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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarter ended:		March 31, 2012

or

 

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

 

For the transition period from				to

 

Commission File Number:		000-51651

WORLD MONITOR TRUST III – SERIES J

 

(Exact name of registrant as specified in its charter)

 

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

 

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

(914) 307-7000

 

(Registrant’s telephone number, including area code)

N/A

 

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

Indicate by check mark whether 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 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 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x    No  ¨

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

 

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

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

Yes  ¨    No  x

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WORLD MONITOR TRUST III – SERIES J

INDEX TO QUARTERLY REPORT ON FORM 10-Q

MARCH 31, 2012

 

				Page
PART I – FINANCIAL INFORMATION					4
Item 1.		Financial Statements			4
		World Monitor Trust III –Series J
		Condensed Statements of Financial Condition as of March 31, 2012 (Unaudited) and December 31, 2011			6
		Condensed Schedules of Investments as of March 31, 2012 (Unaudited) and December 31, 2011			7
		Condensed Statements of Operations (Unaudited) for the Three Months Ended March 31, 2012 and 2011			8
		Condensed Statements of Changes in Unitholders’ Capital (Unaudited) for the Three Months Ended March 31, 2012 and 2011			9
		Notes to Condensed Financial Statements (Unaudited)			10-30
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.		Controls and Procedures			47
PART II – OTHER INFORMATION					47
Item 1.		Legal Proceedings			47
Item 1.A.		Risk Factors			48
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3.		Defaults Upon Senior Securities			48
Item 5.		Other Information			48
Item 6.		Exhibits:			49

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;

FINANCIAL STATEMENTS TO FOLLOW]

 

 

 

 

 

 

 

 

 

 

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED FINANCIAL STATEMENTS

March 31, 2012 (Unaudited)

 

 

 

 

 

 

 

 

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF FINANCIAL CONDITION

March 31, 2012 (Unaudited) and December 31, 2011

 

 

 

		March 31, 2012				December 31, 2011
ASSETS
Cash and cash equivalents (see Note 2)		$	24,399,978			$	69,314,843
Dividend receivable			0				50,972
Due from affiliated investment funds			0				7,020,672
Investment in affiliated investment funds, at fair value (cost $25,272,954 and $8,401,176 at March 31, 2012 and December 31, 2011, respectively)			20,144,297				8,207,427
Investment in securities, at fair value (cost $92,013,874 and $62,015,348 at March 31, 2012 and December 31, 2011, respectively)			92,166,417				62,015,348
Total assets		$	136,710,692			$	146,609,262
LIABILITIES
Accrued expenses payable		$	178,977			$	148,364
Trading advisors’ incentive fees payable			0				180,647
Trading advisors’ management fees payable			0				35,884
Offering costs payable			61,381				25,016
Service fees payable (see Note 5)			196,008				201,379
Redemptions payable			4,877,624				795,582
Subscriptions received in advance			205,000				679,000
Total liabilities			5,518,990				2,065,872
UNITHOLDERS’ CAPITAL (Net Asset Value)
Class I Units:
Unitholders’ Units - 1,028,828.818 and 1,074,594.786 Units outstanding at March 31, 2012 and December 31, 2011, respectively			115,656,361				126,022,812
Managing Owner’s Units - none and none Units outstanding at March 31, 2012 and December 31, 2011, respectively			0				0
Class II Units:
Unitholders’ Units - 126,455.515 and 145,147.530 Units outstanding at March 31, 2012 and December 31, 2011, respectively			15,535,341				18,520,578
Managing Owner’s Units - none and none Units outstanding at March 31, 2012 and December 31, 2011, respectively			0				0
Total unitholders’ capital (Net Asset Value)			131,191,702				144,543,390
Total liabilities and unitholders’ capital		$	136,710,692			$	146,609,262
NET ASSET VALUE PER UNIT
Class I		$	112.42			$	117.27
Class II		$	122.85			$	127.60

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED SCHEDULES OF INVESTMENTS

March 31, 2012 (Unaudited) and December 31, 2011

 

 

 

		March 31, 2012								December 31, 2011
Forward Currency Contracts		Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)				Net Unrealized Gain (Loss) as a % of Unitholders’ Capital				Net Unrealized Gain (Loss)
Forward currency contracts purchased:
Net unrealized gain on forward currency contracts purchased			0.00	%		$	0				0.45	%		$	648,171
Forward currency contracts sold:
Net unrealized gain (loss) on forward currency contracts sold			0.00	%			0				(0.45	)%			(648,171	)
Net unrealized gain (loss) on open forward currency contracts			0.00	%		$	0				0.00	%		$	0
		March 31, 2012								December 31, 2011
Investment in Securities		Fair Value as a % of Unitholders’ Capital				Fair Value				Fair Value as a % of Unitholders’ Capital				Fair Value
Publicly-traded mutual funds
JPMorgan Short Duration Bond (shares 2,800,241.504 and 2,831,751.050 at March 31, 2012 and December 31, 2011, respectively)			23.42	%		$	30,718,649				21.45	%		$	31,007,674
Fidelity Instl Shrt-Interm Govt (shares 3,040,170.603 and none at March 31, 2012 and December 31, 2011, respectively)			23.36	%			30,644,920				0.00	%			0
T Rowe Price Short-Term Fund (shares 6,364,224.860 and 6,446,501.870 at March 31, 2012 and December 31, 2011, respectively)			23.48	%			30,802,848				21.45	%			31,007,674
Total investments in securities, at fair value (cost $92,013,874 and $62,015,348 at March 31, 2012 and December 31, 2011, respectively)			70.26	%		$	92,166,417				42.90	%		$	62,015,348
Investments in Affiliated Investment Funds
Total investment in affiliated investment funds, at fair value (cost $25,272,954 and $8,401,176 at March 31, 2012 and December 31, 2011, respectively)			15.35	%		$	20,144,297				5.68	%		$	8,207,427

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

 

 

		Three months ended March 31,
		2012				2011
REVENUE
Realized		$	7,722			$	1,775,042
Change in unrealized			152,543				(2,814,391	)
Dividend income			312,752				599,682
Interest income			6,955				4,335
Net gain (loss) from trading investments			479,972				(435,332	)
Net realized loss on investments in affiliated investment funds			(679	)			0
Net change in unrealized depreciation on investment in affiliated investment funds			(4,934,908	)			(473,707	)
Net loss from investments in affiliated investment funds			(4,935,587	)			(473,707	)
Total loss on investments			(4,455,615	)			(909,039	)
EXPENSES
Interest expenses			1,440				0
Brokerage commissions			0				135,591
Management fees to Managing Owner			177,291				190,562
ClariTy Managed Account fees			0				95,281
Managing owner interest earned on investment funds			64,974				190,562
Trading advisors’ management fees			0				432,672
Trading advisors’ incentive fees			0				405,621
Services fees - Class I Units (see Note 5)			546,350				669,980
Sales commission			358,749				381,123
Offering costs			70,427				93,742
Operating expenses			136,294				191,397
Total expenses			1,355,525				2,786,531
NET LOSS		$	(5,811,140	)		$	(3,695,570	)
NET LOSS PER WEIGHTED AVERAGE UNITHOLDER AND MANAGING OWNER UNIT
Net loss per weighted average unitholder and Managing Owner Unit
Class I		$	(4.88	)		$	(3.20	)
Class II		$	(4.65	)		$	(2.83	)
Weighted average number of units outstanding - Class I			1,058,993				1,036,817
Weighted average number of units outstanding - Class II			137,311				134,001

