Attached files
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EX-32.1 - EX-32.1 - FAIRFIELD FUTURES FUND LP II | y04610exv32w1.htm |
EX-31.2 - EX-31.2 - FAIRFIELD FUTURES FUND LP II | y04610exv31w2.htm |
EX-32.2 - EX-32.2 - FAIRFIELD FUTURES FUND LP II | y04610exv32w2.htm |
EX-31.1 - EX-31.1 - FAIRFIELD FUTURES FUND LP II | y04610exv31w1.htm |
EX-10.4.A - EX-10.4.A - FAIRFIELD FUTURES FUND LP II | y04610exv10w4wa.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-51282
FAIRFIELD FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York | 56-2421596 | |
(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
522 Fifth Avenue 14th Floor
New York, New York 10036
(Address and Zip Code of principal executive offices)
(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 No X
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 No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X
No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes No
Indicate by check mark 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 | Accelerated filer | Non-accelerated filer X (Do not check if a smaller reporting company) |
Smaller reporting company |
Indicate
by check mark if the registrant is a shell company (as defined in rule 2b-2 of the
Exchange Act)
Yes
No X
Limited
Partnership Redeemable Units with an aggregate value of $37,156,220 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,
34,607.4187 Limited Partnership Redeemable Units were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
[None]
PART I
Item 1. Business.
(a) General Development of Business. Fairfield Futures Fund L.P. II (the
Partnership) is a limited partnership organized on December 18, 2003 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 futures contracts, options, swaps and
forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and
non-U.S. interest rates, livestock, lumber, metals and softs. The Partnership commenced trading
operations on March 15, 2004. The commodity interests that are traded by the Partnership, through
its investment in the Master (as defined below) are volatile and involve a high degree of market
risk.
Between January 12, 2004 (commencement of the offering period) and March 12, 2004, 28,601
redeemable units of limited partnership interest (Redeemable Units) and 285 General Partner unit
equivalents were sold at $1,000 per unit. The proceeds of the initial offering were held in an
escrow account until March 15, 2004 at which time they were remitted to the Partnership for
trading. Effective January 31, 2011, the Partnership will no longer offer Redeemable Units for sale.
Subscriptions and redemptions of Redeemable Units and General Partner unit equivalents for the
years ended December 31, 2010, 2009 and 2008 are reported in the Statements of Changes in Partners
Capital on page 29 under Item 8. Financial Statements and Supplementary Data.
Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner
(the General Partner) and commodity pool operator of the Partnership. The General Partner is
wholly owned by Morgan Stanley Smith Barney Holdings LLC (MSSB Holdings). 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 June 1, 2006, the Partnership allocated substantially all of its capital to the CMF Graham
Capital Master Fund L.P. (the Master), a limited partnership organized under the partnership laws
of the State of New York. The Partnership purchased 74,569.3761 units of the Master with cash equal
to $75,688,021. The Master was formed in order to permit accounts managed by Graham Capital
Management, L.P. (Graham or the Advisor) using the K4D-12.5 Program, the Advisors proprietary,
systematic trading program, to invest together in one trading vehicle. A description of the trading
activities and focus of the Advisor is included on page 8 under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations. The General Partner
is also the general partner of the Master. The Masters commodity broker is CGM. Individual and
pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be
limited partners 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 financial statements of the Master, including the Condensed Schedule of Investments, are
contained, elsewhere in this report and should be read together with the Partnerships financial
statements.
For the period January 1, 2010 through December 31, 2010, the approximate market sector
distribution for the Partnership was as follows:
* | Due to rounding. |
At December 31, 2010 and 2009, the Partnership owned approximately 22.8% and 25.7%,
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 Partnership will be liquidated upon the first of the following to occur: December 31,
2023; the net asset value per Redeemable Unit falls below $400 as of the close of any business day;
a decline in net assets after trading commences to less than $1,000,000; or under certain
circumstances as defined in the Limited Partnership Agreement of the Partnership (the 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 Partnership will
pay the General Partner a monthly administrative fee in return for its services to the Partnership
equal to 1/24 of 1% (0.5% per year) of month-end Net Assets of the Partnership. Month-end Net
Assets, for the purpose of calculating administrative fees are Net Assets, as defined in the
Limited Partnership Agreement, prior to the reduction of the current months management fee, the
General Partners administrative fee, the profit share allocation accrual and any redemptions or
distributions as of the end of such month. This fee may be increased or decreased at the discretion
of the General Partner.
The General Partner, on behalf of the Partnership, has entered into a management agreement
(the Management Agreement) with the Advisor, a registered commodity trading advisor. The Advisor is
not affiliated with the General Partner or CGM and is not responsible for the organization or
operation of the Partnership. The Partnership pays 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 management fee, the General Partners
administrative fee, the profit share allocation accrual and any redemptions 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 (the 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
the New Trading Profits, as defined in the Management Agreement, earned by the Advisor on behalf of
the Partnership during each calendar quarter and are issued as Special Limited Partner Units.
The Partnership has entered into a customer agreement (the Customer Agreement) with CGM which
provides that the Partnership will pay CGM a monthly brokerage fee equal to 9/24 of 1% (4.5% per
year) of month-end Net Assets, in lieu of brokerage fees on a per trade basis. Month-end Net
Assets, for the purpose of calculating brokerage fees are Net Assets, as defined in the Limited
Partnership Agreement, prior to the reduction of the current months brokerage fees, management
fee, the General Partners administrative fee, profit share allocation accrual, other expenses and
any redemptions or distributions as of the end of such month. The Master will pay for National
Futures Association (NFA) fees as well as exchange, clearing, user, give-up and floor brokerage fees
(collectively the clearing fees). CGM will pay a portion of its brokerage fees to other properly
registered selling agents and to financial advisors who have sold Redeemable Units. Brokerage fees
will be paid for the life of the Partnership, although the rate at which such fees are paid may be
changed. This fee may be increased or decreased at anytime at CGMs discretion upon written notice
to the Partnership. The Partnerships assets not held in the Masters account at CGM are held in
the Partnerships account at CGM. The Partnerships cash is deposited by CGM in segregated bank
accounts to the extent required by Commodity Futures Trading Commission regulations. CGM will pay
the Partnership interest on its allocable share of 80% of the average daily equity maintained in
cash in the Masters brokerage account during each month at a 30-day U.S. Treasury bill rate
determined weekly by CGM based on the average noncompetitive 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 between the Partnership and CGM and the Master
and CGM gives the Partnership and the Master, respectively, the legal right to net unrealized gains
and losses. 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 is set forth under Item 6. Selected Financial
Data. The Partnerships Capital as of December 31, 2010 was $37,956,902.
(c) Narrative Description of Business.
See Paragraphs (a) and (b) above.
3
(i) through (xii) Not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does not engage in
the sale 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 and management fees. 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.
4
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.
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 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.
5
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]
6
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 372. | ||
(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. For the year ended December 31, 2010, there were additional subscriptions of 6,051.0375 Redeemable Units totaling $6,125,500. For the year ended December 31, 2009, there were additional subscriptions of 3,576.7524 Redeemable Units totaling $3,766,000 and an allocation of 59.3707 Redeemable Units of Special Limited Partner Interest totaling $64,276. For the year ended December 31, 2008, there were additional subscriptions of 4,297.2083 Redeemable Units totaling $4,079,000 and 526.2272 General Partner unit equivalents totaling $500,000 and an allocation of 1,444.1797 Redeemable Units of Special Limited Partner Interest totaling $1,517,815. | ||
The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors, as described in Regulation D, and a small number of persons who are non-accredited investors. | |||
Proceeds of net offering were used for the trading of commodity interests including futures contracts, options, swaps and forward contracts. | |||
(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 |
4,303.1074 | $ | 1,065.37 | N/A | N/A | |||||||||||
November 1, 2010 November 30, 2010 |
496.2439 | $ | 1,035.52 | N/A | N/A | |||||||||||
December 1, 2010 December 31, 2010 |
443.0450 | $ | 1,060.69 | N/A | N/A | |||||||||||
5,242.3963 | $ | 1,062.15 | ||||||||||||||
* | 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. |
7
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) by the Partnership and allocated from
the Master, net of expenses allocated from the
Master and brokerage fees (including clearing
fees) of $1,833,646, $2,041,895, $2,989,992, $3,023,496 and
$3,374,786, respectively |
$ | 920,835 | $ | 1,056,612 | $ | 15,808,543 | $ | 6,359,058 | $ | (1,156,188 | ) | |||||||||
Interest income allocated from Master |
35,439 | 31,264 | 690,161 | 2,284,911 | 2,768,911 | |||||||||||||||
$ | 956,274 | $ | 1,087,876 | $ | 16,498,704 | $ | 8,643,969 | $ | 1,612,723 | |||||||||||
Net income (loss) before allocation to Special
Limited Partner |
$ | (404,351 | ) | $ | (192,469 | ) | $ | 14,689,973 | $ | 6,786,738 | $ | (391,912 | ) | |||||||
Allocation to Special Limited Partner |
$ | | $ | (64,276 | ) | $ | (1,517,815 | ) | $ | | | |||||||||
Net income (loss) after allocation to Special
Limited Partner |
$ | (404,351 | ) | $ | (256,745 | ) | $ | 13,172,158 | $ | 6,786,738 | $ | (391,912 | ) | |||||||
Increase (decrease) in net asset value per unit |
$ | (10.92 | ) | $ | (4.60 | ) | $ | 197.31 | $ | 85.38 | $ | (4.51 | ) | |||||||
Net asset value per unit |
$ | 1,060.69 | $ | 1,071.61 | $ | 1,076.21 | $ | 878.90 | $ | 793.52 | ||||||||||
Total assets |
$ | 38,771,398 | $ | 44,174,544 | $ | 60,887,773 | $ | 69,761,424 | $ | 68,501,056 | ||||||||||
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
The Partnership, through its investment in the Master, aims to achieve substantial capital
appreciation through speculative trading in U.S. and international markets for currencies, interest
rates, stock indices, agricultural and energy products and precious and base metals. The Master may
employ futures, options on futures, and forward and swap contracts in those markets.
