morgan Stanley DW Inc., a financial services firm, from February 1998 to April
2007, when, because of the merger of Morgan Stanley DW Inc. into MS & Co., he became an associated
person of MS & Co. due to the transfer of his original registration as an associated person of
Morgan Stanley DW Inc. Mr. Egan withdrew as an associated person of MS & Co. in November 2010.
Mr. Egan is an Executive Director at Morgan Stanley Smith Barney LLC and currently serves as the
Co- Chief Investment Officer for Morgan Stanley Smith Barney LLCs Managed Futures Department.
Prior to his current role, Mr. Egan served as the Head of Due Diligence & Manager Research for
Morgan Stanleys Managed Futures Department from October 2003 until the formation of Morgan Stanley
Smith Barney LLC in June 2009. From March 1993 through September 2003, Mr. Egan was an analyst and
manager within the Managed Futures Department for Morgan Stanley DW Inc., and its predecessor firm,
Dean Witter Reynolds, Inc., a financial services firm, with his primary responsibilities being
dedicated to the product development, due diligence, investment analysis and risk management of the
firms commodity pools. Mr. Egan began his career in August 1991, joining Dean Witter
Intercapital, the asset management arm of Dean Witter Reynolds, Inc., until March 1993 when he
joined the firms Managed Futures Department. Mr. Egan received a Bachelor of Business
Administration with a concentration in Finance from the University of Notre Dame in May 1991. Mr.
Egan is a former Director to the Managed Funds Associations Board of Directors, a position he was
elected to by industry peers for two consecutive two-year terms, from November 2004 to October 2006
and November 2006 to October 2008.
Alper Daglioglu, age 33, has been a Director, and listed as a principal of the General Partner
since December 2010. Mr. Daglioglu is an Executive Director at Morgan Stanley Smith Barney LLC and
the Co-Chief Investment Officer for Morgan Stanley Smith Barney LLCs Managed Futures Department.
Mr. Daglioglu also serves on the Alternative Investments Product Review Committee of Morgan Stanley
Smith Barney LLCs Alternative Investments Group. Prior to his current role, Mr. Daglioglu was a
Senior Analyst at the Product Origination Group within Morgan Stanley Managed Futures Department
from December 2003 until the formation of Morgan Stanley Smith Barney LLC in June 2009. In
addition to his responsibilities within Managed Futures Department, Mr. Daglioglu was also the lead
investment analyst for Global Macro and Managed Futures strategies within Morgan Stanley Graystone
Research Group from February 2007 to June 2009. Mr. Daglioglu served as a consultant at the
Product Origination Group within Morgan Stanley Managed Futures Department from June 2003 to
November 2003. Mr. Daglioglu received a BS degree in Industrial Engineering from Galatasaray
University in June 2000 and a MBA degree in Finance from the University of Massachusetts-Amhersts
Isenberg School of Management in May 2003. Mr. Daglioglu was awarded a full merit scholarship and
research assistantship at the Center for International Securities and Derivatives Markets during
his graduate studies. In this capacity, he worked with various major financial institutions in
performance monitoring, asset allocation and statistical analysis projects and specialized on
alternative approaches to risk assessment for hedge funds and managed futures. Mr. Daglioglu wrote
and published numerous research papers on alternative investments. Mr. Daglioglu is a Chartered
Alternative Investment Analyst charterholder.
The Partnership has not adopted a code of ethics that applies to officers because it has no
officers. In addition, the Partnership has not adopted any procedures by which investors may
recommend nominees to the Partnerships board of directors, and has not established an audit
committee because it has no board of directors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by its General Partner,
which receives compensation for its services, as set forth under Item 1. Business. CGM,
an affiliate of the General Partner, is the commodity broker for the Partnership and receives
brokerage commissions for such services, as described under Item 1. Business. During the
year ended December 31, 2010, CGM earned $3,312,893 in brokerage commissions and clearing fees from
the Partnership. The Advisor earned
$5,198,291 in management fees for the year ended December 31, 2010. There were no profit share
allocations earned by the Advisor for the year ended December 31, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
(a) Security
ownership of certain beneficial owners. As of February 28, 2011, the
Partnership knows of no person who beneficially owns more than 5% of the Redeemable Units
outstanding.
(b) Security ownership of management. Under the terms of the Limited Partnership
Agreement, the Partnerships affairs are managed by the General Partner. The following table indicates securities owned by
management as of December 31, 2010:
(3) Amount and | ||||||||||||
(2) Name of | Nature of | |||||||||||
Beneficial | Beneficial | (4) Percent of | ||||||||||
(1) Title of Class | Owner | Ownership | Class | |||||||||
General Partner unit
equivalents |
General Partner | 242.9887 | 1.1 | % |
(c) Changes in control. None.
55
Item 13. Certain Relationships and Related Transactions, and Director Independence.
(a) Transactions with related persons. None.
(b) Review, approval or ratification of transactions with related persons. Not applicable.
(c) Promoters and
certain control persons. CGM and the General Partner would be considered promoters
for purposes of item 404(d) of Regulation S-K. The nature and
the amounts of compensation each promoter will receive, if any, from the
Partnership are set forth under Item 1. Business and Item 11. Executive Compensation.
56
Item 14. Principal Accountant Fees and Services.