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF CHANGES IN UNITHOLDERS’ CAPITAL

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

 

 

		Class I																Class II
		Unitholders								Managing Owner Interests								Unitholders								Managing Owner Interests								Total
		Units				Amount				Units				Amount				Units				Amount				Units				Amount				Units				Amount
Three months ended March 31, 2012
Unitholders’ capital at December 31, 2011			1,074,594.786			$	126,022,812				0.000			$	0				145,147.530			$	18,520,578				0.000			$	0				1,219,742.316			$	144,543,390
Additions			14,507.903				1,699,200				0.000				0				1,049.339				134,000				0.000				0				15,557.242				1,833,200
Redemptions			(60,273.871	)			(6,893,613	)			0.000				0				(19,741.354	)			(2,480,135	)			0.000				0				(80,015.225	)			(9,373,748	)
Net loss for the three months ended March 31, 2012							(5,172,038	)							0								(639,102	)							0				0.000				(5,811,140	)
Unitholders’ capital at March 31, 2012			1,028,828.818			$	115,656,361				0.000			$	0				126,455.515			$	15,535,341				0.000			$	0				1,155,284.333			$	131,191,702
Three months ended March 31, 2011
Unitholders’ capital at December 31, 2010			1,033,469.123			$	132,255,516				0.000			$	0				125,308.427			$	17,110,868				2,362.860			$	322,649				1,161,140.410			$	149,689,033
Additions			27,578.964				3,532,585				0.000				0				13,692.531				1,866,585				0.000				0				41,271.495				5,399,170
Redemptions			(27,612.447	)			(3,509,862	)			0.000				0				(3,227.365	)			(433,660	)			0.000				0				(30,839.812	)			(3,943,522	)
Net loss for the three months ended March 31, 2011							(3,315,969	)							0								(373,174	)							(6,427	)							(3,695,570	)
Unitholders’ capital at March 31, 2011			1,033,435.640			$	128,962,270				0.000			$	0				135,773.593			$	18,170,619				2,362.860			$	316,222				1,171,572.093			$	147,449,111

 

See accompanying notes.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Note 1.

ORGANIZATION

 

A.

General Description of the Trust

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

As the Managing Owner of the Trust and of each Series, Kenmar Preferred Investments Corp. (“Kenmar Preferred” or the “Managing Owner”) conducts and manages the business of the Trust and each Series.

From January 1, 2008 through June 30, 2009, Series J allocated its assets to three managed accounts separately managed by the following trading advisors: Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program, Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program, and Graham Capital Management, L.P. (“Graham”) pursuant to its K4D-15V Program. Effective July 1, 2009, Series J entered into trading agreements with an additional three trading advisors: GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Commodity Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus Program.

Beginning April 1, 2010, Series J entered into trading advisory agreements with Tudor Investment Corporation (“Tudor”), pursuant to its Tudor Quantitative Commodities Strategy, and Paskewitz Asset Management, LLC (“Paskewitz”), pursuant to its Contrarian Stock Index Program). Paskewitz, together with Graham, Eagle, Ortus, Krom, Crabel and Tudor are each referred to herein as a “Trading Advisor” and collectively referred to herein as the “Trading Advisors.” Beginning April 1, 2010, Series J allocated approximately one-seventh of its net assets to each Trading Advisor’s managed account (each a “Managed Account” and collectively, the “Managed Accounts”), with such allocations to be re-balanced quarterly.

The Managing Owner terminated the Managed Account agreements with GLC, Graham, Eagle, Crabel, Tudor and Paskewitz, Ortus and Krom effective March 31, 2010, December 31, 2010, April 30, 2011, August 31, 2011, October 31, 2011, December 31, 2011, December 31, 2011 and December 31, 2011, respectively.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

A.

General Description of the Trust (Continued)

 

Effective January 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice GRM (“GRM”), a segregated series of CTA Choice Fund LLC (the “Company”), a Delaware limited liability company organized in series. Graham is the Trading Advisor for GRM and will manage the assets pursuant to its K4D-15V Program. Any loss carry forward from Series J’s Graham Managed Account was transferred over to Series J’s member interest in GRM.

Effective May 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice EAGL (“EAGL”), a segregated series of the Company. Eagle is the Trading Advisor for EAGL and will manage the assets pursuant to the Eagle Momentum Program. Any loss carry forward from Series J’s Eagle Managed Account was transferred over to Series J’s member interest in EAGL.

Effective September 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice CRABL-PV (“CRABL-PV”), a segregated series of the Company. Crabel is the Trading Advisor for CRABL-PV and will manage the assets pursuant to its Two Plus Program. Any loss carry forward from Series J’s Crabel Managed Account was transferred over to Series J’s member interest in CRABL-PV.

Effective October 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice KRM (“KRM”), a segregated series of the Company. Krom is the Trading Advisor of KRM and will manage the assets pursuant to its Commodity Diversified Program. Any loss carry forward from Series J’s Krom Managed Account was transferred over to Series J’s member interest in KRM.

Effective November 1, 2011, Series J allocated approximately one-seventh of its net assets to CTA Choice TDRM (“TDRM”), a segregated series of the Company. Tudor is the Trading Advisor of TDRM and will manage the assets pursuant to its Tudor Quantitative Commodities Strategy. Any loss carry forward from Series J’s Tudor Managed Account was transferred over to Series J’s member interest in TDRM.

Effective December 31, 2011, Series J fully redeemed from GRM and TDRM.

Effective January 1, 2012, the allocation to EAGL was split with a 50% allocation to EAGL and a 50% allocation to CTA Choice EGLG (“EGLG”), a segregated series of the Company. Eagle is the Trading Advisor for EGLG and will manage the assets pursuant to its Eagle Global Program.

Effective January 1, 2012, Series J allocated approximately one-seventh of its net assets to CTA Choice ORT (“ORT”), a segregated series of the Company. Ortus is the Trading Advisor for ORT and will manage the assets pursuant to its Major Currency Program. Any loss carry forward from Series J’s Ortus Managed Account was transferred over to Series J’s member interest in ORT.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

A.