The General Partner manages all business of the Partnership. The General Partner has delegated
its responsibility for the investment of the Partnerships assets to the Advisor. 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 use propriety technology and on-site
evaluations to monitor new and existing futures money managers. The accounting and operations staff
provide processing of trading activity and reporting to limited partners and regulatory
authorities. In selecting the Advisor for the Partnership, the General Partner considered 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.
Responsibilities of the General Partner 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. |
In addition, the General Partner 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 the operation of the Partnership. These services include the preparation of
required books and records and reports to limited partners, government agencies and regulators;
computation of net
8
asset value; calculation of fees; effecting subscriptions, redemptions and limited partner
communications; and preparation of offering documents and sales literature.
The
General Partner seeks the best prices and services available in its commodity futures
brokerage transactions.
The Partnerships assets allocated to the Advisor for trading are 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 K4D 12.5 Program, a proprietary, systematic trading system.
As of January 2009,
Graham began trading the Partnerships asset in accordance with its K4D 12.5 Program.
Between June 1, 2006 and
January 2009, Graham traded the Partnerships assets allocated to it in accordance with its
Multi-Trend Program at 125% Leverage (Multi-Trend). Prior to June 1, 2006, Graham traded its
Global Diversified Program at Standard Leverage, the Graham Selective Trading Program at Standard
Leverage and the K5 Program on behalf of the Partnership. The Multi-Trend Program combines four
individual Graham investment programs into one program. The K4D 12.5 Program consolidates on an
equal basis, the trading programs that previously comprised Grahams Multi-Trend Program. As market
conditions or other circumstances change, Graham may alter the weightings of the individual
programs and add (or delete) other programs to the K4D 12.5 Program, as it deems appropriate.
The
K4D 12.5 Program trades in approximately 90 - 100 markets including foreign exchange,
global interest rates, stock index futures, agricultural futures, metals and energy.
In addition to the K4D 12.5 Program, as of December 31, 2010, Graham traded the following
futures programs: its Global Diversified Program, the Graham Selective Trading Program, the
Proprietary Matrix Program and the K4 Fed Policy Program.
Grahams success depends to a great extent upon the occurrence of market conditions favorable
to its trading strategy. Factors such as lack of major price trends or increased governmental
control of, or participation in, the markets, may reduce Grahams ability to trade profitably in
the future.
As a managed futures partnership, the Partnerships/Masters performance is dependent upon the
successful trading of the Partnerships Advisor to achieve the Partnerships/Masters objectives.
It is the business of the General Partner to monitor the Advisors performance to ensure compliance
with the Partnerships/Masters trading policies and to determine if the Advisors performance is
meeting the Partnerships/Masters objectives. Based on 2010 results, the General Partner continues
to believe the Advisor and the trading of the K4D-12.5 Program has met the Partnerships/Masters
objectives and expects to continue to allocate the Partnerships/Masters assets to the Advisor and
this program unless otherwise indicated.
(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 sales of goods or services.
Because of the low margin deposits normally required in commodity futures 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. |
9
(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, indicating 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 10.8%. 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 may include forwards,
futures, and 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 and certain forwards and option contracts. OTC contracts are negotiated between contracting
parties and include certain forwards and options 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.
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 have 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 General Partner 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 General Partner to
statistically analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account analysis of
futures, forwards and options positions by sector, margin requirements, gain and loss transactions
and
10
collateral positions. (See also Item 8. Financial Statements and Supplementary Data
for further information on financial instrument risk included in the notes to the financial
statements.)
Other than the risks inherent in commodity futures and other derivatives 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 Master to cease trading operations and liquidate all open positions under certain circumstances
including a decrease in the 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 allocated from the Master on trading and by expenses,
interest income allocated from the Master, 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,
brokerage fees, advisory fees and administrative fees. The level of these expenses is dependent upon
trading performance and 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 any 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, 10,029.1714 Redeemable Units
were redeemed totaling $10,429,396 and 703.9492 General Partner unit equivalents were redeemed
totaling $700,077. For the year ended December 31, 2009, 11,070.4695 Redeemable Units were redeemed
totaling $11,759,877 and 1,161.1489 Redeemable Units of Special Limited Partner Interest were
redeemed totaling $1,250,000. For the year ended December 31, 2008, 34,524.8501 Redeemable Units
were redeemed totaling $34,423,789.
For the year ended December 31, 2010, there were additional subscriptions of 6,051.0375
Redeemable Units totaling $6,125,500. For the year ended December 31, 2009, there were additional
subscriptions of 3,576.7524 Redeemable Units totaling $3,766,000 and an allocation of 59.3707
Redeemable Units of Special Limited Partner Interest totaling $64,276. For the year ended December
31, 2008, there were additional subscriptions of 4,297.2083 Redeemable Units totaling $4,079,000
and 526.2272 General Partner unit equivalents totaling $500,000 and an allocation of 1,444.1797
Redeemable Units of Special Limited Partner Interest totaling $1,517,815.
(c) Results of Operations.
For the year ended December 31, 2010, the net asset value per unit decreased 1.0% from
$1,071.61 to $1,060.69. For the year ended December 31, 2009, the net asset value per unit
decreased 0.4% from $1,076.21 to $1,071.61. For the year ended December 31, 2008, the net asset
value per unit increased 22.5% from $878.90 to $1,076.21.
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage fees and related fees in 2010 of $2,894,796. Gains were primarily attributable to the
Masters trading of commodity futures in currencies, grains, U.S. and non-U.S. interest rates,
livestock and metals and were partially offset by losses in energy,
indices and softs. The net trading gain (or loss) realized from the
Partnerships investment in the Master is disclosed on page 28 under Item 8. Financial
Statements and Supplementary Data.
Most financial risk assets recovered well in 2010 due to expansionary monetary and fiscal
policies adopted by most central banks. However, this recovery came amidst global unrest due to
geographically localized crises such as the European sovereign debt crisis and inflationary
headwinds in emerging markets. Global weather conditions also played a significant role in 2010 in
affecting commodity prices. Many agricultural products remained at record-level prices as extreme
weather conditions such as drought, floods and winter storms affected production.
The Partnership was profitable in agricultural markets, currencies, interest rates and metals,
while registering losses in the energy sector and equity indices.
In the agricultural sector, products such as corn, cotton and coffee reached record price levels.
In the case of cotton, prices reached 140-year highs. Extreme weather conditions in some of the
biggest exporters of these products significantly disrupted the global supply. Several exporting
countries even imposed an export ban to meet the internal demand. The Partnership capitalized on
the strong trends in such agricultural products and remained profitable in this sector.
11
In currencies, the Partnership registered its most significant gains in the euro and Australian
dollar. As the European debt crisis loomed, the euro dropped to some of the lowest levels against
the U.S. dollar. Separately, the Australian dollar strengthened considerably against the U.S.
dollar due to strong economic growth and materials exports. The Partnership was favorably
positioned to profit from these trends.
In metals, the Partnership was profitable in precious metals as they reached record prices.
Precious metals such as gold and silver appealed to many investors as both inflation hedges and a
flight to quality.
In the interest rates sector, the Partnership recorded gains in both U.S. and non-U.S. interest
rates. The Federal Reserve kept U.S. interest rates at historically low levels amid
consistently high unemployment at above 9%. Also, as the European debt crisis seemed to engulf
several countries, most notably Greece and Ireland, investors flocked to U.S. and German bonds as a
flight to quality. Thus the yields remained at historically low levels, reaffirming the trend from
earlier in the year.
In equity indices, the Partnership recorded losses earlier in the year as global equities sharply
corrected. The European debt crisis and Flash crash of equities on May 6th came around
the time that many economists were actively discussing the possibility of a double dip recession.
Equity indices recovered from their lowest levels following the announcement of a European Union
bailout of troubled nations within the Union. Also, later in the year, the U.S. Federal Reserve
announced a second round of quantitative easing which increased the appetite for risk assets.
The Partnership registered losses in the energy sector, primarily from crude oil and its
derivatives as oil remained range bound on concerns over global economic growth. Oil markets
remained very volatile through most of the year and reacted sharply to global events and economic
factors
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage fees and related fees in 2009 of $3,266,492. Gains were primarily attributable to the
Masters trading of commodity futures in currencies, indices, livestock, metals and softs and were
partially offset by losses in energy, grains, U.S. and non-U.S. interest rates.
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 had hit bottom
in March, banks were seeking to return TARP bailout money and other leading indicators were
recovering.
In the energy sector, most of the products did not exhibit any strong trends and mostly
remained range bound after the reversals earlier in the year. This pattern of sharp reversal
followed by non-directional volatility attributed to the losses in
this sector. The fixed-income
sector also incurred losses. With the economic backdrop of 2008, yields started to exhibit
asymmetric volatility due to extreme uncertainty prevailing in the longer time horizon. Encouraged
by the continuing fiscal and monetary efforts of the U.S. government to stabilize the economy, the
markets finally began to recover. In agricultural commodities, losses were realized primarily in
corn and wheat. Prices of corn and wheat both unexpectedly rallied in October as cold, wet weather
threatened to delay harvest.
In currencies, the Partnership registered gains primarily from the strong trend in the
Australian dollar which strengthened against the U.S. dollar. The Partnership recorded gains in the
metals sector primarily from gold, zinc and copper. Investors across the world chose to buy gold
through ETFs and bullion as a hedge against inflation, driven by the massive monetary influx of the
central banks. In softs, the Partnership recorded gains in sugar, cotton and cocoa. In stock
indices, strong trends emerged in the second quarter after the lows of March 2009. The Partnership
was favorably positioned to capitalize on these trends and recover the losses from the sharp
reversals.