(1) Audit Fees. The aggregate fees billed for each of the last two fiscal years for
professional services rendered by Deloitte in the year ended December 31, 2010 and for the period
from July 23, 2009 through December 31, 2009, PwC in the period from January 1, 2009 through July 22,
2009 for the audit of the Partnerships annual financial statements, review of financial statements
included in the Partnerships Forms 10-Q and 10-K and other services normally provided in
connection with regulatory filings or engagements were:
Deloitte | PwC | |||||||
2010 |
$ | 64,200 | $ | | ||||
2009 |
$ | 53,000 | (1) | $ | 26,300 | (2) |
(1) For the period July 23, 2009 to December 31, 2009.
(2) For the period January 1, 2009 to July 22, 2009.
(2) Audit-Related Fees. None
(3) Tax Fees. In the last two fiscal years, Deloitte did not provide any professional
services for tax compliance, tax advice or tax planning. The aggregate fees billed for each of the
last two fiscal years for professional services rendered by PwC for tax compliance and tax advice
given in the preparation of the Partnerships Schedule K1s, the preparation of the Partnerships
Form 1065 and preparation of all State Tax Returns were:
2010 |
$ | 26,250 | ||
2009 |
$ | 25,000 |
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
57
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) | Financial Statements: | |
Statements of Financial Condition at December 31, 2010 and 2009. | ||
Statements of Income and Expenses for the years ended December 31, 2010, 2009 and 2008. | ||
Statements of Changes in Partners Capital for the years ended December 31, 2010, 2009 and 2008. | ||
Notes to Financial Statements | ||
(2) | Exhibits |
3.1 | Certificate of Limited Partnership of the Partnership as filed in the Office of the Secretary of State of the State of New York, dated December 30, 1997 (filed as Exhibit 3.1 to the Partnership Form 10 filed on April 30, 1999 and incorporated herein by reference). | ||
(a) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated October 1, 1999 (filed as Exhibit 3.1(a) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(b) | Certificate of Change of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.1(b) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(c) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.1(c) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(d) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(d) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(e) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(e) to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(f) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference). | ||
(g) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated June 30, 2010 (filed as Exhibit 3.1 to the Form 8-K filed on July 2, 2010 and incorporated herein by reference). | ||
3.2 | Amended and Restated Limited Partnership Agreement, dated September 30, 2006 (filed as Exhibit 10.1 to the Form 10-Q filed on November 14, 2006 and incorporated herein by reference). | ||
10.1 | Customer Agreement between the Partnership and Smith Barney Inc., dated February 12, 1998 (filed as Exhibit 10.B to the Partnership Form 10 filed on April 30, 1999 and incorporated herein by reference). | ||
10.2 | Agency Agreement among the Partnership, Smith Barney Futures Management Inc. and Smith Barney Inc., dated February 12, 1998 (filed as Exhibit 10.2 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). |
58
10.3 | Joinder Agreement among the Partnership, Citigroup Managed Futures LLC, Citigroup Global Markets Inc. and Morgan Stanley Smith Barney LLC, dated June 1, 2009 (filed as Exhibit 10 to the Form 10-Q filed on August 14, 2009 and incorporated herein by reference). | ||
10.4 | Escrow Agreement among the Partnership, Smith Barney Futures Management Inc., Smith Barney Inc. and European American Bank, dated February 9, 1998 (filed as Exhibit 10.4 to the Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
10.5 | Advisory Agreement among the Partnership, the General Partner and AAA Capital Management Advisors, Ltd., dated April 3, 2006 (filed as Exhibit 33 to the Form 10-Q filed on August 14, 2006 and incorporated herein by reference). | ||
(a) | Letter from the General Partner extending Advisory Agreement with AAA Capital Management Advisory, Ltd. for 2010, dated June 1, 2010 (filed herein). | ||
16.1 | Letter from KPMG LLP (filed as Exhibit 16.1 to the Form 8-K filed on July 1, 2008 and incorporated herein by reference). | ||
16.2 | Letter from Pricewaterhouse Coopers LLP (filed as Exhibit 16.1 to the Form 8-K filed on July 23, 2009 and incorporated herein by reference). |
The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by
reference
31.1 | Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director) | ||
32.1 | Section 1350 Certification (Certification of President and Director) | ||
32.2 | Section 1350 Certification (Certification of Chief Financial Officer and Director) |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
AAA CAPITAL ENERGY FUND L.P.
By: | Ceres Managed Futures LLC | |||
(General Partner) | ||||
By: | /s/ Walter Davis | |||
Walter Davis, | ||||
President & Director | ||||
Date: March 31, 2011 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/ Walter Davis
|
/s/ Ian Bernstein | /s/ Patrick T. Egan | ||
|
||||
Walter Davis
|
Ian Bernstein | Patrick T. Egan | ||
President and Director
|
Director | Director | ||
Ceres Managed Futures LLC Date: March 31, 2011 |
Ceres Managed Futures LLC Date: March 31, 2011 |
Ceres Managed Futures LLC Date: March 31, 2011 |
||
/s/ Jennifer Magro
|
/s/ Michael McGrath | /s/ Alper Daglioglu | ||
Jennifer Magro
|
Michael McGrath | Alper Daglioglu | ||
Chief Financial Officer and Director
|
Director | Director | ||
(Principal Accounting Officer) Ceres Managed Futures LLC Date: March 31, 2011 |
Ceres Managed Futures LLC Date: March 31, 2011 |
Ceres Managed Futures LLC Date: March 31, 2011 |
||
/s/ Douglas J. Ketterer
|
/s/ Harry Handler | |||
Douglas J. Ketterer
|
Harry Handler | |||
Director
|
Director | |||
Ceres Managed Futures LLC Date: March 31, 2011 |
Ceres Managed Futures LLC Date: March 31, 2011 |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by
Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
Annual Report to Limited Partners
No proxy material has been sent to Limited Partners.
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