General Description of the Trust (Continued)

 

Effective January 1, 2012, Series J allocated approximately one-seventh of its net assets to CTA Choice SAXN (“SAXN”), a segregated series of the Company. Saxon Investment Corporation is the Trading Advisor for SAXN and will manage the assets pursuant to its Saxon Aggressive Diversified Program.

Effective January 1, 2012, Series J allocated approximately one-seventh of its net assets to CTA Choice BLKW (“BLKW”), a segregated series of the Company. Blackwater Capital Management, LLC is the Trading Advisor for BLKW and will manage the assets pursuant to its Blackwater Global Program.

Effective January 1, 2012, Series J allocated approximately one-seventh of its net assets to CTA Choice BEAM (“BEAM”), a segregated series of the Company. BEAM Bayesian Efficient Asset Management, LLC is the Trading Advisor for BEAM and will manage the assets pursuant to its BEAM Multi-Strategy Program. BEAM, together with GRM, EAGL, CRABL-PV, KRM, TDRM, EGLG, ORT, SAXN and BLKW are each referred to herein as an “Affiliated Investment Fund” and collectively referred to herein as the “Affiliated Investment Funds.”

ClariTy Managed Account & Analytics Platform LLC (“ClariTy”) serves as the managing member for the Company. The Company consists of multiple segregated series, each established pursuant to a separate Certificate of Designation prepared by the Company’s managing member. Each series maintains separate and distinct records. The assets associated with each series, and the liabilities and obligations incurred with respect to a particular series are enforceable only against the assets of that series. ClariTy charges Series J, within each of the Affiliated Investment Funds, a monthly managed account fee of 25 basis points of Series J’s beginning of month allocated assets for providing certain administrative services.

Kenmar Global Investment Management LLC (“Asset Allocator”), an affiliate of the Managing Owner, is the Asset Allocator of the Company. Pursuant to the Asset Allocation Agreements between the Managing Owner, the Asset Allocator, and each interestholder, the Asset Allocator determines the trading level of each interestholder’s assets and reallocates among the separate series of the Company as agreed upon with the trading advisors. While the Asset Allocator receives no fees for such services from Series J, the Asset Allocator is paid management and incentive fees directly from the interestholders pursuant to each interestholder’s Asset Allocation Agreement.

The segregated series of the Company were formed to engage in the speculative trading of a diversified portfolio of futures, forward (including interbank foreign currencies) and options contracts and other derivative instruments and may, from time to time, engage in cash and spot transactions.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

B.

Regulation

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

 

C.

The Offering

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

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

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

Series J completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443. Until the Subscription Maximum for Series J is reached, Series J’s Units will continue to be offered on a monthly basis at the then current net asset value per Unit.

 

D.

Exchanges, Redemptions and Termination

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

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 1.

ORGANIZATION (CONTINUED)

 

D.

Exchanges, Redemptions and Termination (Continued)

 

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

In addition, in the event that the Net Asset Value of the allocated assets, after adjustments for distributions, contributions and redemptions, for the Affiliated Investment Funds declines by 40% or more since the commencement of trading activities or the first day of a fiscal year, that Affiliated Investment Fund will automatically terminate. The Managing Owner may terminate any current Trading Advisor or select new advisors or new trading programs of the Trading Advisors from time to time in its sole discretion.

 

E.

Foreign Currency Transactions

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

 

F.

Investments in Affiliated Investment Funds

The investments in the Affiliated Investment Funds are reported in Series J’s condensed statement of financial condition. Fair value ordinarily is the value determined for the Affiliated Investment Funds in accordance with the fund’s valuation policies and reported at the time of Series J’s valuation by the management of the funds. Generally, the fair value of Series J’s investments in the funds represents the Net Asset Value which is the amount that Series J could reasonably expect to receive from the funds if Series J’s investments were redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that Series J believes to be reliable.

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A.

Basis of Accounting

The condensed statements of financial condition, including the condensed schedules of investments, as of March 31, 2012, the condensed statements of operations for the three months ended March 31, 2012 (“First Quarter 2012”) and for the three months ended March 31, 2011 (“First Quarter 2011”) and the condensed statements of changes in trust capital for the First Quarter 2012 and First Quarter 2011 are unaudited.

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A.

Basis of Accounting (Continued)

 

In the opinion of the Managing Owner, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of Series J as of March 31, 2012 and the results of its operations for the First Quarter 2012 and First Quarter 2011. The operating results for these interim periods may not be indicative of the results expected for a full year.

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

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in Series J’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011.

Commodity futures, options and foreign exchange forward contracts are reflected in the accompanying financial statements on the trade date basis. Net unrealized gain or loss on open contracts (the difference between contract trade price and market price) are offset when reflected in the financial statements since the contracts are executed with the same counterparty under a master netting agreement (See Note 10). The market value of futures (exchange-traded) contracts is based upon the closing quotation on the various futures exchanges on which the contract is traded. The values which will be used by Series J for open forward and option positions will be provided by its administrator, who obtains market quotes from independent data vendors and third parties. Any change in net unrealized gain or loss during the current period is reported in the statements of operations. Realized gains and losses on transactions are recognized in the period in which the contracts are closed. Brokerage commissions include other trading fees and are charged to expense when incurred.

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

Investments in securities consist of publicly-traded mutual funds. Publicly-traded mutual funds are valued using the net asset value on the last day of the period provided by a third party pricing service. Realized gains and losses from investment securities are determined using the identified cost method. Any change in net unrealized gain or loss from the preceding period is reported in the condensed statement of operations. Dividends are recorded on the ex-dividend date.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

A.

Basis of Accounting (Continued)

 

Series J has elected not to provide a statement of cash flows since substantially all of Series J’s investments are highly liquid and carried at fair value, Series J has little or no debt and a condensed statement of changes in unitholders’ capital (net asset value) is provided.

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

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

Series J considers its investments in publicly-traded mutual funds, prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps and certain options contracts for which market quotations are not readily available are priced by independent third party data vendors or pricing services who derive fair values for those assets from observable inputs (Level 2). Series J’s investments in the Affiliated Investment Funds are classified as Level 2 using the fair value hierarchy. The Level 2 investments in Affiliated Investment Funds are valued at the net asset value as reported by the underlying investment funds’ capital balance using the expedient method. The carrying value of the underlying investments in Affiliated Investment Funds is at fair value. There are no Level 3 investments on March 31, 2012 or December 31, 2011.

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

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

B.

Recent Accounting Pronouncement

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (“ASU 2011-04”) to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. It does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amended guidance is effective for financial statements for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance effective January 1, 2012, did not have a material impact on Series J’s condensed financial statements.

 

C.

