Attached files
file | filename |
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EX-31.1 - EX-31.1 - Ceres Tactical Macro L.P. | y04782exv31w1.htm |
EX-32.2 - EX-32.2 - Ceres Tactical Macro L.P. | y04782exv32w2.htm |
EX-32.1 - EX-32.1 - Ceres Tactical Macro L.P. | y04782exv32w1.htm |
EX-31.2 - EX-31.2 - Ceres Tactical Macro L.P. | y04782exv31w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 000-54284
BHM DISCRETIONARY FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
Delaware | 27-3371689 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
c/o Ceres Managed Futures LLC
522 Fifth Avenue - 14th Floor
New York, New York 10036
(Address of principal executive offices) (Zip Code)
(212) 296-1999
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer X | Smaller reporting company |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes No X
BHM DISCRETIONARY FUTURES FUND L.P.
FORM 10-Q
INDEX
Page | ||||
Number | ||||
3 | ||||
4 | ||||
5-19 | ||||
20-21 | ||||
22-23 | ||||
24 | ||||
25-26 | ||||
Exhibit 31.1 Certification |
||||
Exhibit 31.2 Certification |
||||
Exhibit 32.1 Certification |
||||
Exhibit 32.2 Certification |
2
PART I
Item 1. Financial Statements
BHM Discretionary Futures Fund L.P.
Statements of Financial Condition
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Assets: |
||||||||
Investment in Trading Company, at fair value |
$ | 135,982,810 | $ | 57,170,009 | ||||
Subscriptions receivable |
| 32,140,809 | ||||||
Total assets |
$ | 135,982,810 | $ | 89,310,818 | ||||
Liabilities and Partners Capital |
||||||||
Liabilities: |
||||||||
Payable to Trading Company |
$ | | $ | 31,929,508 | ||||
Accrued expenses: |
||||||||
Organizational costs due to MS&Co. |
56,528 | 80,756 | ||||||
Redemptions payable |
186,324 | | ||||||
Total liabilities |
242,852 | 32,010,264 | ||||||
Partners Capital: |
||||||||
General Partner, Class A, (1,281.298 and 562.789 units at March 31, 2011
and December 31, 2010, respectively) |
1,392,976 | 606,777 | ||||||
General Partner, Class D, (0 units at March 31, 2011 and December 31, 2010) |
| | ||||||
Limited Partners, Class A, (117,122.581 and 52,488.504 units at March 31,
2011 and December 31, 2010, respectively) |
127,330,510 | 56,693,777 | ||||||
Limited Partners, Class D, (7,127.494 and 0 units at March 31, 2011 and
December 31, 2010, respectively) |
7,016,472 | | ||||||
Total Partners Capital |
135,739,958 | 57,300,554 | ||||||
Total liabilities and Partners Capital |
$ | 135,982,810 | $ | 89,310,818 | ||||
Class A, net asset value per redeemable unit |
$ | 1,087.16 | $ | 1,078.16 | ||||
Class D, net asset value per redeemable unit |
$ | 983.71 | $ | | ||||
The accompanying notes
are an integral part of these financial statements.
3
BHM Discretionary Futures Fund L.P.
Statement of Income and Expenses and Changes in Partners Capital
(Unaudited)
Three Months Ended | ||||
March 31, 2011 | ||||
Investment income: |
||||
Interest income allocated from Trading Company |
$ | 383 | ||
Expenses: |
||||
Expenses allocated from Trading Company |
548,614 | |||
Ongoing placement agent fees |
708,119 | |||
Administrative fees |
244,990 | |||
Other |
61,247 | |||
Total expenses |
1,562,970 | |||
Net investment income (loss) |
(1,562,587 | ) | ||
Trading Results: |
||||
Net realized gains on closed contracts allocated from Trading Company |
8,002,590 | |||
Change in net unrealized gains (losses) on open contracts allocated
from Trading Company |
(7,924,007 | ) | ||
Total trading results allocated from Trading Company |
78,583 | |||
Net income (loss) |
(1,484,004 | ) | ||
Net income (loss) allocation from Trading Company |
||||
Class A |
$ | (1,372,982 | ) | |
Class D |
$ | (111,022 | ) | |
Net asset value per redeemable unit |
||||
Class A |
$ | 1,087.16 | ||
Class D |
$ | 983.71 | ||
Net income (loss) per redeemable unit* |
||||
Class A |
$ | 9.00 | ||
Class D |
$ | (16.29 | ) | |
Weighted average units outstanding |
||||
Class A |
84,197.378 | |||
Class D |
7,127.494 | |||
* | Based on change in net asset value per unit. |
Class A | Class D | Total | ||||||||||
Partners Capital, December 31, 2010 |
$ | 57,300,554 | $ | | $ | 57,300,554 | ||||||
Subscriptions General Partner |
800,000 | | 800,000 | |||||||||
Subscriptions Limited Partners |
77,371,910 | 7,127,494 | 84,499,404 | |||||||||
Net income (loss) |
(1,372,982 | ) | (111,022 | ) | (1,484,004 | ) | ||||||
Redemptions Limited Partners |
(5,375,996 | ) | | (5,375,996 | ) | |||||||
Partners Capital, March 31, 2011 |
$ | 128,723,486 | $ | 7,016,472 | $ | 135,739,958 | ||||||
The accompanying notes
are an integral part of these
financial statements.
4
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
1. General:
BHM Discretionary Futures Fund L.P. (the Partnership) is a limited partnership organized on
August 23, 2010 under the partnership laws of the State of Delaware 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 Partnership commenced trading on
November 1, 2010. The commodity interests that are traded by the Partnership are volatile and
involve a high degree of market risk. The Partnership is authorized to sell an unlimited number of
redeemable units of limited partnership interest (Units) on a continuous basis.
In
2009 Morgan Stanley and Citigroup Inc. combined certain assets of the Global Wealth
Management Group of Morgan Stanley & Co. Incorporated including
Demeter Management LLC (Demeter),
the former general partner of the Partnership
and the Smith Barney division of Citigroup Global Markets Inc., into a new joint venture, Morgan
Stanley Smith Barney Holdings LLC (MSSBH). As part of that transaction, Ceres Managed Futures LLC
(Ceres) and Demeter were contributed to Morgan Stanley Smith Barney LLC (MSSB or
the Placement Agent), and each became a wholly-owned subsidiary of MSSBH.