12
Interest income on 80% of the Partnerships daily average 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
$7,121 and $4,175, respectively as compared to the corresponding periods in 2009. The increase in
interest income is primarily due to higher U.S. Treasury bill rates 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 fees are calculated as a percentage of the Partnerships adjusted net asset value on
the last day of each month and are affected by trading performance, subscriptions and redemptions.
Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values.
Brokerage fees for the three and twelve months ended December 31, 2010 decreased by $43,814 and
$208,249, respectively, as compared to the corresponding periods in 2009. The decrease in brokerage
fees is due to lower average net assets as compared to the corresponding periods in 2009.
Management fees are calculated as a percentage of the Partnerships adjusted net asset value
as of the end of each month and are affected by trading performance, subscriptions and redemptions.
Management fees for the three and twelve months ended December 31, 2010 decreased by $19,873 and
$92,284, respectively, as compared to the corresponding periods in 2009. The decrease in management
fees is due to lower average net assets as compared to the corresponding periods in 2009.
Administrative fees are calculated as a percentage of the Partnerships adjusted net asset
value as of the end of each month and are affected by trading performance, subscriptions and
redemptions. Administrative fees for the three and twelve months ended December 31, 2010 decreased
by $4,969 and $23,070, respectively, as compared to the corresponding periods in 2009. The decrease
in administrative fees is due to lower average net assets as compared to the corresponding periods
in 2009.
Special Limited Partner profit share allocations are based on the new trading profits
generated by the Advisor at the end of the quarter, as defined in the Management Agreement. There
were no profit share allocations earned for the three months 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 $64,276. 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.
The Partnership pays professional fees, which generally include legal and accounting expenses.
Professional fees for the years ended December 31, 2010 and 2009 were $293,141 and $117,024,
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 $53,779 and
$34,262, respectively.
The Partnership, through its investment in the Master, experienced a net trading gain before
brokerage fees and related fees in 2008 of $19,100,001. Gains were primarily attributable to the
Masters trading of commodity futures in currencies, energy, grains, indices, U.S. and non-U.S.
interest rates, livestock, metals and softs.
In 2008, the liquidity crisis that began in 2007 rapidly spread to all corners of the globe,
significantly pushing down global economic growth and presenting the economies with some of the
hardest challenges. During the year, the worlds credit markets virtually seized up, commodity
prices plunged and most major equity indices declined dramatically, while some of the large
financial institutions were under pressure. Faced with unprecedented and rapid deterioration in
economic data and outlook, and fearing a snowball adverse effect of the credit crunch, global
central banks reacted with aggressive campaigns of interest rate cuts and coordinated capital
injections. As the markets re-priced the cost of risk, several strong trends emerged. The
Partnership strongly capitalized on the trends and was profitable in currencies, energy, grains,
interest rates, metals, agricultural softs and stock indices. The Partnership was well positioned
to capitalize on the strong trends that emerged in currencies and realized gains for the year. The
U.S. dollar was relatively strong compared with most of the other developed economy currencies. The
euro was put to its first major test since its inception. The UK, Germany and France continued to
show weak growth early in the year and as the situations worsened
13
in the latter part of the year, these countries officially entered recession. The Japanese yen
remained an exception and showed extraordinary strength as the carry trade reversed.
The Partnership 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. Natural gas also
contributed to profits as prices plunged from $14 to about $5 per MMBtu. In grains and agricultural
softs, the Partnership was profitable as the trading strategy successfully navigated the trend
reversal period and captured the bullish and bearish legs of the trend across several products.
Corn prices continued to show a strong correlation to the energy prices and while peaking at 800
cents around mid year, closed the year around 400 cents.
The Partnership was profitable in interest rates as the yields on the shorter end of the yield
curve dropped to almost unphysical levels. Short term U.S. Treasury bills were in such high demand
due to flight-to-quality that the yields dropped below zero. While
the 10-year U.S. Treasury bill yielded on an
average between 3.5%-4% most of the year, the yield dropped to 2% in December. Non-U.S. interest
rates also showed tremendous volatility as the rates dropped precipitously due to the actions of
the central banks.
The Partnership registered gains in the metals sector primarily from the industrials. Precious
metals did not demonstrate a very strong directional trend, but the industrial metals reflected the
general economic malaise. Copper, which is usually considered essential for growth, dropped from 4
cents to 1.5 cents per pound.
Global stock indices also contributed to the gains as the indices continued to test multi-year
lows. As banks continued to write off the assets and as bankruptcies loomed, investors lost
confidence in the equity markets. Futures markets offered greater flexibility as the SEC
temporarily banned short selling in the equity markets.
In the General Partners opinion, the Advisor continues to employ its trading methods in a
consistent and disciplined manner and its results are consistent with the objectives of the
Partnership and expectations for the Advisors programs. The General Partner continues to monitor
the Advisors performance on a daily, weekly, monthly and annual basis to ensure that these
objectives are met.
Commodity
markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increases the possibility of profit.
The profitability of the Partnership depends on the existence of major price trends and the ability
of the Advisor to correctly identify those price trends. Price trends are influenced by,
among other things, changing supply and demand relationships, weather, governmental, agricultural,
commercial and trade programs and policies, national and international political and economic
events and changes in interest rates. To the extent that market trends exist and the Advisor is
able to identify them, the Partnership expects 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
14
volumes of transactions. The Master is subject to increased risks with respect to its 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.
(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 and the Masters 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 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 that are priced at fair value using unobservable
inputs through the application of managements assumptions and internal valuation pricing models
(Level 3).
15
Futures Contracts. The Master trades futures contracts. A futures contract is a firm
commitment to buy or sell a specified quantity of investments, currency or a standardized amount of
a deliverable grade commodity, at a specified price on a specified future date, unless the contract
is closed before the delivery date or if the delivery quantity is something where physical delivery
cannot occur (such as 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.
Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the
Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price
on an agreed future date. Foreign currency contracts are valued daily, and the Masters net equity
therein, representing unrealized gain or loss on the contracts as measured by the difference
between the forward foreign exchange rates at the dates of entry into the contracts and the forward
rates at the reporting date, is included in the Statements of Financial Condition. Realized gains
(losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in
the period in which the contract is closed or the changes occur, respectively, and are included in
the Statements of Income and Expenses.
The Master does not isolate that portion of the results of operations arising from the effect
of changes in foreign exchange rates on investments from fluctuations from changes in market prices
of investments held. Such fluctuations are included in net gain (loss) on investments in the
Statements of Income and Expenses.
London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange
(LME) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead,
nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates
published by the LME. 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. A contract is considered offset when all long
positions have been matched with a like number of short positions settling on the same prompt date.
When the contract is closed at the prompt date, 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 LME contracts require participants to make both initial margin
deposits of cash or other assets and variation margin deposits, through the broker, directly with
the LME. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are
included in the Statements of Income and Expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Introduction
All of the Partnerships assets are subject to the risk of trading loss through its investment
in the Master. 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 market risk is influenced
by a wide variety of factors, including the level and volatility of interest rates, exchange rates,
equity price levels, the market value of financial instruments and contracts, the diversification
effects among the Masters open positions and the liquidity of the markets in which it trades.
16
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 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.
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.
Quantifying the Partnerships Trading Value at Risk
The following quantitative disclosures regarding the Masters market risk exposures contain
forward-looking statements within the meaning of the safe harbor from civil liability provided
for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section
27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act)). 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 risk exposure in the various market sectors traded by the Advisor is quantified
below in terms of Value at Risk. Due to the Partnerships mark-to-market accounting, any loss in
the fair value of the Partnerships investment in the Master is directly reflected in the
Partnerships 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 interval. 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.
The fair value of the Masters futures and forward positions does not have any optionality
component. However, the Advisor may 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.
17
The Partnerships 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 December 31, 2009, the
highest and lowest value at any point and the average value 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 $168,924,671 and the Partnership
owned approximately 22.8% 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 | |||||||||||||||
Currencies |
$ | 6,192,975 | 3.67 | % | $ | 11,364,239 | $ | 996,231 | $ | 5,226,199 | ||||||||||
Energy |
1,048,521 | 0.62 | % | 1,989,347 | 236,269 | 1,000,222 | ||||||||||||||
Grains |
448,450 | 0.26 | % | 964,687 | 124,875 | 411,118 | ||||||||||||||
Indices |
5,301,813 | 3.14 | % | 13,726,706 | 1,137,775 | 5,507,221 | ||||||||||||||
Interest Rates U.S. |
161,600 | 0.10 | % | 2,021,410 | 68,806 | 1,014,515 | ||||||||||||||
Interest Rates Non-U.S. |
1,209,918 | 0.72 | % | 4,305,447 | 749,055 | 2,006,426 | ||||||||||||||
Livestock |
40,000 | 0.02 | % | 106,400 | 800 | 50,304 | ||||||||||||||
Metals |
1,012,127 | 0.60 | % | 1,771,142 | 494,357 | 993,963 | ||||||||||||||
Softs |
258,565 | 0.15 | % | 1,144,148 | 85,988 | 385,351 | ||||||||||||||
Total |
$ | 15,673,969 | 9.28 | % | ||||||||||||||||
* | Annual average of month-end Value at Risk |
As of December 31, 2009, the Masters total capitalization was $171,212,260 and the Partnership
owned approximately 25.7% 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 | |||||||||||||||
Currencies |
$ | 2,410,532 | 1.41 | % | $ | 8,136,447 | $ | 833,881 | $ | 4,612,528 | ||||||||||
Energy |
684,083 | 0.40 | % | 3,017,929 | 273,236 | 1,214,764 | ||||||||||||||
Grains |
549,675 | 0.32 | % | 1,846,996 | 96,550 | 731,407 | ||||||||||||||
Indices |
4,809,915 | 2.81 | % | 12,019,804 | 623,680 | 5,396,991 | ||||||||||||||
Interest Rates U.S. |
142,150 | 0.08 | % | 2,365,808 | 87,777 | 859,990 | ||||||||||||||
Interest Rates Non-U.S. |
1,869,099 | 1.09 | % | 8,320,518 | 471,498 | 2,867,131 | ||||||||||||||
Livestock |
59,200 | 0.04 | % | 160,380 | 1,080 | 58,409 | ||||||||||||||
Metals |
1,222,254 | 0.71 | % | 1,806,942 | 297,478 | 1,002,985 | ||||||||||||||
Softs |
1,131,557 | 0.66 | % | 1,479,945 | 190,202 | 768,323 | ||||||||||||||
Total |
$ | 12,878,465 | 7.52 | % | ||||||||||||||||
* | Annual average of month-end Value 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 maintenance 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
18
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 Master give no
indication of this risk of ruin.