Cash and Cash Equivalents

Cash and cash equivalents represents amounts deposited with clearing brokers and a bank, a portion of which is restricted for purposes of meeting margin requirements, which typically ranged from 0% to 35% of the notional amounts of the derivatives traded. A substantial portion of the cash deposited with a bank is deposited in an off-shore sweep account facility daily. Series J receives interest on all cash balances held by the clearing brokers and bank at prevailing rates.

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

 

D.

Income Taxes

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

Series J recognizes tax benefits or expenses of uncertain tax positions in the year such determination is made when the positions are “more likely than not” to be sustained assuming examination by tax authorities. The Managing Owner has reviewed Series J’s tax positions for all open years (after December 31, 2007) and concluded that no provision for unrecognized tax benefits or expense is required in these financial statements. Series J has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense. The 2008 through 2011 tax years generally remain subject to examination by U.S. federal and most state tax authorities.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

E.

Profit and Loss Allocations and Distributions

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

 

F.

Offering Costs

In accordance with the Trust’s Agreement and Prospectus, the Managing Owner is responsible for the payment of all offering expenses of Series J incurred after the Initial Offering Period (“ongoing offering costs”), provided that the amount of such ongoing offering costs paid by the Managing Owner are subject to reimbursement by the Trust, without interest, in up to 36 monthly payments during each of the first 36 months following the month in which such expenses were paid by the Managing Owner. Through March 31, 2012, the Managing Owner has paid $2,451,099 in ongoing offering costs, of which $2,393,937 has been allocated to Series J.

Ongoing offering costs incurred through November 30, 2006 in the amount of $599,062 will not be reimbursed to the Managing Owner. For the period December 1, 2006 through March 31, 2012, the Managing Owner incurred and Series J was allocated ongoing offering costs in the amount of $1,814,480 and $1,794,874, respectively. Of the $1,794,874, allocated to Series J, $635,144 will not be reimbursable to the Managing Owner.

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

During the First Quarter 2012 and First Quarter 2011, Series J’s allocable portion of ongoing offering costs did not exceed 0.50% per annum of the net asset value of Series J.

 

G.

Interest Income and Dividend Income

Interest is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.

 

Note 3.

RELATED PARTIES

Series J reimburses the Managing Owner for services it performs for Series J, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, risk management and related services with respect to monitoring the Trading Advisors and the Trust and other administrative services.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 3.

RELATED PARTIES (CONTINUED)

 

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

 

Expenses payable to the Managing Owner and its affiliates (which are included in accrued expenses payable on the condensed statements of financial condition) as of March 31, 2012 and December 31, 2011 were $61,203 and $68,447, respectively.

 

Note 4.

MANAGING OWNER AND AFFILIATES

Effective October 31, 2011, the Managing Owner and/or its affiliates redeemed 100% of their interest in Series J. Prior to October 31, 2011 the Managing Owner and/or its affiliates had purchased and maintained an interest in Series J in an amount less than 1% of the net asset value of Series J. The Managing Owner is no longer required under the terms of the Trust Agreement to maintain a 1% interest.

The Managing Owner is paid a monthly management fee of 1/12 of 0.5% (0.5% annually) of Series J’s net asset value at the beginning of each month (See Note 5).

From October 1, 2010 to December 31, 2011, Series J paid a monthly fee in the amount of 1/12 of 0.25% of Series J’s beginning net asset value to ClariTy for risk management and related services with respect to monitoring the Trading Advisors. Effective January 1, 2012, Series J will pay this fee indirectly through its investments in the Affiliated Investment Funds.

The Managing Owner has determined that it is in the best interest of Series J to invest a portion of its non-margin assets, either directly or indirectly through certain investment funds, in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rule and regulations. Effective January 1, 2011, the Managing Owner is paid monthly 1/12 of 50% of the first 1% of the positive returns earned on Series J’s investment of non-margin assets. The calculation is based on the average annualized net asset value, and any losses related to returns on the non-margin assets must first be recovered through subsequent positive returns prior to the Managing Owner receiving a payment.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 4.

MANAGING OWNER AND AFFILIATES (CONTINUED)

 

After the calculation of the amount payable to the Managing Owner, Series J will be credited with all additional positive returns (or 100% of any losses) on the Registrant’s investment of non-margin assets. If at the end of any calendar year a loss has been incurred on the returns for the non-margin assets, then the loss carry forward will reset to zero for the next calendar year with regards to the calculation of the Managing Owner’s portion of the non-margin asset’s income. For the First Quarter 2012, the Managing Owner’s portion of income earned on the non-margin assets amounted to $64,974.

 

Note 5.

SERVICE FEES AND SALES COMMISSIONS

Through June 30, 2009, Series J paid a service fee with respect to Class I Units, monthly in arrears, equal to 1/12 of 2% (2% per annum) of the Net Asset Value per Unit of the outstanding Class I Units as of the beginning of the month. The service fee was paid directly by Series J to Kenmar Securities Inc. (“Selling Agent”), an affiliate of the Managing Owner. The Selling Agent was responsible for paying all commissions owing to the Correspondent Selling Agents (“CSA”), who were entitled to receive from the Selling Agent an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by them, payable on the date such Class I Units are purchased.

Commencing with the 13^th month after the purchase of a Class I Unit, the CSAs received an ongoing monthly commission equal to 1/12^th of 2% (2% per annum) of the net asset value per Class I Unit as of the beginning of each month of the Class I Units sold by them. Beginning July 1, 2009, Series J (rather than the Selling Agent) pays its service fee on Class I Units directly to the CSA’s.

Starting July 1, 2009, Service Fee – Class I Units (as described below) disclosed on the condensed statements of operations represents the monthly 1/12 of 2% of the net asset value per Class I Unit as of the beginning of each month of the Class I Units. The service fee calculated on all Class I Units is the initial upfront sales commission of 2% and a deduction for Series J’s recapture of the 1/12 of 2% service fee on all Units owned for less than 12 months that have received the 2% upfront sales commission, a recapture of the service fee on Units held with no CSA.

For the First Quarter 2012 and First Quarter 2011, the Service Fee – Class I Units is composed of the following:

 

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

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 5.

SERVICE FEES AND SALES COMMISSIONS (CONTINUED)

 

Effective October 1, 2010, Series J has agreed to pay a monthly fee to Wells Fargo for providing continuing due diligence, training, operations, system support, and marketing. For Class I and II Units purchased by clients of Wells Fargo on or prior to October 1, 2010, the fee is 1/12^th of 0.10% (0.10% per annum) of the beginning of the month net asset value. For Class I and II Units purchased subsequent to October 1, 2010 the fee is 1/12^th of 0.30% (0.30% per annum) of the beginning of the month net asset value. These fees will be deducted from the management fee paid to the Managing Owner.

 

Note 6.