Effective December 1, 2010, together with the unanimous support of the Boards of Directors of
Demeter and Ceres, combined the assets of Demeter and Ceres into a single commodity pool operator,
Ceres (the General Partner). Ceres will continue to be wholly-owned by MSSBH and will act as the general partner for the
Partnership.
On November 1, 2010, the Partnership allocated substantially all of its capital to the Morgan
Stanley Smith Barney BHM I LLC (the Trading Company), a limited liability company organized under
the Delaware Limited Liability Company Law. The Trading Company was formed in order to permit
accounts managed by Blenheim Capital Management LLC (Blenheim or the Advisor) using Blenheims
Global Markets Strategy-Futures/FX program, a proprietary, systematic trading program, to invest
together in one trading vehicle. The General Partner is also the trading manager of the Trading
Company. Individual and pooled accounts currently managed by the General Partner, including the
Partnership, are permitted to be members of the Trading Company. The General Partner and the
Advisor believe that trading through this master/feeder structure promotes efficiency and economy
in the trading process.
On February 1, 2011, the Units currently offered pursuant to the Limited Partnership Agreement
are deemed Class A Units. The rights, liabilities, risks, and fees associated with investment in
the Class A Units will not be changed. In addition, beginning on February 1, 2011, Class D Units
were offered. Class A and Class D will each be referred to as a Class and collectively referred
to as the Classes. The Class of Units that a Limited Partner receives upon a subscription will
generally depend upon the amount invested in the Partnership, although the General Partner may
determine to offer Units to investors at its discretion. Class A Units and Class D Units will be identical, except that Class D Units will be subject to a
monthly ongoing placement agent fee equal to 1/12th of 0.75% (a 0.75% annual rate) of the Net
Assets of Class D as of the beginning of each month, which differs from the Class A monthly ongoing
placement agent fee of 1/12th of 3.0% (a 3.0% annual rate) of the net assets of Class A.
The non-clearing broker for the Trading Company is MSSB. The clearing commodity brokers for
the Trading Company are Morgan Stanley & Co. Incorporated (MS&CO.) and Morgan Stanley & Co.
International plc (MSIP).
At March 31, 2011, the Partnership owned approximately 47.0% of the Trading Company. At
December 31, 2010, the Partnership owned approximately 27.4% of the Trading Company. The
Partnership intends to continue to invest substantially all of its assets in the Trading Company.
The performance of the Partnership is directly affected by the performance of the Trading Company.
The Trading Companys trading of futures, forwards, and options contracts, as applicable, is done
primarily on U.S. and foreign commodity exchanges. The Trading Companys Statements of Financial
Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and
Changes in Members Capital are included herein.
The General Partner and each limited partner of the Partnership (each a Limited Partner)
share in the profits and losses of the Partnership in proportion to the amount of partnership
interest owned by each except that no limited partner shall be liable for obligations of the
Partnership in excess of its capital contribution and profits, if any, net of distributions.
The accompanying financial statements are unaudited but, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of
the Partnerships financial condition at March 31, 2011 and December 31, 2010, and the results of
its operations for the three months ended March 31, 2011. These financial statements present
5
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
the results of interim periods and do not include all disclosures normally provided in annual
financial statements. You should read these financial statements together with the financial
statements and notes included in the Partnerships Annual Report on the Form 10 filed with the
Securities and Exchange Commission (the SEC) for the year ended December 31, 2010.
The preparation of financial statements in 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, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. As a result, actual results could differ from
these estimates.
Due to the nature of commodity trading, the results of operations for the interim periods
presented should not be considered indicative of the results that may be expected for the entire
year.
6
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
The Trading Companys Statements of Financial Condition and Condensed Schedules of Investments
as of March 31, 2011 and December 31, 2010 and Statements of Income and Expenses and Changes in
Members Capital for the three months ended March 31, 2011 and 2010 are presented below:
BHM I, LLC
Statements of Financial Condition
Statements of Financial Condition
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Assets: |
||||||||
Equity in trading account: |
||||||||
Unrestricted cash |
$ | 262,755,553 | $ | 158,507,875 | ||||
Restricted cash |
22,757,394 | 1,734,854 | ||||||
Total cash |
285,512,947 | 160,242,729 | ||||||
Net unrealized gain on open contracts (MS&Co.) |
1,103,345 | 15,322,971 | ||||||
Net unrealized gain (loss) on open contracts (MSIP) |
(710,708 | ) | 3,077,405 | |||||
Total net unrealized gain on open contracts |
392,637 | 18,400,376 | ||||||
Options purchased, (premiums paid $9,310,823 and $4,623,417, respectively) |
7,627,963 | 6,144,949 | ||||||
Total trading equity |
293,533,547 | 184,788,054 | ||||||
Expense reimbursements |
18,338 | 13,347 | ||||||
Interest receivable (MSSB) |
413 | 365 | ||||||
Contributions receivable |
| 31,929,508 | ||||||
Total assets |
$ | 293,552,298 | $ | 216,731,274 | ||||
Liabilities and Members Capital: |
||||||||
Liabilities: |
||||||||
Options written (premiums received $6,264,549 and $3,883,588, respectively) |
$ | 3,965,070 | $ | 3,209,454 | ||||
Accrued management fees |
341,350 | 132,313 | ||||||
Accrued incentive fees |
245,858 | 2,684,680 | ||||||
Accrued administrative fees |
19,141 | 16,453 | ||||||
Withdrawals payable |
| 2,035,496 | ||||||
Total liabilities |