Non-Trading Risk
The Master has non-trading market risk on its foreign cash balances not needed for margin.
However, these balances (as well as any market risk they represent) are immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding 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
controls to differ materially from the objectives of such strategies. Government interventions,
defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors,
political upheavals, changes in historical price relationships, an influx of new market
participants, increased regulation and many other factors could result in material losses as well
as in material changes to the risk exposures and the 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
Master.
The following were the primary trading risk exposures of the Master as of December 31, 2010,
by market sector.
Interest Rates. Interest rate movements directly affect the price of the futures
positions held by the Master and indirectly the value of its stock index and currency positions.
Interest rate movements in one country as well as relative interest rate movements between
countries materially impact the Masters profitability. The Masters primary interest rate exposure
is to interest rate fluctuations in the United States and the other G-8 countries. However, the
Master also takes futures positions on the government debt of smaller nations e.g., Australia.
Currencies. The Masters currency exposure is to exchange rate fluctuations, primarily
fluctuations which disrupt the historical pricing relationships between different currencies and
currency pairs. These fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the risk profile of the
Masters currency sector will change significantly in the future. The currency trading Value at
Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk inherent to the dollar-based Master in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Masters primary equity exposure is to equity price risk in the G-8
countries. The stock index futures traded by the Master are limited to futures on broadly based
indices. The Masters primary exposures were in the EUREX stock indices. The General Partner
anticipates little, if any, trading in non-G-8 stock indices. The Master is primarily exposed to
the risk of adverse price trends or static markets in the major U.S., European and Japanese
indices. (Static markets would not cause major market changes but would make it difficult for the
Master to avoid being whipsawed into numerous small losses.)
Metals. The Masters primary metal market exposure is to fluctuations in the price of
gold, copper, aluminum and zinc.
Softs. The Masters primary commodities exposure is to agricultural price movements
which are often directly affected by severe or unexpected weather conditions. Cocoa, sugar, and
cotton accounted for the bulk of the Masters commodity exposure.
Energy. The Masters primary energy market exposure is to natural gas and oil price
movements, often resulting from political developments in the Middle East. Oil prices can be
volatile and substantial profits and losses have been and are expected to continue to be
experienced in this market.
Grains. The Masters commodities exposure is to agricultural price movements which are
often directly affected by severe or unexpected weather conditions.
19
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Master as of December 31, 2010.
Foreign Currency Balances. The Masters primary foreign currency balances are in
Japanese yen, euro and Canadian dollars. The Advisor regularly converts foreign currency balances
to U.S. dollars in an attempt to control the Masters non-trading risk.
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.
The General Partner monitors the Masters performance and the concentration of 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 positions as well as enter positions 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.
20
Item 8. Financial Statements and Supplementary Data.
FAIRFIELD FUTURES FUND L.P. II
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.
21
To the Limited
Partners of
Fairfield Futures Fund L.P. II
Fairfield Futures Fund L.P. II
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,
Fairfield Futures Fund L.P. II
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
22
Managements
Report on Internal Control Over
Financial Reporting
Financial Reporting
The management of Fairfield Futures Fund L.P. II (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 Fairfield Futures Fund L.P. II 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, Fairfield Futures Fund L.P. II |
Jennifer Magro Chief Financial Officer and Director Ceres Managed Futures LLC General Partner, Fairfield Futures Fund L.P. II |
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
Fairfield Futures Fund L.P. II:
Fairfield Futures Fund L.P. II:
We have audited the accompanying statements of financial condition of Fairfield Futures
Fund L.P. II (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 Fairfield Futures Fund L.P. II 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
March 23, 2011
New York, New York
March 23, 2011
24
Report of Independent Registered Public Accounting Firm
To the Partners of
Fairfield Futures Fund L.P. II:
Fairfield Futures Fund L.P. II:
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 Fairfield Futures Fund L.P.
II (formerly known as Citigroup Fairfield Futures Fund L.P. II) 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.
25
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
March 26, 2009
New York, New York
March 26, 2009
26
Fairfield Futures
Fund L.P. II
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)
|
$ | 38,570,051 | $ | 44,070,980 | ||||
Cash (Note 3c)
|
201,347 | 103,564 | ||||||
Total assets
|
$ | 38,771,398 | $ | 44,174,544 | ||||
Liabilities and Partners Capital:
|
||||||||
Liabilities:
|
||||||||
Accrued expenses:
|
||||||||
Brokerage fees (Note 3c)
|
$ | 145,393 | $ | 165,655 | ||||
Management fees (Note 3b)
|
64,178 | 73,303 | ||||||
Administrative fees (Note 3a)
|
16,045 | 18,326 | ||||||
Professional fees
|
93,919 | 19,723 | ||||||
Other
|
25,028 | 7,471 | ||||||
Redemptions payable (Note 5)
|
469,933 | 524,840 | ||||||
Total liabilities
|
814,496 | 809,318 | ||||||
Partners Capital (Notes 1 and 5):
|
||||||||
General Partner, 546.3187 and 1,250.2679 unit equivalents
outstanding at December 31, 2010 and 2009, respectively
|
579,475 | 1,339,800 | ||||||
Special Limited Partner, 442.4015 Redeemable Units outstanding
at December 31, 2010 and 2009
|
469,251 | 474,082 | ||||||
Limited Partners, 34,796.4209 and 38,774.5548 Redeemable Units
outstanding at December 31, 2010 and 2009, respectively
|
36,908,176 | 41,551,344 | ||||||
Total partners capital
|
37,956,902 | 43,365,226 | ||||||
Total liabilities and partners capital
|
$ | 38,771,398 | $ | 44,174,544 | ||||
Net asset value per unit
|
$ | 1,060.69 | $ | 1,071.61 | ||||
See accompanying notes to financial statements.
27
Fairfield Futures
Fund L.P. II
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
|
$ | 2,812,195 | $ | 2,947,993 | $ | 18,751,076 | ||||||
Change in net unrealized gains (losses) on open contracts
allocated from Master
|
82,601 | 318,499 | 348,925 | |||||||||
Interest income allocated from Master
|
35,439 | 31,264 | 690,161 | |||||||||
Expenses allocated from Master
|
(140,315 | ) | (167,985 | ) | (301,466 | ) | ||||||
Total income (loss)
|
2,789,920 | 3,129,771 | 19,488,696 | |||||||||
Expenses:
|
||||||||||||
Brokerage fees (Note 3c)
|
1,833,646 | 2,041,895 | 2,989,992 | |||||||||
Management fees (Note 3b)
|
810,963 | 903,247 | 1,321,602 | |||||||||
Administrative fees (Note 3a)
|
202,742 | 225,812 | 330,403 | |||||||||
Professional fees
|
293,141 | 117,024 | 125,698 | |||||||||
Other
|
53,779 | 34,262 | 31,028 | |||||||||
Total expenses
|
3,194,271 | 3,322,240 | 4,798,723 | |||||||||
Net income (loss) before allocation to Special Limited Partner
|
(404,351 | ) | (192,469 | ) | 14,689,973 | |||||||
Allocation to Special Limited Partner (Note 3b)
|
| (64,276 | ) | (1,517,815 | ) | |||||||
Net income (loss) after allocation to Special Limited Partner
|
$ | (404,351 | ) | $ | (256,745 | ) | $ | 13,172,158 | ||||
Net income (loss) per unit (Note 6)
|
$ | (10.92 | ) | $ | (4.60 | ) | $ | 197.31 | ||||
Weighted average units outstanding
|
39,521.3928 | 42,526.3913 | 67,734.9400 | |||||||||
See accompanying notes to financial statements.
28
Fairfield Futures
Fund L.P. II
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
|
$ | 67,232,139 | $ | 87,890 | $ | 636,359 | $ | 67,956,388 | ||||||||
Subscriptions of 4,297.2083 Redeemable Units and 526.2272
General Partner unit equivalents
|
4,079,000 | | 500,000 | 4,579,000 | ||||||||||||
Allocation of 1,444.1797 Redeemable Units of Special Limited
Partner Interest
|
| 1,517,815 | | 1,517,815 | ||||||||||||
Redemptions of 34,524.8501 Redeemable Units
|
(34,423,789 | ) | | | (34,423,789 | ) | ||||||||||
Net income (loss)
|
12,906,809 | 56,157 | 209,192 | 13,172,158 | ||||||||||||
Partners Capital at December 31, 2008
|
49,794,159 | 1,661,862 | 1,345,551 | 52,801,572 | ||||||||||||
Subscriptions of 3,576.7524 Redeemable Units
|
3,766,000 | | | 3,766,000 | ||||||||||||
Allocation of 59.3707 Redeemable Units of Special Limited
Partner Interest
|
| 64,276 | | 64,276 | ||||||||||||
Redemptions of 11,070.4695 Redeemable Units and 1,161.1489
Redeemable Units of Special Limited Partner Interest
|
(11,759,877 | ) | (1,250,000 | ) | | (13,009,877 | ) | |||||||||
Net income (loss)
|
(248,938 | ) | (2,056 | ) | (5,751 | ) | (256,745 | ) | ||||||||
Partners Capital at December 31, 2009
|
41,551,344 | 474,082 | 1,339,800 | 43,365,226 | ||||||||||||
Subscriptions of 6,051.0375 Redeemable Units
|
6,125,500 | | | 6,125,500 | ||||||||||||
Redemptions of 10,029.1714 Redeemable Units and 703.9492 General
Partner unit equivalents
|
(10,429,396 | ) | | (700,077 | ) | (11,129,473 | ) | |||||||||
Net income (loss)
|
(339,272 | ) | (4,831 | ) | (60,248 | ) | (404,351 | ) | ||||||||
Partners Capital at December 31, 2010
|
$ | 36,908,176 | $ | 469,251 | $ | 579,475 | $ | 37,956,902 | ||||||||
Net asset value per unit:
|
2008:
|
$ | 1,076.21 | ||
2009:
|
$ | 1,071.61 | ||
2010:
|
$ | 1,060.69 | ||
See accompanying notes to financial statements.