ADMINISTRATOR

Spectrum Global Fund Administration, L.L.C. (“Spectrum” or the “Administrator”), a Delaware limited liability, was the administrator of Series J and provided certain administration and accounting services pursuant to the terms of a Services Agreement with Series J dated as of May 23, 2007. On December 10, 2010, AlphaMetrix360, LLC purchased the assets of Spectrum.

Effective May 31, 2011, Series J replaced AlphaMetrix 360, LLC with GlobeOp Financial Services LLC (“GlobeOp” or the “Administrator”), a Delaware limited liability company, as administrator and AlphaMetrix 360, LLC Services Agreement with Series J was terminated effective close of business on May 31, 2011.

The Administrator performs or supervises the performance of services necessary for the operation and administration of Series J (other than making investment decisions), including administrative and accounting services. The Administrator also calculates Series J’s Net Asset Value. In addition, the Administrator maintains certain books and records of Series J, including certain books and records required by CFTC Rule 4.23(a). “Administrator” refers to Spectrum, AlphaMetrix 360, LLC, or GlobeOp depending on the applicable period discussed.

For the First Quarter 2012 and the First Quarter 2011, Series J paid administration fees of $0 and $74,932, respectively, of which $0 remains payable by Series J at March 31, 2012. Effective January 1, 2012, Series J pays administration fees directly through the Affiliated Investment Funds and is reflected through their respective Net Asset Value.

 

Note 7.

INVESTMENT IN AFFILIATED INVESTMENT FUNDS

Series J’s investments in the Affiliated Investment Funds represents approximately 15.35% of the net asset value of Series J at March 31, 2012. The investments in the Affiliated Investment Funds are reported in Series J’s condensed statements of financial condition at its fair value. Series J records its proportionate share of income or loss in the condensed statements of operations. The investments are subject to the terms of the organizational and offering documents of the Affiliated Investment Funds.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 7.

INVESTMENT IN AFFILIATED INVESTMENT FUNDS (CONTINUED)

 

The following table summarizes the change in fair value of Series J’s Level 2 investments in Affiliated Investment Funds for the First Quarter 2012 and 2011.

 

The Affiliated Investment Funds are redeemable semi-monthly to monthly and require a redemption notice of 1-5 days.

Through its investments in the Affiliated Investment Funds, Series J pays its pro-rata share of the following trading advisor management fees and incentive fees for achieving “New High Net Trading Profits,” as defined in their respective advisory agreements.

 

 

 

  *  Series J fully redeemed from GRM and TDRM as of December 31, 2011.

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NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 7.

INVESTMENTS IN AFFILIATED INVESTMENT FUNDS (CONTINUED)

 

Series J’s investment in the Affiliated Investment Funds are notionally funded, and the following table sets out the total capital commitment split between net asset value (amount funded) and the remaining capital commitment. The remaining capital commitment is the amount that can be requested from Series J if requested by the Affiliated Investment Funds to meet margin calls in accordance with the governing documents. However, Series J has no capital commitment to the Affiliated Investment Funds except as disclosed below.

 

Series J’s investments in the Affiliated Investment Funds are subject to the market and credit risks of securities held or sold short by this fund. ClariTy has established procedures to monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The interestholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.

 

Note 8.

TRUSTEE

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

 

Note 9.

COSTS, FEES AND EXPENSES

 

A.

Operating Expenses

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

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(Unaudited)

 

 

 

Note 9.

COSTS, FEES AND EXPENSES (CONTINUED)

 

B.

Management and Incentive Fees

Through December 31, 2011, Series J paid each Trading Advisor a monthly management fee and a quarterly incentive fee (calculated monthly) pursuant to the applicable managed account advisory agreement.

 

Trading Advisor		Management Fee % (1)				Incentive Fee % (2)
Ortus			1.00				25.00
Eagle			2.00				25.00
Graham			2.50				25.00
GLC			2.00				25.00
Krom			1.50				25.00
Paskewitz			1.00				25.00
Crabel			1.00				25.00
Tudor			2.00				25.00

 

 

(1)

The Management Fee is paid monthly at a rate equal to 1/12 of the indicated rate above of the net asset value of Series J accordance with the applicable advisory agreement.

(2)

The Incentive Fee is paid quarterly on the percentage indicated of new net high trading profits of Series J in accordance with the applicable advisory agreement.

 

Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS

The fair value of Series J’s derivatives by instrument type, as well as the location of those instruments on the statements of financial condition as of March 31, 2012 and December 31, 2011, are included in the condensed schedule of investments, all of which are deemed derivatives not designated as hedging instruments. No derivatives were held as of March 31, 2012. Derivative trading activity is now conducted within the Affiliated Investment Funds.

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(Unaudited)

 

 

 

Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

The following presents the fair value of derivative contracts at March 31, 2012 and December 31, 2011. The fair value of derivative contracts is presented as an asset if in a gain position and a liability if in a loss position. Fair value is presented on a gross basis in the table below even though the derivative contracts qualify for net presentation in the condensed statements of financial condition.

 

		March 31, 2012												December 31, 2011
Description		Assets				Liabilities				Net				Assets				Liabilities				Net
Forward Currency Contracts		$	0			$	0			$	0			$	648,171			$	(648,171	)		$	0
Total gross fair value of derivatives		$	0			$	0			$	0			$	648,171			$	(648,171	)		$	0

The trading revenue of Series J’s derivatives by instrument type, as well as the location of those gains and losses on the condensed statements of operations, for the First Quarter 2012 and 2011 is as follows:

 

		Trading Revenue for the
		First Quarter 2012				First Quarter 2011
Type of instrument
Commodities contracts		$	0			$	821,144
Currencies contracts			0				(678,680	)
Energy contracts			0				1,598,814
Interest rate contracts			0				(796,328	)
Metals contracts			0				(902,618	)
Stock indices contracts			0				(1,531,063	)
Purchases options on futures contracts			0				62,840
Written options on futures contracts			0				12,731
Forward currency contracts			0				176,346
Total		$	0			$	(1,236,814	)
Line item in the condensed statement of operations
Realized		$	0			$	1,775,042
Unrealized			0				(3,011,856	)
Total		$	0			$	(1,236,814	)

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(Unaudited)

 

 

 

Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

For the First Quarter 2012 and 2011, the total number of closed futures contracts was 0 and 29,299 respectively, the total number of closed options on futures contracts was 0 and 2,477, respectively, and the average monthly notional value of forward currency contracts closed was $0 and $1,571,097,765, respectively.

The average monthly notional value of contracts closed represents the average monthly U.S. dollar notional value of futures and options on futures contracts closed and settled in cash during the First Quarter 2012 and 2011.

Series J’s investments in Affiliated Investment Funds are subject to the market and credit risks of the futures contracts, options on futures contracts, forward currency contracts and other financial instruments held or sold short by them. Series J bears the risk of loss only to the extent of the market value of its investment and, in certain specific circumstances, distributions and redemptions received.