4,571,419 | 8,078,396 | ||||||
Members Capital: |
||||||||
Non-Managing Members |
288,980,879 | 208,652,878 | ||||||
Total members capital |
288,980,879 | 208,652,878 | ||||||
Total liabilities and members capital |
$ | 293,552,298 | $ | 216,731,274 | ||||
7
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
BHM I, LLC
Condensed Schedule of Investments
March 31, 2011
(Unaudited)
Condensed Schedule of Investments
March 31, 2011
(Unaudited)
% of | ||||||||
Fair Value | Members Capital | |||||||
Futures and Forward Contracts Purchased |
||||||||
Commodity |
$ | 4,226,427 | 1.46 | % | ||||
Equity |
9,025 | | ||||||
Foreign currency |
353,359 | 0.12 | ||||||
Interest rate |
20,704 | 0.01 | ||||||
Total futures and forward contracts
purchased |
4,609,515 | 1.59 | ||||||
Futures and Forward Contracts Sold |
||||||||
Commodity |
(3,049,546 | ) | (1.05 | ) | ||||
Foreign currency |
(59,063 | ) | (0.02 | ) | ||||
Interest rate |
(373,284 | ) | (0.13 | ) | ||||
Total futures and forward contracts sold |
(3,481,893 | ) | (1.20 | ) | ||||
Unrealized currency loss |
(734,985 | ) | (0.25 | ) | ||||
Net fair value |
$ | 392,637 | 0.14 | % | ||||
Options Contracts |
||||||||
Options purchased on Futures Contracts |
$ | 7,627,963 | 2.64 | % | ||||
Options written on Futures Contracts |
$ | (3,965,070 | ) | (1.37 | )% |
8
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
BHM I, LLC
Condensed Schedule of Investments
December 31, 2010
Condensed Schedule of Investments
December 31, 2010
% of | ||||||||
Fair Value | Members Capital | |||||||
Futures and Forward Contracts Purchased |
||||||||
Commodity |
$ | 22,721,930 | 10.89 | %* | ||||
Equity |
3,128 | | ||||||
Foreign currency |
374,853 | 0.18 | ||||||
Interest rate |
185,208 | 0.09 | ||||||
Total futures and forward contracts
purchased |
23,285,119 | 11.16 | ||||||
Futures and Forward Contracts Sold |
||||||||
Commodity |
(4,367,221 | ) | (2.10 | ) | ||||
Foreign currency |
(148,064 | ) | (0.07 | ) | ||||
Interest rate |
368,241 | 0.18 | ||||||
Total futures and forward contracts sold |
(4,147,044 | ) | (1.99 | ) | ||||
Unrealized currency loss |
(737,699 | ) | (0.35 | ) | ||||
Net fair value |
$ | 18,400,376 | 8.82 | % | ||||
Options Contracts |
||||||||
Options purchased on Futures Contracts |
$ | 6,144,949 | 2.95 | % | ||||
Options written on Futures Contracts |
$ | (3,209,454 | ) | (1.54 | )% |
* | No single contracts value exceeds 5% of the Members Capital. |
9
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
March 31, 2011
(Unaudited)
BHM I, LLC
Statements of Income and Expenses and Changes in Members Capital
(Unaudited)
Statements of Income and Expenses and Changes in Members Capital
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Investment income: |
||||||||
Interest income (MSSB and MS&Co.) |
$ | 649 | $ | (2,788 | ) | |||
Expenses: |
||||||||
Management fees |
804,979 | 218,694 | ||||||
Incentive fees |
245,858 | | ||||||
Brokerage, clearing and transaction fees |
158,189 | 98,963 | ||||||
Administrative fees |
55,420 | 38,271 | ||||||
Total expenses |
1,264,446 | 355,928 | ||||||
Expense reimbursements |
(57,623 | ) | (68,675 | ) | ||||
Net expenses |
1,206,823 | 287,253 | ||||||
Net investment income (loss) |
(1,206,174 | ) | (290,041 | ) | ||||
Trading results |
||||||||
Trading profit (loss) : |
||||||||
Realized |
23,799,553 | 11,099,424 | ||||||
Net change in unrealized |
(19,586,786 | ) | (15,786,805 | ) | ||||
Total trading results |
$ | 4,212,767 | $ | (4,687,381 | ) | |||
Net income (loss) |
$ | 3,006,593 | $ | (4,977,422 | ) | |||
Net income (loss) allocation |
||||||||
Non-managing members |
$ | 3,006,593 | $ | (4,977,422 | ) | |||
Managing | Non-Managing | |||||||||||
Member | Members | Total | ||||||||||
Members Capital, December 31, 2010 |
$ | | $ | 208,652,878 | $ | 208,652,878 | ||||||
Capital contributions |
| 81,583,299 | 81,583,299 | |||||||||
Net income |
| 3,006,593 | 3,006,593 | |||||||||
Capital withdrawals |
| (4,261,891 | ) | (4,261,891 | ) | |||||||
Members Capital, March 31, 2011 |
| 288,980,879 | 288,980,879 | |||||||||
Members Capital, December 31, 2009 |
| 154,003,687 | 154,003,687 | |||||||||
Capital contributions |
| 1,221,298 | 1,221,298 | |||||||||
Net loss |
| (4,977,422 | ) | (4,977,422 | ) | |||||||
Capital withdrawals |
| (21,459,490 | ) | (21,459,490 | ) | |||||||
Members Capital, March 31, 2010 |
$ | | $ | 128,788,073 | $ | 128,788,073 | ||||||
10
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
2. Financial Highlights:
Changes in the net asset value per redeemable unit for the period ended March 31, 2011
was as follows:
Three Months Ended |
For the period February 1, 2011 (commencement of operations) to |
|||||||
March 31, 2011 | March 31, 2011 | |||||||
Class A | Class D | |||||||
Net realized and unrealized gains(losses)* |
$ | 20.72 | $ | (12.36 | ) | |||
Expenses** |
(11.72 | ) | (3.93 | ) | ||||
Increase (decrease) for the period |
9.00 | (16.29 | ) | |||||
Net asset value per Unit, beginning of period |
1,078.16 | 1,000.00 | ||||||
Net asset value per Unit, end of period |
$ | 1,087.16 | $ | 983.71 | ||||
Redemption/subscription value per Unit, end of period*** |
$ | 1,087.64 | $ | 984.28 | ||||
* | Includes brokerage fees. | |
** | Excludes brokerage fees. | |
*** | GAAP net asset value per unit adjusted for the remaining accrued liability for reimbursement of organizational costs (Note 3). |
Class A | Class D | |||||||
Ratios to average net assets:**** |
||||||||
Net investment income (loss)***** |
(7.4 | )% | (4.4 | )% | ||||
Operating expenses |
7.4 | % | 4.4 | % | ||||
Incentive fees |
| %****** | (0.2 | )% | ||||
Total expenses |
7.4 | % | 4.2 | % | ||||
Total return: |
||||||||
Total return before incentive fees |
0.8 | % | (1.8 | )% | ||||
Incentive fees |
| %****** | 0.2 | % | ||||
Total return after incentive fees |
0.8 | % | (1.6 | )% | ||||
**** | Annualized. | |
***** | Interest income less operating expenses which exclude incentive fees allocated from the Trading Company. | |
****** | Due to rounding. |
The above ratios may vary for individual investors based on the timing of capital transactions
during the period. Additionally, these ratios are calculated for the limited partner class using
the limited partners share of income, expenses and average net assets.