29
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
1. | Partnership Organization: |
Fairfield Futures Fund L.P. II (the
Partnership) is a limited partnership organized on
December 18, 2003 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 futures contracts, options, swaps and
forward contracts. The sectors traded include currencies,
energy, grains, indices, U.S. and
non-U.S. interest
rates, livestock, lumber, metals and softs. The commodity
interests that are traded by the Partnership, through its
investment in the Master (as defined below) are volatile and
involve a high degree of market risk.
Between January 12, 2004 (commencement of the offering
period) and March 12, 2004, 28,601 redeemable units of
limited partnership interest (Redeemable Units) and
285 General Partner unit equivalents were sold at $1,000 per
unit. The proceeds of the initial offering were held in an
escrow account until March 15, 2004 at which time they were
remitted to the Partnership for trading. Effective
January 31, 2011, the Partnership will no longer offer
Redeemable Units for sale.
Ceres Managed Futures LLC, a Delaware limited liability company,
acts as the general partner (the General Partner)
and commodity pool operator of the Partnership. The General
Partner is wholly owned by Morgan Stanley Smith Barney Holdings
LLC (MSSB Holdings). 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 June 1, 2006, the Partnership allocated substantially
all of its capital to the CMF Graham Capital Master
Fund L.P. (the Master), a limited partnership
organized under the partnership laws of the State of New York.
The Partnership purchased 74,569.3761 units of the Master with
cash equal to $75,688,021. The Master was formed in order to
permit accounts managed by Graham Capital Management, L.P.
(Graham or the Advisor) using the
K4D-12.5 Program, the Advisors proprietary, systematic
trading program, to invest together in one trading vehicle. The
General Partner is also the general partner of the Master. In
addition, the Masters commodity broker is CGM. Individual
and pooled accounts currently managed by the Advisor, including
the Partnership, are permitted to be limited partners 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 financial statements of the Master, including the Condensed
Schedule of Investments, are contained elsewhere in this report
and should be read together with the Partnerships
financial statements.
At December 31, 2010 and 2009, the Partnership owned
approximately 22.8% and 25.7%, 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 (defined herein) in proportion to
the amount of Partnership interest owned by each except that no
limited partner shall be liable for obligations of the
Partnership in excess of their initial capital contribution and
profits, net of distributions.
The Partnership will be liquidated upon the first to occur of
the following: December 31, 2023; the net asset value of a
Redeemable Unit decreases to less than $400 per Redeemable Unit
as of a close of any business day; a decline in net assets after
trading commences to less than $1,000,000; or under certain
30
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
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 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).
31
Fairfield Futures
Fund L.P. II
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
|
$ | 38,570,051 | $ | | $ | 38,570,051 | $ | | ||||||||
Total fair value
|
$ | 38,570,051 | $ | | $ | 38,570,051 | $ | | ||||||||
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
|
$ | 44,070,980 | $ | | $ | 44,070,980 | $ | | ||||||||
Total fair value
|
$ | 44,070,980 | $ | | $ | 44,070,980 | $ | | ||||||||
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.
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 has 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. |
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 Partnership will pay
the General Partner a monthly administrative fee in return for
its services to the Partnership equal to 1/24 of 1% (0.5% per
year) of month-end Net Assets of the Partnership. Month-end Net
Assets,
32
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
for the purpose of calculating administrative fees are Net
Assets, as defined in the Limited Partnership Agreement, prior
to the reduction of the current months management fee, the
General Partners administrative fee, the profit share
allocation accrual and any redemptions or distributions as of
the end of such month. This fee may be increased or decreased at
the discretion of the General Partner.
b. | Management Agreement: |
The General Partner, on behalf of the Partnership, has entered
into a management agreement (the Management
Agreement) with the Advisor, a registered commodity
trading advisor. The Advisor is not affiliated with the General
Partner or CGM and is not responsible for the organization or
operation of the Partnership. The Partnership pays 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 management fee, the
General Partners administrative fee, the profit share
allocation accrual and any redemptions 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 (the
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 the New
Trading Profits, as defined in the Management Agreement, earned
by the Advisor 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 has entered into a customer agreement (the
Customer Agreement) which provides that the
Partnership will pay CGM a monthly brokerage fee equal to 9/24
of 1% (4.5% per year) of month-end Net Assets, allocated pro
rata from the Master, in lieu of brokerage fees on a per trade
basis. Month-end Net Assets, for the purpose of calculating
brokerage fees are Net Assets, as defined in the Limited
Partnership Agreement, prior to the reduction of the current
months brokerage fees, management fee, the General
Partners administrative fee, profit share allocation
accrual, other expenses and any redemptions or distributions as
of the end of such month. Brokerage fees will be paid for the
life of the Partnership, although the rate at which such fees
are paid may be changed. This fee may be increased or decreased
at anytime at CGMs discretion upon written notice to the
Partnership. CGM will pay a portion of its brokerage fees to
other properly registered selling agents and to financial
advisors who have sold Redeemable Units. All National Futures
Association fees as well as exchange, clearing, user, give-up
and floor brokerage fees (collectively the clearing
fees) will be borne by the Master and allocated to the
Partnership through its investment in the Master. The
Partnerships assets not held in the Masters account
at CGM are held in the Partnerships account at CGM. The
Partnerships cash is deposited by CGM in segregated bank
accounts to the extent required by Commodity Futures Trading
Commission regulations. CGM will pay the Partnership interest on
its allocable share of 80% of the average daily equity
maintained in cash in the Masters brokerage account during
each month at a 30-day U.S. Treasury bill rate determined
weekly by CGM based on the average noncompetitive 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.
33
Fairfield Futures
Fund L.P. II
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 gives the Partnership and the Master,
respectively, the legal right to net unrealized gains and losses
on open futures and forward contracts. The Master nets, for
financial reporting purposes, the unrealized gains and losses on
open futures and forward contracts on the Statements of
Financial Condition.
Brokerage fees are calculated as a percentage of the
Partnerships adjusted net asset value on the last day of
each month and are affected by trading performance, additions
and redemptions.
For disclosures regarding the Masters trading activities,
see Note 4, Trading Activities, on the attached
Masters financial statements.
5. | Subscriptions, Distributions and Redemptions: |
Subscriptions are accepted monthly from investors and they
become limited partners on the first day of the month after
their subscription is processed. 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 their Redeemable
Units at their net asset value per Redeemable Unit as of the
last day of any 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)*
|
$ | 23.11 | $ | 26.62 | $ | 239.00 | ||||||
Interest income
|
0.89 | 0.74 | 9.73 | |||||||||
Expenses **
|
(34.92 | ) | (31.96 | ) | (51.42 | ) | ||||||
Increase (decrease) for the year
|
(10.92 | ) | (4.60 | ) | 197.31 | |||||||
Net asset value per unit, beginning of year
|
1,071.61 | 1,076.21 | 878.90 | |||||||||
Net asset value per unit, end of year
|
$ | 1,060.69 | $ | 1,071.61 | $ | 1,076.21 | ||||||
* | Includes Partnership brokerage fees and expenses allocated from the Master. | |
** | Excludes Partnership brokerage fees and expenses allocated from the Master. |
34
Fairfield Futures
Fund L.P. II
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***
|
(8.3 | )% | (7.7 | )% | (6.9 | )% | ||||||
Operating expenses
|
8.4 | % | 7.8 | % | 8.0 | % | ||||||
Allocation to Special Limited Partner
|
| % | 0.1 | % | 2.4 | % | ||||||
Total expenses
|
8.4 | % | 7.9 | % | 10.4 | % | ||||||
Total return:
|
||||||||||||
Total return before allocation to Special Limited Partner
|
(1.0 | )% | (0.3 | )% | 26.0 | % | ||||||
Allocation to Special Limited Partner
|
| % | (0.1 | )% | (3.5 | )% | ||||||
Total return after allocation to Special Limited Partner
|
(1.0 | )% | (0.4 | )% | 22.5 | % | ||||||
*** | 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 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.
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
35
Fairfield Futures
Fund L.P. II
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
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 have 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 General Partner 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 to
statistically analyze actual trading results with risk-adjusted
performance indicators and correlation statistics. In addition,
on-line monitoring systems provide account analysis of futures,
forwards and options positions by sector, margin requirements,
gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the
inception date. However, due to the nature of the
Partnerships/Masters business, these instruments may
not be held to maturity.