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

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

Market Risk

Trading in futures and forward contracts (including foreign exchange) involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series J’s net assets being traded, significantly exceeds Series J’s future cash requirements since Series J intends to close out its open positions prior to settlement. As a result, Series J is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series J considers the fair value of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series J’s commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series J enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contracts at prevailing market prices or settle in cash. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series J to unlimited risk. In addition, as both a buyer and seller of options, Series J pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose Series J to potentially unlimited liability, and purchased options expose Series J to a risk of loss limited to the premiums paid.

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(Unaudited)

 

 

 

Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

Market Risk (Continued)

 

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

Credit Risk

When entering into futures or forward contracts, Series J is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on U.S. and most foreign futures exchanges is the clearinghouse associated with the particular exchange. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, there is concentration risk on forward transactions entered into by Series J, as Series J’s clearing broker is the sole counterparty.

Series J has entered into a master netting agreement with UBS Securities LLC, the clearing broker for Ortus. Series J has also entered into a master netting agreement with Newedge USA LLC, the clearing broker for Tudor. Series J does not have a master netting agreement between UBS Securities LLC and Newedge USA LLC. As a result of the master netting agreements, when applicable, Series J presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of Series J’s contracts is the net unrealized gain (loss) included in the statements of financial condition; however, counterparty non-performance on only certain of Series J’s contracts may result in greater loss than non-performance on all of Series J’s contracts. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series J.

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

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

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(Unaudited)

 

 

 

Note 10.

DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

At March 31, 2012 and December 31, 2011, such segregated assets totaled $0 and $0, respectively, which are included in cash and cash equivalents on the statements of financial condition. Part 30.7 of the CFTC regulations also requires Series J’s futures commission merchants to secure assets of Series J related to foreign futures trading, which totaled $0 and $0 at March 31, 2012 and December 31, 2011, respectively. There are no segregation requirements for assets related to forward trading.

As of March 31, 2012, Series J had no open futures or forward currency contracts as Series J has transitioned from investments in direct managed accounts to accessing the Trading Advisors through the Company’s managed account platform.

 

 

 

 

 

 

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Note 11.

FINANCIAL HIGHLIGHTS

The following information presents per Unit operating performance data and other supplemental financial data for the First Quarter 2012 and 2011. This information has been derived from information presented in the financial statements.

 

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

 

 

(1)

Dividend and Interest income per Unit, expenses per Unit are calculated by dividend and interest income and expenses applicable to each class by the weighted average number of Units of each class outstanding during the period. Total trading and investing loss is a balancing amount necessary to reconcile the change in net asset value per Unit of each class with the other per Unit information.

(2)

Represents dividend and interest income less total expenses (exclusive of incentive fees). Excludes the Trust’s proportionate share of income and expenses from investments in affiliated funds.

(3)

Annualized.

(4)

Not annualized.

-25-

 

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WORLD MONITOR TRUST III – SERIES J

NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 

 

 

Note 12.

SUBSEQUENT EVENTS

The following table sets out the total capital commitment split between net asset value (amount funded) and the remaining capital commitments as of April 30, 2012:

 

From April 1, 2012 through May 11, 2012, there were estimated subscriptions of $140,000; effective for May 1, 2012 and estimated redemptions of $3,913,161, effective for April 30, 2012.

 

 

 

 

 

 

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Item 2.

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

This report on Form 10-Q (the “Report”) for the quarter ending March 31, 2012 (“First Quarter 2012”) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments Corp., the managing owner of World Monitor Trust III – Series J (“Registrant”), about the future results, performance, prospects and opportunities of Registrant. The managing owner has tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “should,” “estimate” or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the managing owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause Registrant’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, the managing owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Introduction

General

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

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

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

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

Managing Owner and its Affiliates

Kenmar Preferred Investments Corp. (“Kenmar Preferred” or the “Managing Owner”) is the Managing Owner of the Registrant.

Kenmar Preferred has been the Managing Owner of Registrant since October 1, 2004. The Managing Owner may, but is not required under the terms of the Trust Agreement to maintain an interest in Registrant.

Registrant reimburses the Managing Owner for services it performs for Registrant, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, risk management and related services with respect to monitoring the Trading Advisors and the Trust and other administrative services. In addition to the reimbursements paid to the Managing Owner, the Registrant paid a monthly fee from October 1, 2010 to December 31, 2011, to ClariTy Managed Account & Analytics Platform LLC (“ClariTy”), an affiliate of the Managing Owner, for risk management and related services with respect to monitoring the trading advisors.

 

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The Offering

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

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

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

The Trading Advisors and the Trading Vehicles

From January 1, 2008 through June 30, 2009, Registrant allocated its assets to the three managed accounts separately managed by the advisors: Eagle Trading Systems Inc. (“Eagle”) pursuant to its Momentum Program, Ortus Capital Management Limited (“Ortus”) pursuant to its Major Currency Program, and Graham Capital Management, L.P. (“Graham”) pursuant to its K4D-15V Program. Effective July 1, 2009, Registrant entered into trading advisory agreements with GLC Ltd. (“GLC”) pursuant to both its Behavioral Trend and Directional Programs, Krom River Investment Management (Cayman) Limited (“Krom”) pursuant to its Diversified Program and Crabel Capital Management, LLC (“Crabel”) pursuant to its Two Plus Program. The Managing Owner may terminate any current managed account agreement with an Advisor or select new Trading Advisors, from time-to-time, in its sole discretion, in order to achieve the goals of the portfolio.

Beginning April 1, 2010, Registrant entered into trading advisory agreements with Tudor Investment Corporation (“Tudor”), pursuant to its Tudor Quantitative Commodities Strategy and Paskewitz Asset Management, LLC (“Paskewitz”), pursuant to its Contrarian Stock Index Program). Paskewitz, together with Graham, Eagle, Ortus, Krom, Crabel and Tudor are each referred to herein as a “Trading Advisor” and collectively referred to herein as the “Trading Advisors.” Beginning April 1, 2010, Registrant allocated approximately one-seventh of its net assets to each Trading Advisor’s managed account (each a “Managed Account” and collectively, the “Managed Accounts”), with such allocations to be re-balanced quarterly.

The Managing Owner terminated the Managed Account agreements with GLC, Graham, Eagle, Crabel, Tudor and Paskewitz, Ortus and Krom effective March 31, 2010, December 31, 2010, April 30, 2011, August 31, 2011, October 31, 2011, December 31, 2011, December 31, 2011 and December 31, 2011, respectively.

Effective January 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice GRM (“GRM”), a segregated series of CTA Choice Fund LLC (the “Company”), a Delaware limited liability company organized in series. Graham is the Trading Advisor for GRM and will manage the assets pursuant to its K4D-15V Program. Any loss carry forward from Registrant’s Graham Managed Account was transferred over to Registrant’s member interest in GRM.