11
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
Financial Highlights of the Trading Company:
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Ratios to average members capital: (1) |
||||||||
Net investment loss(2) |
(1.64 | )% | (0.82 | )% | ||||
Expenses before incentive fees(2) |
1.54 | % | 0.81 | % | ||||
Expenses after incentive fees(2) |
1.64 | % | 0.81 | % | ||||
Net income (loss) |
1.73 | % | (3.47 | )% | ||||
Total return before incentive fees |
2.12 | % | (3.15 | )% | ||||
Total return after incentive fees |
2.33 | % | (3.15 | )% |
(1) | The calculation is based on non-managing Members allocated income and expenses and average non-managing Members Capital. | |
(2) | Annualized except for incentive fees. |
3. Organizational Costs:
Organizational costs of $96,931 relating to the issuance and marketing of the Partnerships
Units offered were initially paid by MS&Co. These costs have been recorded as due to MS&Co. in
the Statement of Financial Condition. These costs are being reimbursed to MS&Co. by the Partnership
in twelve monthly installments.
As of March 31, 2011, $40,403 of these costs have been reimbursed to MS&Co by the Partnership.
The remaining liability due to MS&Co of $56,528 will not reduce net asset value per Unit for any
purpose other than financial reporting, including calculation of administrative and brokerage fees
and the redemption value of Units.
12
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
4. Trading Activities:
The Partnerships pro rata share of the results of the Trading Companys trading activities
are shown in the Statement of Income and Expenses and Changes in Partners Capital.
The Partnership and Trading Company in the normal course of business, enter into various
contracts with MSSB, MS&Co., and MSIP acting as their commodity brokers. Pursuant to the brokerage
agreement with MSSB, MS&Co., gives the Partnership and the Trading Company, respectively, the legal
right to net unrealized gains and losses on open futures and forward contracts. The Trading Company
nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward
contracts on the Statements of Financial Condition.
The following tables summarize the valuation of the Trading Companys investments as of March
31, 2011 and December 31, 2010, respectively.
March 31, 2011
Average | ||||||||||||||||||||||||
number of | ||||||||||||||||||||||||
contracts | ||||||||||||||||||||||||
outstanding | ||||||||||||||||||||||||
for the | ||||||||||||||||||||||||
Long | Long | Short | Short | Net | quarter | |||||||||||||||||||
Unrealized | Unrealized | Unrealized | Unrealized | Unrealized | (absolute | |||||||||||||||||||
Futures and Forward Contracts | Gain | Loss | Gain | Loss | Gain/(Loss) | quantity) | ||||||||||||||||||
Commodity |
$ | 12,629,206 | $ | (8,402,779 | ) | $ | 3,763,775 | $ | (6,813,321 | ) | $ | 1,176,881 | 4,662 | |||||||||||
Equity |
9,025 | | | | 9,025 | 20 | ||||||||||||||||||
Foreign currency |
354,065 | (706 | ) | | (59,063 | ) | 294,296 | 1,960 | ||||||||||||||||
Interest rate |
35,918 | (15,214 | ) | 226,360 | (599,644 | ) | (352,580 | ) | 2,462 | |||||||||||||||
Total |
$ | 13,028,214 | $ | (8,418,699 | ) | $ | 3,990,135 | $ | (7,472,028 | ) | $ | 1,127,622 | ||||||||||||
Unrealized currency
loss |
(734,985 | ) | ||||||||||||||||||||||
Total net unrealized
gain on open contracts |
$ | 392,637 | * | |||||||||||||||||||||
Average number of | ||||||||
contracts outstanding | ||||||||
for the quarter | ||||||||
(absolute quantity) | ||||||||
Option Contracts at Fair Value |
||||||||
Options purchased |
$ | 7,627,963 | ** | 2,146 | ||||
Options written |
$ | (3,965,070) | *** | 1,736 |
* | This amount is in Net unrealized gain on open contracts on the Trading Companys Statements of Financial Condition. | |
** | This amount is in Options purchased, on the Trading Companys Statements of Financial Condition. | |
*** | This amount is in Options written, on the Trading Companys Statements of Financial Condition. |
13
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
December 31, 2010
Average number of | ||||||||||||||||||||||||
contracts | ||||||||||||||||||||||||
Short | Net | outstanding for the | ||||||||||||||||||||||
Long Unrealized | Long Unrealized | Unrealized | Short Unrealized | Unrealized | year (absolute | |||||||||||||||||||
Futures and Forward Contracts | Gain | Loss | Gain | Loss | Gain/(Loss) | quantity) | ||||||||||||||||||
Commodity |
$ | 27,015,590 | $ | (4,293,660 | ) | $ | 2,332,149 | $ | (6,699,370 | ) | $ | 18,354,709 | 2,653 | |||||||||||
Equity |
3,128 | | | | 3,128 | 25 | ||||||||||||||||||
Foreign currency |
380,069 | (5,216 | ) | | (148,064 | ) | 226,789 | 446 | ||||||||||||||||
Interest rate |
206,346 | (21,138 | ) | 697,388 | (329,147 | ) | 553,449 | 1,112 | ||||||||||||||||
Total |
$ | 27,605,133 | $ | (4,320,014 | ) | $ | 3,029,537 | $ | (7,176,581 | ) | $ | 19,138,075 | ||||||||||||
Unrealized currency
loss |
(737,699 | ) | ||||||||||||||||||||||
Total net unrealized
gain on open contracts |
18,400,376 | * | ||||||||||||||||||||||
Average number of | |||||||||
contracts | |||||||||
outstanding for the | |||||||||
year (absolute | |||||||||
Option Contracts at Fair Value | quantity) | ||||||||
Options purchased |
$ | 6,144,949 | ** | 1,791 | |||||
Options written |
$ | (3,209,454) | *** | 1,275 |
* | This amount is in Net unrealized gain on open contracts on the Trading Companys Statements of Financial Condition. | |
** | This amount is in Options purchased, on the Trading Companys Statements of Financial Condition. | |
*** | This amount is in Options written, on the Trading Companys Statements of Financial Condition. |
The following table indicates the trading gains and losses, by market sector, on derivative
instruments for the three months ended March 31, 2011 and 2010.