36
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 | For the period from | |||||||||||||
October 1, 2010 to | July 1, 2010 to | from April 1, 2010 | January 1, 2010 to | |||||||||||||
December 31, 2010 | September 30, 2010 | to June 30, 2010 | March 31, 2010 | |||||||||||||
Net realized and
unrealized trading
gains (losses),
expenses and
interest income
allocated from
Master, net of
brokerage fees |
$ | 1,905,061 | $ | 942,073 | $ | (253,563 | ) | $ | (1,637,297 | ) | ||||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | 1,569,452 | $ | 556,262 | $ | (599,682 | ) | $ | (1,930,383 | ) | ||||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | 1,569,452 | $ | 556,262 | $ | (599,682 | ) | $ | (1,930,383 | ) | ||||||
Increase (decrease)
in net asset value
per unit |
$ | 38.08 | $ | 13.17 | $ | (15.24 | ) | $ | (46.93 | ) |
For the period from | For the period from | For the period | For the period from | |||||||||||||
October 1, 2009 to | July 1, 2009 to | from April 1, 2009 | January 1, 2009 to | |||||||||||||
December 31, 2009 | September 30, 2009 | to June 30, 2009 | March 31, 2009 | |||||||||||||
Net realized and
unrealized trading
gains (losses),
expenses and
interest income
allocated from
Master, net of
brokerage fees |
$ | (96,416 | ) | $ | 3,219,232 | $ | (1,078,976 | ) | $ | (955,964 | ) | |||||
Net income (loss)
before allocation
to Special Limited
Partner |
$ | (425,338 | ) | $ | 2,912,328 | $ | (1,381,204 | ) | $ | (1,298,255 | ) | |||||
Net income (loss)
after allocation to
Special Limited
Partner |
$ | (425,338 | ) | $ | 2,848,052 | $ | (1,381,204 | ) | $ | (1,298,255 | ) | |||||
Increase (decrease)
in net asset value
per unit |
$ | (11.02 | ) | $ | 69.79 | $ | (33.39 | ) | $ | (29.98 | ) |
37
To the
Limited Partners of
CMF Graham Capital Master Fund L.P.
CMF Graham Capital Master 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, CMF Graham Capital Master 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
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of
CMF Graham Capital Master Fund L.P.:
CMF Graham Capital Master Fund L.P.:
We have audited the accompanying statements of financial condition of CMF Graham
Capital Master Fund L.P. (the Partnership), including the condensed schedules of
investments, 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 CMF Graham Capital Master 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
March 23, 2011
New York, New York
March 23, 2011
39
Report of Independent Auditors
To the
Partners of
CMF Graham Capital Master Fund L.P.:
CMF Graham Capital Master 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 CMF Graham Capital
Master 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. 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
March 26, 2009
New York, New York
March 26, 2009
40
CMF
Graham Capital Master Fund L.P.
Statements of Financial Condition
December 31, 2010 and 2009
Statements of Financial Condition
December 31, 2010 and 2009
2010 | 2009 | |||||||
Assets:
|
||||||||
Equity in commodity futures trading account:
|
||||||||
Cash (Note 3c)
|
$ | 151,476,359 | $ | 153,765,196 | ||||
Cash margin (Note 3c)
|
14,248,524 | 15,503,558 | ||||||
Net unrealized appreciation on open futures contracts
|
1,429,574 | 406,652 | ||||||
Net unrealized appreciation on open forward contracts
|
1,819,046 | 1,562,793 | ||||||
Total assets
|
$ | 168,973,503 | $ | 171,238,199 | ||||
Liabilities and Partners Capital:
|
||||||||
Liabilities:
|
||||||||
Accrued expenses:
|
||||||||
Professional fees
|
$ | 48,832 | $ | 25,939 | ||||
Total liabilities
|
48,832 | 25,939 | ||||||
Partners Capital:
|
||||||||
General Partner, 0.0000 unit equivalents at December 31,
2010 and 2009
|
| | ||||||
Limited Partners, 96,248.2420 and 104,371.4673 Redeemable Units
outstanding at December 31, 2010 and 2009, respectively
|
168,924,671 | 171,212,260 | ||||||
Total liabilities and partners capital
|
$ | 168,973,503 | $ | 171,238,199 | ||||
Net asset value per unit
|
$ | 1,755.09 | $ | 1,640.41 | ||||
See accompanying notes to financial statements.
41
CMF
Graham Capital Master Fund L.P.
Condensed Schedule of Investments
December 31, 2010
Condensed Schedule of Investments
December 31, 2010
Notional ($)/ |
||||||||||||
Number |
% of Partners |
|||||||||||
of Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased
|
||||||||||||
Currencies
|
228 | $ | 359,313 | 0.21 | % | |||||||
Energy
|
283 | 315,626 | 0.19 | |||||||||
Grains
|
266 | 558,739 | 0.33 | |||||||||
Indices
|
1,248 | (459,198 | ) | (0.27 | ) | |||||||
Interest Rates U.S.
|
504 | 67,408 | 0.04 | |||||||||
Interest Rates
Non-U.S.
|
203 | 53,235 | 0.03 | |||||||||
Livestock
|
40 | 9,485 | 0.00 | * | ||||||||
Metals
|
116 | 778,969 | 0.46 | |||||||||
Softs
|
73 | 266,456 | 0.16 | |||||||||
Total futures contracts purchased
|
1,950,033 | 1.15 | ||||||||||
Futures Contracts Sold
|
||||||||||||
Currencies
|
77 | 29,787 | 0.02 | |||||||||
Energy
|
25 | (61,340 | ) | (0.04 | ) | |||||||
Grains
|
10 | (33,100 | ) | (0.02 | ) | |||||||
Indices
|
56 | 15,505 | 0.01 | |||||||||
Interest Rates U.S.
|
308 | (68,192 | ) | (0.04 | ) | |||||||
Interest Rates
Non-U.S.
|
1,570 | (394,024 | ) | (0.23 | ) | |||||||
Metals
|
1 | (7,875 | ) | (0.01 | ) | |||||||
Softs
|
5 | (1,220 | ) | (0.00 | )* | |||||||
Total futures contracts sold
|
(520,459 | ) | (0.31 | ) | ||||||||
Unrealized Appreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 437,368,583 | 6,906,040 | 4.09 | ||||||||
Metals
|
91 | 653,412 | 0.39 | |||||||||
Total unrealized appreciation on open forward contracts
|
7,559,452 | 4.48 | ||||||||||
Unrealized Depreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 362,272,604 | (5,591,385 | ) | (3.31 | ) | ||||||
Metals
|
23 | (149,021 | ) | (0.09 | ) | |||||||
Total unrealized depreciation on open forward contracts
|
(5,740,406 | ) | (3.40 | ) | ||||||||
Total fair value
|
$ | 3,248,620 | 1.92 | % | ||||||||
*Due to rounding
See accompanying notes to financial statements.
42
CMF
Graham Capital Master Fund L.P.
Condensed Schedule of Investments
December 31, 2009
Condensed Schedule of Investments
December 31, 2009
Notional ($)/ |
||||||||||||
Number of |
% of Partners |
|||||||||||
Contracts | Fair Value | Capital | ||||||||||
Futures Contracts Purchased
|
||||||||||||
Currencies
|
2 | $ | 360 | 0.00 | %* | |||||||
Energy
|
449 | 242,192 | 0.14 | |||||||||
Grains
|
286 | 34,342 | 0.02 | |||||||||
Indices
|
1,065 | 633,603 | 0.37 | |||||||||
Interest Rates U.S.
|
233 | (94,262 | ) | (0.06 | ) | |||||||
Interest Rates
Non-U.S.
|
1,523 | (996,822 | ) | (0.58 | ) | |||||||
Livestock
|
74 | 20,482 | 0.01 | |||||||||
Metals
|
78 | (100,473 | ) | (0.06 | ) | |||||||
Softs
|
589 | 556,321 | 0.33 | |||||||||
Total futures contracts purchased
|
295,743 | 0.17 | ||||||||||
Futures Contracts Sold
|
||||||||||||
Currencies
|
69 | 11,480 | 0.01 | |||||||||
Energy
|
308 | (40,301 | ) | (0.02 | ) | |||||||
Grains
|
275 | 57,491 | 0.03 | |||||||||
Indices
|
7 | 6,437 | 0.00 | * | ||||||||
Interest Rates U.S.
|
50 | (406 | ) | (0.00 | )* | |||||||
Interest Rates
Non-U.S.
|
451 | 57,808 | 0.03 | |||||||||
Metals
|
10 | 18,400 | 0.01 | |||||||||
Total futures contracts sold
|
110,909 | 0.06 | ||||||||||
Unrealized Appreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 550,199,867 | 7,739,782 | 4.52 | ||||||||
Metals
|
429 | 2,324,147 | 1.36 | |||||||||
Total unrealized appreciation on open forward contracts
|
10,063,929 | 5.88 | ||||||||||
Unrealized Depreciation on Open Forward Contracts
|
||||||||||||
Currencies
|
$ | 551,949,465 | (7,486,471 | ) | (4.37 | ) | ||||||
Metals
|
285 | (1,014,665 | ) | (0.59 | ) | |||||||
Total unrealized depreciation on open forward contracts
|
(8,501,136 | ) | (4.96 | ) | ||||||||
Total fair value
|
$ | 1,969,445 | 1.15 | % | ||||||||
* Due to rounding.
See accompanying notes to financial statements.
43
CMF
Graham Capital Master 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 gains (loss) on trading of commodity interests:
|
||||||||||||
Net realized gains (losses) on closed contracts
|
$ | 11,520,692 | $ | 11,381,456 | $ | 61,878,532 | ||||||
Change in net unrealized gains (losses) on open contracts
|
1,279,175 | 1,086,609 | 1,251,182 | |||||||||
Gain (loss) from trading, net
|
12,799,867 | 12,468,065 | 63,129,714 | |||||||||
Interest income
|
150,635 | 125,256 | 2,202,621 | |||||||||
Total income (loss)
|
12,950,502 | 12,593,321 | 65,332,335 | |||||||||
Expenses:
|
||||||||||||
Clearing fees
|
490,941 | 614,452 | 940,378 | |||||||||
Professional fees
|
104,216 | 46,648 | 30,056 | |||||||||
Total expenses
|
595,157 | 661,100 | 970,434 | |||||||||
Net income (loss)
|
12,355,345 | 11,932,221 | $ | 64,361,901 | ||||||||
Net income (loss) per unit (Note 6)
|
$ | 116.10 | $ | 112.10 | $ | 396.07 | ||||||
Weighted average units outstanding
|
108,090.1761 | 118,814.5765 | 167,979.9211 | |||||||||
See accompanying notes to financial statements.