Effective May 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice EAGL (“EAGL”), a segregated series of the Company. Eagle is the Trading Advisor for EAGL and will manage the assets pursuant to its Momentum Program. Any loss carry forward from Registrant’s Eagle Managed Account was transferred over to Registrant’s member interest in EAGL.

 

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Effective September 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice CRABL PV (“CRABL-PV”), a segregated series of the Company. Crabel is the Trading Advisor for CRABL-PV and will manage the assets pursuant to its Two Plus Program. Any loss carry forward from Registrant’s Crabel Managed Account was transferred over to Registrant’s member interest in CRABL-PV.

Effective October 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice KRM (“KRM”), a segregated series of the Company. Krom is the Trading Advisor of KRM and will manage the assets pursuant to its Commodity Diversified Program. Any loss carry forward from Registrant’s Krom Managed Account was transferred over to Registrant’s member interest in KRM.

Effective November 1, 2011, Registrant allocated approximately one-seventh of its net assets to CTA Choice TDRM (“TDRM”), a segregated series of the Company. Tudor is the Trading Advisor of TDRM and will manage the assets pursuant to its Tudor Quantitative Commodities Strategy. Any loss carry forward from Registrant’s Tudor Managed Account was transferred over to Registrant’s member interest in TDRM.

Effective December 31, 2011, Registrant fully redeemed from GRM and TDRM.

Effective January 1, 2012, the allocation to EAGL was split to a 50% allocation to EAGL and a 50% allocation to CTA Choice EGLG (“EGLG”), a segregated series of the Company. Eagle is the Trading Advisor for EGLG and will manage the assets pursuant to its Eagle Global Program.

Effective January 1, 2012, Registrant allocated approximately one-seventh of its net assets to CTA Choice ORT (“ORT”), a series of the Company. Ortus is the Trading Advisor for ORT and will manage the assets pursuant to its Major Currency Program. Any loss carry forward from Registrant’s Ortus Managed Account was transferred over to Registrant’s member interest in ORT.

Effective January 1, 2012, Registrant allocated approximately one-seventh of its net assets to CTA Choice SAXN (“SAXN”), a segregated series of the Company. Saxon Investment Corporation is the Trading Advisor for SAXN and will manage the assets pursuant to its Saxon Aggressive Diversified Program.

Effective January 1, 2012, Registrant allocated approximately one-seventh of its net assets to CTA Choice BLKW (“BLKW”), a segregated series of the Company. Blackwater Capital Management, LLC is the Trading Advisor for BLKW and will manage the assets pursuant to its Blackwater Global Program.

Effective January 1, 2012, Registrant allocated approximately one-seventh of its net assets to CTA Choice BEAM (“BEAM”), a segregated series of the Company. BEAM Bayesian Efficient Asset Management, LLC is the Trading Advisor for BEAM and will manage the assets pursuant to its BEAM Multi-Strategy Program. BEAM, together with GRM, EAGL, CRABL-PV, KRM, TDRM, EGLG, ORT, SAXN and BLKW are each referred to herein as an “Affiliated Investment Fund” and collectively referred to herein as the “Affiliated Investment Funds.”

ClariTy serves as the managing member for the Company. The Company consists of multiple segregated series, each established pursuant to a separate Certificate of Designation prepared by the Company’s managing member. Each series maintains separate and distinct records. The assets associated with each series, and the liabilities and obligations incurred with respect to a particular series are enforceable only against the assets of that series. ClariTy charges the Registrant, within each of the Affiliated Investment Funds; a monthly managed account fee of 25 basis points of Registrants beginning of month allocated assets for providing certain administrative services.

Kenmar Global Investment Management LLC (“Asset Allocator”), an affiliate of the Managing Owner, is the Asset Allocator of the Company. Pursuant to the Asset Allocation Agreements between the Managing Owner, the Asset Allocator, and each interestholder, the Asset Allocator determines the trading level of each interestholder’s assets and reallocates among the separate series of the Company as agreed upon with the trading advisors. While the Asset Allocator receives no fees for such services from the Registrant, the Asset Allocator is paid management and incentive fees directly from the interestholders pursuant to each interestholder’s Asset Allocation Agreement.

Crabel’s Two Plus Program employs multiple, price-driven, systematic strategies that participate in market trends. The average holding period is 5 days with a range of 2 to 55 days. Risk is controlled by dynamic sizing of new trades relative to market volatility, the use of stops and time exits along with a balance of volatility derived from 4 sectors and 3 geographic regions.

Eagle’s Momentum Program is a computerized, technical trading system developed to capture short and intermediate term trading opportunities in markets that exhibit strong price momentum. The adoption of the trading philosophy to a

 

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computerized trading system was done by applying rule-based techniques to confirm the trading concept over an extensive body of historical market data and by constantly monitoring and re-evaluating the rules in actual trading. The program currently covers 30 commodities, currencies, stock indices and global fixed income markets.

Graham’s K4D-15V Program utilizes multiple computerized trading models designed to capture profit opportunities during sustained price trends in approximately 65 global markets. This program features broad diversification in both financial and non-financial markets. The trading strategies are primarily long-term in nature and are intended to generate significant returns over time with an acceptable degree of risk and volatility.

Krom’s Diversified Commodity Program is a discretionary global macro strategy that attempts to identify commodity price moves that are predicated on a shift in the supply/demand fundamentals; the strategy eschews granular statistical modeling in favor of more qualitative interpretations of the current market conditions. When a potential opportunity is identified, chart-based analyses are used to enhance entry and exits. Trade ideas may be structured as directional, spread or volatility and position duration can last from weeks to months.

Ortus’s Currency Program is a computerized, global macro strategy that seeks to capitalize on fundamentally driven price moves in the G7 currencies that are a result of a shift in the exchange rate cycle. It is the advisor’s belief that these shifts are driven by the dynamic interactions between asset prices (e.g. stocks and bonds) and underlying economic fundamentals (e.g. monetary policy, interest rates). As such, position duration is long-term and changes to the portfolio are gradual.

Paskewitz’s Contrarian Stock Index Program systematically trades the S&P 500 futures in an effort to profit from investor overreaction to both positive and negative news. The manager utilizes three pattern-based models that attempt to identify points where prices are overextended. Each model is given the same amount of risk and the signals are combined to create an overall long or short signal. Over nearly five years of trading, the program has been uncorrelated to both the S&P 500 and trend followers. The program tends to perform well in congested, highly volatile markets.

Tudor’s Quantitative Commodities strategy employs a combination of proprietary computerized mathematical strategies to invest in commodities on a worldwide basis. The proprietary models, when applied to market data, produce computer-generated trading signals on a largely worldwide basis. These models base their investment decisions on a variety of algorithms that analyze, among other factors, historical prices and economic data in order to identify patterns or trends to predict future price direction or identify relative value opportunities.