Three Months Ended | Three Months Ended | |||||||
March 31, 2011 | March 31, 2010 | |||||||
Sector | Gain (loss) from trading | Gain (loss) from trading | ||||||
Commodity |
$ | 5,084,378 | $ | (2,199,894 | ) | |||
Equity |
27,274 | 8,211 | ||||||
Foreign currency |
2,200,956 | 923,158 | ||||||
Interest rate |
(3,102,555 | ) | (2,320,663 | ) | ||||
Unrealized currency gain |
2,714 | (1,098,193 | ) | |||||
Total |
$ | 4,212,767 | **** | $ | (4,687,381) | **** | ||
**** | This amount is in Total trading results on the Trading Companys Statements of Income and Expenses and Changes in Members Capital. |
14
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
5. Fair Value Measurements:
Partnerships Investments. The Partnership values its investment in the Trading Company at its
net asset value per unit as calculated by the Trading Company. The Trading Company values its
investments as described in note 2 of the Trading Companys notes to the annual financial
statements as of December 31, 2010.
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.
The Partnership will separately present purchases, sales, issuances, and settlements in its
reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis
rather than on a net basis), and make 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 Trading Company 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 Trading Company (Level 2). The value of the Partnerships investment in
the Trading Company reflects its proportional interest in the Trading Company. As of and for the
periods ended March 31, 2011 and December 31, 2010, 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).
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
March 31, 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Investment in Trading Company |
$ | 135,982,810 | $ | | $ | 135,982,810 | $ | | ||||||||
Net fair value |
$ | 135,982,810 | $ | | $ | 135,982,810 | $ | | ||||||||
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets | ||||||||||||||||
Investment in Trading Company |
$ | 57,170,009 | $ | | $ | 57,170,009 | $ | | ||||||||
Net fair value |
$ | 57,170,009 | $ | | $ | 57,170,009 | $ | | ||||||||
Trading Companys Investments. All commodity interests of the Trading Company (including
derivative financial instruments and derivative commodity instruments) are held for trading
purposes. The commodity interests are recorded on trade date and open contracts are recorded at
fair value (as described below) at the measurement date. Investments in commodity interests
denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing
at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized
gains or losses on open contracts are included as a component of equity in trading account on the
Statements of Financial Condition. Net realized gains or losses and any change in net unrealized
gains or losses from the preceding period are reported in the Statements of Income and Expenses and
Changes in Members Capital.
Trading Companys 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
15
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
fair value measurement in its entirety falls shall be determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
GAAP also requires the need to use judgment in determining if a formerly active market has
become inactive and in determining fair values when the market has become inactive. Management has
concluded that based on available information in the marketplace, the Trading Companys Level 1
assets and liabilities are actively traded.
The Trading Company will separately present purchases, sales, issuances, and settlements in
its reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis
rather than on a net basis), and make 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 Trading Company 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 periods ended March 31,
2011 and December 31, 2010, the Trading Company did not hold any derivative instruments for which
market quotations are not readily available and which are priced by broker-dealers who derive fair
values for those assets from observable inputs (Level 2) or that are priced at fair value using
unobservable inputs through the application of managements assumptions and internal valuation
pricing models (Level 3).
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | March 31, 2011 | |||||||||||||
Assets |
||||||||||||||||
Futures |
$ | 16,682,425 | $ | | n/a | $ | 16,682,425 | |||||||||
Forwards |
| 335,908 | n/a | 335,908 | ||||||||||||
Options purchased |
7,627,963 | | n/a | 7,627,963 | ||||||||||||
Total assets |
$ | 24,310,388 | $ | 335,908 | n/a | $ | 24,646,296 | |||||||||
Liabilities |
||||||||||||||||
Futures |
$ | 15,850,152 | $ | | n/a | $ | 15,850,152 | |||||||||
Forwards |
| 40,559 | n/a | 40,559 | ||||||||||||
Options written |
3,965,070 | | n/a | 3,965,070 | ||||||||||||
Total liabilities |
$ | 19,815,222 | $ | 40,559 | n/a | $ | 19,855,781 | |||||||||
Unrealized currency loss |
$ | (734,985 | ) | |||||||||||||
*Net fair value |
$ | 4,495,166 | $ | 295,349 | n/a | $ | 4,055,530 | |||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2010 | |||||||||||||
Assets |
||||||||||||||||
Futures |
$ | 30,296,863 | $ | | n/a | $ | 30,296,863 | |||||||||
Forwards |
| 337,807 | n/a | 337,807 | ||||||||||||
Options purchased |
6,144,949 | | n/a | 6,144,949 | ||||||||||||
Total assets |
$ | 36,441,812 | $ | 337,807 | n/a | $ | 36,779,619 | |||||||||
Liabilities |
||||||||||||||||
Futures |
$ | 11,373,915 | $ | | n/a | $ | 11,373,915 | |||||||||
Forwards |
| 122,680 | n/a | 122,680 | ||||||||||||
Options written |
3,209,454 | | n/a | 3,209,454 | ||||||||||||
Total liabilities |
$ | 14,583,369 | $ | 122,680 | n/a | $ | 14,706,049 | |||||||||
Unrealized currency loss |
$ | (737,699 | ) | |||||||||||||
*Net fair value |
$ | 21,858,443 | $ | 215,127 | n/a | $ | 21,335,871 | |||||||||
* | This amount comprises of the net unrealized gain (loss) on open contracts, options purchased and options written on the Statement of Financial Condition. |
16
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
6. Financial Instrument Risks:
In the normal course of business, the Partnership, through its investment in the Trading
Company, 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 Trading Company 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
Trading Company 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/Trading Companys risk of loss in
the event of a counterparty default is typically limited to the asset amounts recognized in the
Statements of Financial Condition and is not represented by the contract or notional amounts of the
instruments. The Partnerships/Trading Companys risk of loss is reduced through the use of legally
enforceable Trading Company netting agreements with counterparties that permit the
Partnership/Trading Company to offset unrealized gains and losses and other assets and liabilities
with such counterparties upon the occurrence of certain events. The Partnership/Trading Company has
credit risk and concentration risk as the sole counterparty or broker with respect to the
Partnerships/Trading Companys assets is MSSB or a MSSB affiliate. Credit risk with respect to
exchange-traded instruments is reduced to the extent that, through MSSB, the Partnerships/Trading
Companys counterparty is an exchange or clearing organization.