44
CMF
Graham Capital Master 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
Partners |
||||
Capital | ||||
Partners Capital at December 31, 2007
|
$ | 213,594,387 | ||
Net income (loss)
|
64,361,901 | |||
Subscriptions of 3,998.1810 Redeemable Units
|
5,096,496 | |||
Redemptions of 43,548.1379 Redeemable Units
|
(56,359,221 | ) | ||
Distribution of interest income to feeder funds
|
(2,202,621 | ) | ||
Partners Capital at December 31, 2008
|
224,490,942 | |||
Net income (loss)
|
11,932,221 | |||
Subscriptions of 7,455.9216 Redeemable Units
|
11,912,177 | |||
Redemptions of 49,869.3195 Redeemable Units
|
(76,997,824 | ) | ||
Distribution of interest income to feeder funds
|
(125,256 | ) | ||
Partners Capital at December 31, 2009
|
171,212,260 | |||
Net income (loss)
|
12,355,345 | |||
Subscriptions of 25,177.9622 Redeemable Units
|
39,272,697 | |||
Redemptions of 33,301.1875 Redeemable Units
|
(53,764,996 | ) | ||
Distribution of interest income to feeder funds
|
(150,635 | ) | ||
Partners Capital at December 31, 2010
|
$ | 168,924,671 | ||
Net asset value per unit:
|
2008:
|
$ | 1,529.39 | ||
2009:
|
$ | 1,640.41 | ||
2010:
|
$ | 1,755.09 | ||
See accompanying notes to financial statements.
45
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
1. | Partnership Organization: |
CMF Graham Capital Master Fund L.P. (the
Master) is a limited partnership organized under the
partnership laws of the State of New York to engage in the
speculative trading of a diversified portfolio of commodity
interests including futures contracts, options, swaps and
forward contracts. The sectors traded include currencies,
energy, grains, indices, U.S. and non-U.S. interest rates,
livestock, metals and softs. 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 redeemable units of limited partnership interest
(Redeemable Units).
Ceres Managed Futures LLC, a Delaware limited liability company,
acts as the general partner (the General Partner)
and commodity pool operator of the Master. 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 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 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 Master are made by the Advisor (defined below).
On April 1, 2006 (commencement of trading operations),
Diversified 2000 Futures Fund L.P. (Diversified
2000), Diversified Multi-Advisor Futures Fund L.P.
(Diversified I) and Diversified Multi-Advisor
Futures Fund L.P. II (Diversified II) each
allocated a portion of their capital to the Master. Diversified
2000 purchased 41,952.2380 Redeemable Units with cash equal to
$41,952,238. Diversified I purchased 14,741.1555 Redeemable
Units with cash equal to $14,741,156. Diversified II
purchased 11,192.9908 Redeemable Units with cash equal to
$11,192,991. On June 1, 2006, Fairfield Futures
Fund L.P. II (Fairfield II) allocated
substantially all of its capital and Tactical Diversified
Futures Fund L.P. (Tactical Diversified)
allocated a portion of its capital to the Master.
Fairfield II purchased 74,569.3761 Redeemable Units with
cash equal to $75,688,021. Tactical Diversified purchased
101,486.0491 Redeemable Units with cash equal to $103,008,482.
The Master was formed to permit commodity pools managed now or
in the future by Graham Capital Management, L.P. (the
Advisor), using the K4D 12.5 program,
the Advisors proprietary, systematic trading program, to
invest together in one trading vehicle.
The Master operates under a structure where its investors
consist of Diversified 2000, Diversified I, Diversified II,
Fairfield II and Tactical Diversified (each a
Feeder, collectively the Funds), each of
which owned approximately 7.2%, 4.3%, 3.2%, 22.8% and 62.5%
investments in the Master at December 31, 2010,
respectively. Diversified 2000, Diversified I, Diversified
II, Fairfield II and Tactical Diversified owned
approximately 13.2%, 5.4%, 4.6%, 25.7% and 51.1% investments in
the Master at December 31, 2009, respectively.
The Master will be liquidated upon the first to occur of the
following: December 31, 2025; or under certain other
circumstances as defined in the Limited Partnership Agreement of
the Master (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 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. |
46
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
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. Management has
concluded that based on available information in the
marketplace, the Masters Level 1 assets and
liabilities are actively traded.
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 Masters Level 2
assets and liabilities.
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 that
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 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.
Quoted Prices in |
||||||||||||||||
Active Markets for |
Significant Other |
Significant |
||||||||||||||
Identical Assets |
Observable Inputs |
Unobservable Inputs |
||||||||||||||
12/31/2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 1,429,574 | $ | 1,429,574 | $ | | $ | | ||||||||
Forwards
|
1,819,046 | 504,391 | 1,314,655 | | ||||||||||||
Total assets
|
3,248,620 | 1,933,965 | 1,314,655 | | ||||||||||||
Total fair value
|
$ | 3,248,620 | $ | 1,933,965 | $ | 1,314,655 | $ | | ||||||||
47
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
Quoted Prices in |
||||||||||||||||
Active Markets for |
Significant Other |
Significant |
||||||||||||||
Identical Assets |
Observable Inputs |
Unobservable Inputs |
||||||||||||||
12/31/2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets
|
||||||||||||||||
Futures
|
$ | 406,652 | $ | 406,652 | $ | | $ | | ||||||||
Forwards
|
1,562,793 | 1,309,482 | 253,311 | | ||||||||||||
Total assets
|
1,969,445 | 1,716,134 | 253,311 | | ||||||||||||
Total fair value
|
$ | 1,969,445 | $ | 1,716,134 | $ | 253,311 | $ | | ||||||||
d. | Futures Contracts. The Master trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as 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. | |
e. | Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Foreign currency contracts are valued daily, and the Masters net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Realized gains (losses) and changes in unrealized gains (losses) on foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses. |
The Master does not isolate that portion of the results of
operations arising from the effect of changes in foreign
exchange rates on investments from fluctuations from changes in
market prices of investments held. Such fluctuations are
included in net gain (loss) on investments in the Statements of
Income and Expenses.
f. | London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (LME) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. 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. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, 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 LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Realized gains (losses) and changes in unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses. |
48
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
g. | 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. | |
h. | Income Taxes. Income taxes have not been provided as each partner 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 General
Partner 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.
i. | 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 has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements. | |
j. | 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 Partnership Agreement: |
The General Partner administers the business and affairs of the
Master including selecting one or more advisors to make trading
decisions for the Master.
b. | Management Agreement: |
The General Partner, 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 General Partner 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 are 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 exchange, clearing, user,
give-up,
floor brokerage and National Futures Association fees
(collectively the clearing fees) are borne by the
Master. All other fees including CGMs direct brokerage
fees shall be borne by the Funds. All of the Masters
assets are deposited in the Masters account at CGM. 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
49
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
$14,248,524 and $15,503,558, respectively. The Customer
Agreement may be terminated upon notice by either party.
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 interests. 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 forward contracts. The Master nets, for
financial reporting purposes, the unrealized gains and losses on
open futures and forward 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 contracts traded
for the years ended December 31, 2010 and 2009 based on a
monthly calculation, were 6,576 and 6,643, respectively. The
average number of metals forward contracts traded for the years
ended December 31, 2010 and 2009 based on a monthly
calculation, were 326 and 487, respectively. The average
notional values of currency forward contracts for the years
ended December 31, 2010 and 2009 based on a monthly
calculation, were $904,929,087 and $1,640,220,199, respectively.
In prior year, the average contracts and average notional values
were based on a quarterly and not a monthly calculation. The
amounts for the year ended December 31, 2009 have been
revised accordingly.
50
CMF
Graham Capital Master Fund L.P.
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 forward contracts as
separate assets and liabilities as of December 31, 2010 and
2009.
December 31, 2010 | ||||
Assets
|
||||
Futures Contracts
|
||||
Currencies
|
$ | 406,727 | ||
Energy
|
333,430 | |||
Grains
|
560,664 | |||
Indices
|
184,453 | |||
Interest Rates U.S.
|
145,320 | |||
Interest Rates
Non-U.S.
|
71,168 | |||
Livestock
|
9,485 | |||
Metals
|
778,969 | |||
Softs
|
297,786 | |||
Total unrealized appreciation on open futures contracts
|
$ | 2,788,002 | ||
Liabilities
|
||||
Futures Contracts
|
||||
Currencies
|
$ | (17,627 | ) | |
Energy
|
(79,144 | ) | ||
Grains
|
(35,025 | ) | ||
Indices
|
(628,146 | ) | ||
Interest Rates U.S.
|
(146,104 | ) | ||
Interest Rates
Non-U.S.
|
(411,957 | ) | ||
Metals
|
(7,875 | ) | ||
Softs
|
(32,550 | ) | ||
Total unrealized depreciation on open futures contracts
|
$ | (1,358,428 | ) | |
Net unrealized appreciation on open futures contracts
|
$ | 1,429,574 | * | |
Assets
|
||||
Forward Contracts
|
||||
Currencies
|
$ | 6,906,040 | ||
Metals
|
653,412 | |||
Total unrealized appreciation on open forward contracts
|
$ | 7,559,452 | ||
Liabilities
|
||||
Forward Contracts
|
||||
Currencies
|
$ | (5,591,385 | ) | |
Metals
|
(149,021 | ) | ||
Total unrealized depreciation on open forward contracts
|
$ | (5,740,406 | ) | |
Net unrealized appreciation on open forward contracts
|
$ | 1,819,046 | ** | |
* | This amount is in Net unrealized appreciation on open futures contracts on the Statements of Financial Condition. | |
** | This amount is in Net unrealized appreciation on open forward contracts on the Statements of Financial Condition. |
51
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
December 31, 2009 | ||||
Assets
|
||||
Futures Contracts
|
||||
Currencies
|
$ | 29,498 | ||
Energy
|
357,695 | |||
Grains
|
223,296 | |||
Indices
|
871,966 | |||
Interest Rates U.S.