As both a buyer and seller of options, the Partnership/Trading Company pays or receives a
premium at the outset and then bears the risk of unfavorable changes in the price of the contract
underlying the option. Written options expose the Partnership/Trading Company to potentially
unlimited liability; for purchased options the risk of loss is limited to the premiums paid.
Certain written put options permit cash settlement and do not require the option holder to own the
reference asset.
The General Partner monitors and attempts to control the Partnerships/Trading Companys 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/Trading Company 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/Trading Companys business, these instruments may not be held to
maturity.
17
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
7. Critical Accounting Policies:
Use of Estimates. The preparation of financial statements and accompanying notes in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, income and expenses, and related disclosures of contingent assets and
liabilities in the financial statements and accompanying notes. As a result, actual results could
differ from these estimates.
Partnerships Investments. The Partnership values its investment in the Trading Company at its
net asset value per unit as calculated by the Trading Company. The Trading Company values its
investments as described in note 2 of the Trading Companys notes to the annual financial
statements as of December 31, 2010.
Partnerships and the Trading Companys 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 Trading Company 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 Partnerships Level 2 assets and liabilities.
The Partnership will separately present purchases, sales, issuances, and settlements in its
reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis
rather than on a net basis), and make 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 Trading Company 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 Trading Company (Level 2). The value of the Partnerships investment in the
Trading Company reflects its proportional interest in the Trading Company. As of and for the periods ended March 31,
2011 and December 31, 2010, the Partnership did not hold any derivative instruments that are based
on unadjusted quoted prices in active markets for identical assets (Level 1) or priced at fair
value using unobservable inputs through the application of managements assumptions and internal
valuation pricing models (Level 3).
The Trading Company 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 periods ended March 31, 2011 and
December 31, 2010, the Trading Company did not hold any derivative instruments for which market quotations
are not readily available, and are priced by broker-dealers who derive fair values for those assets
from observable inputs (Level 2) or that are priced at fair value using unobservable inputs through
the application of managements assumptions and internal valuation pricing models (Level 3).
Futures Contracts. The Trading Company 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 Trading Company 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 Trading Company.
When the contract is closed, the Trading Company 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. Net realized gains (losses) and changes in net unrealized gains (losses) on futures
contracts are included in the Statements of Income and Expenses and Changes in Members Capital.
Forward Foreign Currency Contracts. Foreign currency contracts are those contracts where the
Trading Company 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 Trading Companys 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. Net realized gains (losses) and changes
in net unrealized gains (losses) on foreign currency contracts are recognized in the period in which the
contract is closed or the changes occur, respectively, and are included in the Statements of Income and
Expenses and Changes in Members Capital.
The Trading Company does not isolate the
portion of the results of operations arising from the
effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices
of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of
Income and Expenses and Changes in Members Capital.
Options. The Trading Company may purchase and write (sell) both exchange listed and OTC
options on commodities or financial instruments. An option is a contract allowing, but not requiring, its
holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified
price during a specified time period. The option premium is the total price paid or received for the option
contract. When the Trading Company writes an option, the premium received is recorded as a liability in
the Statements of Financial Condition and marked to market daily. When the Trading Company purchases
an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to
market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts
are included in the Statements of Income and Expenses and Changes in Members Capital.
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.
18
BHM Discretionary Futures Fund L.P.
Notes to Financial Statements
March 31, 2011
(Unaudited)
Notes to Financial Statements
March 31, 2011
(Unaudited)
The Partnership
files U.S. federal and various state and local tax returns. No income tax returns are currently under examination.
In general the statute of limitations of the Partnerships U.S. federal tax returns remains
open three years after a tax return is filed. The statutes of limitations on the Partnerships state
and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management does not believe that there are any uncertain tax positions that require recognition
of a tax liability.
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.
Net Income (Loss) per Redeemable Unit. Net income (loss) per unit is calculated in accordance
with investment company guidance. See Note 2, Financial Highlights.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in sales of goods or services. Its only assets are its
investment in the Trading Company and cash. The Trading Company does not engage in the sale 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 Trading Company. While substantial losses could lead to a material
decrease in liquidity, no such illiquidity occurred during the first quarter of 2011.
The Partnerships capital consists of the capital contributions of the partners as increased
or decreased by income (loss) from its investment in the Trading Company and by expenses, interest
income, subscriptions, redemptions of Units and distributions of profits, if any.
For the three months ended March 31, 2011, Partnership capital increased 136.9% from
$57,300,554 to $135,739,958. This increase was attributable by the subscriptions of 76,611.229
Units totaling $84,499,404 and 718.509 General Partner unit
equivalents totaling $800,000, which was partially offset by redemptions of 4,849.658 Units
totaling $5,375,996, coupled with the net loss from operations of $1,484,004. Future redemptions
could impact the amount of funds available for investment in the Trading Company in subsequent
periods.
The Trading Companys capital consists of the capital contributions of the members as
increased or decreased by realized and/or unrealized gains or losses on commodity futures trading
and by expenses, interest income, redemptions of units and distributions of profits, if any.
For the three months ended March 31, 2011, the Trading Companys capital increased 38.5% from
$208,652,878 to $288,980,879. This increase was attributable to the net income from operations of
$3,006,593, coupled with the contributions of $81,583,299, which was partially offset by the
withdrawals of $4,261,891. Future withdrawals can impact the amount of funds available for
investments in commodity contract positions in subsequent periods.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of income and expense during the reporting period. Management believes that the
estimates utilized in preparing the financial statements are reasonable. Actual results could
differ from those estimates. The Partnerships significant accounting policies are described in
detail in Note 7 of the Financial Statements.
The Partnership records all investments at fair value in its financial statements, with
changes in fair value reported as a component of net realized and change in net unrealized trading
gain (loss) in the Statements of Income and Expenses and Changes in Members Capital.
Results of Operations
During the Partnerships first quarter of 2011, the net asset value per redeemable unit for
Class A increased 0.8% from $1,078.16 to $1,087.16 as compared to December 31, 2010. During the
Partnerships first quarter of 2011, the net asset value per redeemable unit for Class D decreased
1.6% from $1,000.00 to $983.71 from February 1, 2011 to March 31, 2011. The Partnership, for its
own account, through its investment in the Trading Company experienced a net trading gain in the first quarter of 2011 of $78,583. Gains were
primarily attributable to the Trading Companys trading in agricultural commodities, metals and
currencies and were partially offset by losses in interest rates and energies.
The most significant gains were generated within the agricultural commodities markets,
primarily from corn and wheat futures, as prices in these two commodities traded significantly
higher during the first quarter. Further gains were made in the base and precious metals markets
as long futures positions in aluminum and tin in the base metals and silver and platinum in the
precious metals profited. Overall, agricultural and metals positions performed well given the
significant supply and demand imbalances in those markets and the continued growth out of China,
which continues to be a significant driver of commodity prices globally. Currencies also performed
well during the quarter as a long Euro versus U.S. Dollar position generated significant gains as
the Euro started to
20
rally in late January. The continued unease in the United States regarding the current
deficit has led to significant underperformance of the U.S. dollar and a strengthening of the Euro
based on recent data showing some stability in the European Union.
A portion of the Partnerships gains for the quarter was offset by losses within the interest
rate and energy markets, primarily during the month of February and March, from short positions in
the U.S. 30-year, 10-year and 5-year Treasury bonds and notes, as well as in the German 10-year
bund and the U.K. 3-month sterling, and long futures positions in natural gas and RBOB gasoline.
Trading in the interest rates suffered the most during early to mid-March after the earthquake and
tsunami in Japan saw a flight to quality assets and short futures positions in this sector suffered
losses. Energies in general saw losses albeit modest as positions across the natural gas complex,
and WTI crude oil, as well as some of the refined products such as RBOB gasoline, were the main
detractors. Volatility in the natural gas markets continues to persist making this market
difficult to trade.
Commodity futures markets are highly volatile. The potential for broad and rapid price
fluctuations increases the risks involved in commodity trading, but also increases the possibility
of profit. The profitability of the Partnership (and the Trading Company) depends on the Advisors
ability to forecast price changes in energy and energy-related commodities. Such price changes are
influenced by, among other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and international political and
economic events and changes in interest rates. To the extent that the Advisor correctly makes such
forecasts, the Partnership (and the Trading Company) expects to increase capital through
operations.
Interest income allocated from the Trading Company for the three months ended March 31, 2011
was $383. Interest earned by the Partnership will increase the net asset value of the Partnership.
The amount of interest income earned by the Partnership depends on the average daily equity in the
Partnerships account and upon interest rates.
The Partnership will pay the Placement Agent ongoing compensation on a monthly basis of the Net Assets (as defined in the Limited Partnership Agreement)
of the Partnership as of the beginning of each month. The placement agent and fees for the three
months ended March 31, 2011 was $708,119.
Administrative fees are calculated on a monthly basis equal to 1% of the net assets of the
Partnership. Administrative fees for the three months ended March 31, 2011 was $244,990.
All management and incentive fees are borne by the Trading Company.
In allocating substantially all of the assets of the Partnership to the Trading Company, the
General Partner considers 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.
Off-Balance
Sheet Arrangements and Contractual Obligations
The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or
commercial commitments to make future payments that would affect its
liquidity or capital resources.
21
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
All of the Partnerships assets are subject to the risk of trading loss through its investment
in the Trading Company. The Trading Company is a speculative commodity pool. The market sensitive
instruments held by the Trading Company are acquired for speculative trading purposes, and all or
substantially all of the Partnerships capital is subject to the risk of trading loss through its
investment in the Trading Company. Unlike an operating company, the risk of market sensitive
instruments is integral, not incidental, to the Trading Companys 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 value of the Trading Companys open
positions and, consequently, in their earnings and cash balances. The Trading Companys and the
Partnerships market risk is influenced by a wide variety of factors, including the level and
volatility of interest rates, exchange rates, equity price levels, the value of financial
instruments and contracts, the diversification results among the Trading Companys open positions
and the liquidity of the markets in which the Trading Company trades.
The Trading Company rapidly acquires and liquidates both long and short positions in a range
of different markets. Consequently, it is not possible to predict how a particular future market
scenario will affect performance, and the Trading Companys past performance is not necessarily
indicative of its future results.
Limitations on Value at Risk as an Assessment of Market Risk
Value at Risk models permit estimation of a portfolios aggregate market risk exposure,
incorporating a range of Value at Riskied market risks, reflect risk reduction due to portfolio
diversification or hedging activities, and can cover a wide range of portfolio assets. However,
Value at Risk risk measures should be viewed in light of the methodologys limitations, which
include, but may not be limited to the following:
| past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements; | ||
| changes in portfolio value caused by market movements may differ from those of the Value at Risk model; | ||
| Value at Risk results reflect past market fluctuations applied to current trading positions while future risk depends on future positions; | ||
| Value at Risk using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and | ||
| the historical market risk factor data used for Value at Risk estimation may provide only limited insight into losses that could be incurred under certain unusual market movements. |
In addition, the Value at Risk tables above, as well as the past performance of the
Partnership and the Trading Companies, give no indication of the Partnerships potential risk
of ruin.
The Value at Risk tables provided present the results of the Partnerships Value at Risk
for each of the Trading Companies market risk exposures and on an aggregate basis at March 31,
2011 and December 31, 2010, and for the four quarter-end reporting periods from April 1, 2010
through March 31, 2011 and from January 1, 2010 through December 31, 2010, respectively.