|
10,273 | |||
Interest Rates
Non-U.S.
|
169,828 | |||
Livestock
|
20,482 | |||
Metals
|
93,687 | |||
Softs
|
810,673 | |||
Total unrealized appreciation on open futures contracts
|
$ | 2,587,398 | ||
Liabilities
|
||||
Futures Contracts
|
||||
Currencies
|
$ | (17,658 | ) | |
Energy
|
(155,804 | ) | ||
Grains
|
(131,463 | ) | ||
Indices
|
(231,926 | ) | ||
Interest Rates U.S.
|
(104,941 | ) | ||
Interest Rates
Non-U.S.
|
(1,108,842 | ) | ||
Metals
|
(175,760 | ) | ||
Softs
|
(254,352 | ) | ||
Total unrealized depreciation on open futures contracts
|
$ | (2,180,746 | ) | |
Net unrealized appreciation on open futures contracts
|
$ | 406,652 | * | |
Assets
|
||||
Forward Contracts
|
||||
Currencies
|
$ | 7,739,782 | ||
Metals
|
2,324,147 | |||
Total unrealized appreciation on open forward contracts
|
$ | 10,063,929 | ||
Liabilities
|
||||
Forward Contracts
|
||||
Currencies
|
$ | (7,486,471 | ) | |
Metals
|
(1,014,665 | ) | ||
Total unrealized depreciation on open forward contracts
|
$ | (8,501,136 | ) | |
Net unrealized appreciation on open forward contracts
|
$ | 1,562,793 | ** | |
* | This amount is in Net unrealized appreciation on open futures contracts on the Statements of Financial Condition. | |
** | This amount is in Net unrealized appreciation on open forward contracts on the Statements of Financial Condition. |
52
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
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
|
$ | 4,170,018 | $ | 3,111,674 | ||||
Energy
|
(4,033,664 | ) | (3,297,102 | ) | ||||
Grains
|
462,563 | (1,460,464 | ) | |||||
Indices
|
(3,169,520 | ) | 15,480,005 | |||||
Interest Rates U.S.
|
5,687,697 | (3,698,764 | ) | |||||
Interest Rates
Non-U.S.
|
6,009,190 | (2,767,757 | ) | |||||
Livestock
|
317,837 | 21,968 | ||||||
Metals
|
3,862,111 | 3,246,372 | ||||||
Softs
|
(506,365 | ) | 1,832,133 | |||||
Total
|
$ | 12,799,867 | *** | $ | 12,468,065 | *** | ||
*** | 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 limited partners on the first day of the month after
their subscription is processed. A limited partner 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 Redeemable Unit as of the end of any day (the
Redemption Date) after a request for redemption
has been made to the General Partner at least 3 days in
advance of the Redemption Date. The Redeemable Units are
classified as a liability when the limited partner elects to
redeem and informs the Master.
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)*
|
$ | 115.67 | $ | 111.45 | $ | 383.27 | ||||||
Interest income
|
1.42 | 1.08 | 12.97 | |||||||||
Expenses**
|
(0.99 | ) | (0.43 | ) | (0.17 | ) | ||||||
Increase (decrease) for the year
|
116.10 | 112.10 | 396.07 | |||||||||
Distribution of interest income to feeder funds
|
(1.42 | ) | (1.08 | ) | (12.97 | ) | ||||||
Net asset value per unit, beginning of year
|
1,640.41 | 1,529.39 | 1,146.29 | |||||||||
Net asset value per unit, end of year
|
$ | 1,755.09 | $ | 1,640.41 | $ | 1,529.39 | ||||||
* | Includes clearing fees. | |
** | Excludes clearing fees. |
2010 | 2009 | 2008 | ||||||||||
Ratios to average net assets:
|
||||||||||||
Net investment income (loss)***
|
(0.3 | )% | (0.3 | )% | 0.6 | % | ||||||
Operating expenses
|
0.4 | % | 0.4 | % | 0.4 | % | ||||||
Total return
|
7.1 | 7.3 | % | 34.6 | % | |||||||
*** | Interest income less total expenses. |
53
CMF
Graham Capital Master Fund L.P.
Notes to Financial Statements
December 31, 2010
Notes to Financial Statements
December 31, 2010
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 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 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 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 General Partner 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 General
Partner to statistically analyze actual trading results with
risk-adjusted
performance indicators and correlation statistics. In addition,
on-line monitoring systems provide account analysis of futures,
forwards and options positions by sector, margin requirements,
gain and loss transactions and collateral positions.
The majority of these instruments mature within one year of the
inception date. However, due to the nature of the Masters
business, these instruments may not be held to maturity.
54
Selected unaudited quarterly financial data for Graham 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 |
$ | 9,768,625 | $ | 5,838,495 | $ | 878,231 | $ | (4,025,790 | ) | |||||||
Net income (loss) |
$ | 9,749,856 | $ | 5,826,322 | $ | 821,669 | $ | (4,042,502 | ) | |||||||
Increase (decrease)
in net asset value per
unit |
$ | 96.03 | $ | 54.96 | $ | 7.64 | $ | (42.53 | ) | |||||||
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 |
$ | 1,522,383 | $ | 14,250,196 | $ | (2,335,820 | ) | $ | (1,457,890 | ) | ||||||
Net income (loss) |
$ | 1,502,514 | $ | 14,240,193 | $ | (2,344,541 | ) | $ | (1,465,945 | ) | ||||||
Increase (decrease) in net asset value per unit |
$ | 13.91 | $ | 135.03 | $ | (21.43 | ) | $ | (15.41 | ) |
55
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 SECs 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 General Partners 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.
56
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 Advisor.
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
57
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
58
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.
CGM, an affiliate of the General Partner, is the commodity broker for the Partnership and receives
brokerage fees for such services, as described under Item 1. Business. Brokerage fees and
clearing fees of $1,833,646 were earned by CGM for the year ended December 31, 2010. Management
fees of $810,963 were earned by the Advisor for the year ended December 31, 2010. Administrative
fees of $202,742 were earned by the General Partner for the year ended December 31, 2010. There was
no profit share allocation to the Special Limited Partner 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 five percent (5%) of the Redeemable
Units outstanding.
59
(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 | 546.3187 | 1.5 | % |
(c) Changes in control. None.
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.
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 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 |
$ | 50,500 | N/A | |||||
2009 |
$ | 54,200 | (1) | $ | 15,300 | (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 |
$ | 15,750 | ||
2009 |
$ | 15,000 |
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
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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 | Limited Partnership Agreement (filed as Exhibit 3.2 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference). | ||
3.2 | Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference). |
(a) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of New York, dated September 21, 2005 (filed as Exhibit 3.2A on Form 10-Q filed on November 16, 2009 and incorporated herein by reference). | ||
(b) | Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of New York, dated September 19, 2008 (filed as Exhibit 3.2B on 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 New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference). | ||
(d) | Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of New York, dated June 29, 2010 (filed as Exhibit 3.2(d) to the Form 8-K filed on July 2, 2010 and incorporated herein by reference). |
10.1 | Customer Agreement between the Partnership and CGM (filed as Exhibit 10.2 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference). | ||
10.2 | Form of Subscription Agreement (filed as Exhibit 10.4 to the Partnerships Form 10 filed on April 29, 2005 and incorporated herein by reference). | ||
10.3 | Agency Agreement among the Partnership, the General Partner and CGM (filed as Exhibit 10.3 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference). |
(a) | Joinder Agreement among the Partnership, the General Partner, CGM 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 | Management Agreement among the Partnership, the General Partner and Graham (filed as Exhibit 10.1 to the Registration Statement on Form 10 filed on April 29, 2005 and incorporated herein by reference). |
(a) | Letter extending the Management Agreement between the General Partner and Graham Capital Management L.P. for 2010 (filed herein). |
61
16.1 | Letter dated July 23, 2009 from PricewaterhouseCoopers LLP regarding Change in Certifying Accountant (filed as Exhibit 16.1 to the Form 8-K filed on July 24, 2009) | ||
16.2 | Letter dated June 26, 2008 from KPMG LLP regarding Change in Certifying Accountant (filed as Exhibit 16.1 to the Form 8-K filed on July 1, 2008) |
The exhibits required to be filed by Item 601 of regulation S-K are incorporated herein by reference. | ||
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director). | ||
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director). | ||
Exhibit 32.1 Section 1350 Certification (Certification of President and Director). | ||
Exhibit 32.2 Section 1350 Certification (Certification of Chief Financial Officer and Director). |
62
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.
Fairfield Futures Fund L.P. II
By: | Ceres Managed Futures LLC | |||
(General Partner) | ||||
By: | /s/ Walter Davis | |||
Walter Davis | ||||
President & Director | ||||
Date: March 31, 2010 | ||||
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
|
Ceres Managed Futures LLC | Ceres Managed Futures LLC | ||
Date:
March 31, 2010
|
Date: March 31, 2010 | Date: March 31, 2010 | ||
/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, 2010 |
Ceres Managed Futures LLC Date: March 31, 2010 |
Ceres Managed Futures LLC Date: March 31, 2010 |
||
/s/ Douglas J. Ketterer
|
/s/ Harry Handler
|
|||
Douglas J. Ketterer
|
Harry Handler | |||
Director
|
Director | |||
Ceres Managed Futures LLC
|
Ceres Managed Futures LLC | |||
Date:
March 31, 2010
|
Date: March 31, 2010 |
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.
63