Value at Risk is not necessarily representative of the Trading Companies historic risk, nor
should it be used to predict the Partnership or the Trading Companies future financial performance
or their ability to manage or monitor risk. There can be no assurance that the Trading Companies
actual losses on a particular day will not exceed the Value at Risk amounts indicated above or that
such losses will not occur more than once in 100 trading days.
Value at Risk is a measure of the maximum amount which the Trading Company could reasonably
be expected to lose in a given market sector. However, the inherent uncertainty of the Trading
Companys speculative trading and the recurrence in the markets traded by the Trading Company of
market movements far exceeding expectations could result in actual trading or non-trading losses
far beyond the indicated Value at Risk or the Trading Companys 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 Trading Companys losses in any market sector
will be limited to Value at Risk or by the Trading Companys attempts to manage its market risk.
Exchange maintenance margin requirements have been used by the Trading Company as the measure
of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the
maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% -
99% of any one-day interval. Maintenance margin has been used rather than the more generally
available initial margin, because initial margin includes a credit risk component, which is not
relevant to Value at Risk.
Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk
sensitive instruments. There has been no material
change in the trading Value at Risk information previously disclosed in the Partnerships Annual
Report on the Form 10 for the year ended December 31, 2010.
As of March 31, 2011, the Trading Companys total capitalization was $288,980,897, and the
Partnership owned approximately 47.0% of the Trading Company. The Partnership invests substantially
all of its assets in the Trading Company. The Trading Companys Value at Risk as of March 31, 2011 was as
follows:
The following table indicates the Value at Risk associated with the Partnerships open
positions as a percentage of total net assets by primary market risk category at March 31, 2011 and
December 31, 2010.
Primary Market | March 31, 2011 | December 31, 2010 | ||||||
Risk Category | Value at Risk | Value at Risk | ||||||
Interest Rate |
(0.55 | )% | (0.39 | )% | ||||
Currency |
(0.08 | ) | (0.08 | ) | ||||
Commodity |
(3.33 | ) | (3.79 | ) | ||||
Aggregate Value at Risk |
(3.61 | )% | (4.02 | )% |
22
The following tables supplement the quarter-end Value at Risk set forth above by presenting
the Partnerships high, low, and average Value at Risk, as a percentage of total net assets for the
four quarter-end reporting periods from April 1, 2010 through March 31, 2011 and January 1, 2010
through December 31, 2010, respectively.
March 31, 2011
Primary Market Risk Category | High | Low | Average | |||||||||
Interest Rate |
(0.55 | )% | (0.16 | )% | (0.36 | )% | ||||||
Currency |
(0.37 | ) | (0.06 | ) | (0.15 | ) | ||||||
Commodity |
(3.90 | ) | (2.52 | ) | (3.39 | ) | ||||||
Aggregate Value at Risk |
(4.45 | )% | (2.41 | )% | (3.62 | )% |
December 31, 2010
Primary Market Risk Category | High | Low | Average | |||||||||
Interest Rate |
(0.78 | )% | (0.16 | )% | (0.42 | )% | ||||||
Currency |
(0.37 | ) | (0.06 | ) | (0.22 | ) | ||||||
Commodity |
(3.90 | ) | (2.52 | ) | (3.33 | ) | ||||||
Aggregate Value at Risk |
(4.45 | )% | (2.41 | )% | (3.65 | )% |
23
Item 4. | 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, as amended (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 Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of March 31, 2011 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. |
There were no changes in the Partnerships internal control over financial reporting process
during the fiscal quarter ended March 31, 2011 that materially affected, or are reasonably likely
to materially affect, the Partnerships internal control over financial reporting.
Limitations
on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can provide reasonable (not absolute)
assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected.
24
PART II. OTHER INFORMATION
Item 1A. | Risk Factors |
There have been no material changes to the risk factors set forth under Part I, Item 1A. Risk
Factors in the Partnerships Annual Report on the Form 10 for the fiscal year ended December 31,
2010.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
For the three months ended March 31, 2011, there were additional subscriptions of 76,611.229 Units totaling $84,499,404. The 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 Units were purchased by
accredited investors as described in Regulation D.
Proceeds from the sale of Units are used in the trading of commodity
interests including futures contracts, swaps, options and forward contracts.
The following chart sets forth the purchases of Units by the Partnership.
(d) Maximum Number |
||||||||||||||||||||
(or Approximate |
||||||||||||||||||||
(c) Total Number |
Dollar Value) of |
|||||||||||||||||||
Class A | Class A | of Units |
Units that |
|||||||||||||||||
(a) Total Number |
(b) Average |
Purchased as Part |
May Yet Be |
|||||||||||||||||
of Units |
Price Paid per |
of Publicly Announced |
Purchased Under the |
|||||||||||||||||
Period | Purchased* | Unit** | Plans or Programs | Plans or Programs | ||||||||||||||||
January 1, 2011 -
January 31, 2011 |
4,622.696 | $ | 1,109.20 | N/A | N/A | |||||||||||||||
February 1, 2011-
February 28, 2011 |
55.652 | $ | 1,117.26 | N/A | N/A | |||||||||||||||
March 1, 2011 -
March 31, 2011 |
171.310 | $ | 1,087.64 | N/A | N/A | |||||||||||||||
4,849.658 | $ | 1,108.53 | N/A | N/A | ||||||||||||||||
* | Generally, limited partners are permitted to redeem their Units as of the end of each month on three business days notice to the General Partner. Under certain circumstances, the General Partner may compel redemption but to date the General Partner has not exercised this right. Purchases of 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 Units are effected as of the last day of each month at the net asset value per Unit as of that day. |
25
Item 6. | Exhibits |
Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and
Director).
32.1 Section 1350 Certification (Certification of President and Director).
32.2 Section 1350 Certification (Certification of Chief Financial Officer and Director).
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BHM Discretionary Futures Fund L.P. By: Ceres Managed Futures LLC (General Partner) |
|||||
By: | /s/ Walter Davis | ||||
Walter Davis | |||||
President and Director |
|||||
Date: May 16, 2011 | |||||
By: | /s/ Jennifer Magro | ||||
Jennifer Magro | |||||
Chief Financial Officer and
Director (Principal Accounting Officer) |
|||||
Date: May 16, 2011 | |||||
27