BEAM Bayesian Efficient Asset Management’s BEAM Multi-Strategy Program is a systematic, global macro strategy that focuses primarily in G10 financial markets and energies. The quantitative approach, which is based on Bayesian statistics and factor analysis, seeks to derive an expected return forecast for each instrument using systematically based, fundamental analyses that are largely derived from price and various other market factors. Thereafter, an optimizer is used to build a portfolio with the best reward: risk characteristics.

Blackwater Capital Management’s Blackwater Global Program is a fully computerized strategy that seeks to profit from longer-term trends across a broad basket of futures markets. Signal generation is based on the output of two, independent systems that look to price patterns and volatility to identify a potential opportunity.

Eagle’s Global Program employs a systematic methodology to capitalize on medium to long term trends in a wide range of global futures markets: currencies, fixed income, energies, commodities and stock indices. Well defined trading rules, which are based on extensive discretionary trading experience, incorporate screening and learning mechanisms which adjust to changes in market environment while giving strong attention to volatility. An attempt is made to participate in markets which exhibit favorable “signal to noise” characteristics. Money management and risk control disciplines serve to limit downside risk.

Saxon Investment Corporation’s Saxon Aggressive Diversified Program uses a systematic strategy that seeks to participate in the market’s extended trends using a combination of longer- and shorter-term systems. It is not a fully automatic strategy in that the advisor allows for discretion when warranted. Price data is the major input to the systems. The book is broadly diversified throughout the global futures markets with the exception of the global stock indices.

 

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Registrant paid each Trading Advisor a monthly management fee and an incentive fee accrued monthly and paid quarterly pursuant to the applicable managed account advisory agreement.

 

		Effective October 1, 2010
Trading Advisor (4)		Management Fee%(1)				Incentive Fee%(2)
Ortus(3)			1.00				25.00
Eagle			2.00				25.00
Graham			2.50				25.00
GLC			2.00				25.00
Krom			1.50				25.00
Paskewitz			1.00				25.00
Crabel			1.00				25.00
Tudor			2.00				25.00

 

 

(1)

The Management Fee is paid monthly at a rate equal to 1/12 of the indicated rate above of the net asset value of Registrant accordance with the applicable advisory agreement.

(2)

The Incentive Fee is paid quarterly on the percentage indicated of new net high trading profits of Registrant in accordance with the applicable advisory agreement.

(3)

The change in fees for Ortus are not effective until January 1, 2011.

(4)

As of January 1, 2012, Registrant transitioned from investments in direct managed accounts to accessing the trading advisors through the Company’s managed account platform.

Through its investments in the Affiliated Investment Funds, Registrant pays its pro-rata share of the following management fees and incentive fees for achieving “New High Net Trading Profits,” as defined in their respective advisory agreements.

 

Affiliated Investment Fund		Management Fee%				Incentive Fee%
BEAM			1.00				20.00
BLKW			1.00				25.00
CRABL-PV			1.00				25.00
EAGL			1.50				25.00
EGLG			2.00				25.00
GRM*			2.00				20.00
KRM			1.50				25.00
ORT			1.00				25.00
SAXN			0.00				25.00
TDRM*			2.00				20.00

 

 

*  As of December 31, 2011, Registrant fully redeemed from GRM and TDRM.

Competition

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

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

 

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The Administrator

Spectrum Global Fund Administration, L.L.C. (“Spectrum” or the “Administrator”), a Delaware limited liability company, was the administrator of Registrant and provided certain administration and accounting services pursuant to the terms of a Services Agreement with Registrant dated as of May 23, 2007. On December 10, 2010, AlphaMetrix360, LLC purchased the assets of Spectrum.

Effective May 31, 2011, the Registrant replaced AlphaMetrix 360, LLC with GlobeOp Financial Services LLC (“GlobeOp” or the “Administrator”), a Delaware limited liability company, as administrator and AlphaMetrix 360, LLC Services Agreement with the Registrant was terminated effective close of business on May 31, 2011.

The Administrator performs or supervises the performance of services necessary for the operation and administration of Registrant (other than making investment decisions), including administrative and accounting services. The Administrator also calculates Registrant’s Net Asset Value. In addition, the Administrator maintains certain books and records of Registrant, including certain books and records required by CFTC Rule 4.23(a). “Administrator” refers to Spectrum, AlphaMetrix 360, LLC, or GlobeOp depending on the applicable period discussed.

Employees

Registrant has no employees. Management and administrative services for Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3, 4, 5, 6 and 8 of Registrant’s 2011 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the year ended December 31, 2011.

Critical Accounting Policies

General

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

The Managing Owner has evaluated Registrant’s financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For further discussion of Registrant’s significant accounting policies, see Note 2 of Registrant’s 2011 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the year ended December 31, 2011.

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

Registrant records all investments at fair value in its financial statements, with changes in fair value reported as a component of trading profits (losses) in the statements of operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price. Registrant considers its investments in publicly-traded mutual funds, prices for exchange traded commodity futures and options contracts to be based on quoted prices in active markets for identical assets (Level 1). The values of forwards, swaps, and certain option contracts for which market quotations are not readily available are priced by independent third party data vendors or pricing services who derive fair values for those assets from observable inputs (Level 2). Level 3 inputs reflect Registrant’s assumptions that it believes market participants would use in pricing the asset or liability. Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or Registrant’s proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data. Registrant does not currently have any investments valued using Level 3 inputs.

 

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The investments in Affiliated Investment Funds are reported in Registrants statements of financial condition and are considered Level 2 investments. Fair value ordinarily is the value determined for the Affiliated Investment Funds in accordance with the fund’s valuation policies and reported at the time of Registrants valuation by the management of the fund. Generally, the fair value of Registrant’s investments in the funds represents the amount that Registrant could reasonably expect to receive from the funds if Registrant’s investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that Registrant believes to be reliable.

Of the Registrant’s investments at March 31, 2012, $92,166,417 or 82.06% are classified as Level 1 and $20,144,297 or 17.94% as Level 2. Of the Registrant’s investments at December 31, 2011, $62,015,348 or 88.31% are classified as Level 1 and $8,207,427 or 11.69% as Level 2. There are no Level 3 investments at March 31, 2012 or December 31, 2011.

The Managing Owner has determined that it is in the best interest of the Registrant to invest a portion of its non-margin assets, either directly or indirectly through certain investment funds, in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rule and regulations. Effective January 1, 2011, the Managing Owner is paid monthly 1/12 of 50% of the first 1% of the positive returns earned on the Registrant’s investment of non-margin assets. The calculation is based on the averaged annualized net asset value, and any losses related to returns on the non-margin assets must first be recovered through subsequent positive returns prior to the Managing Owner receiving a payment. After the calculation of the amount payable to the Managing Owner, the Registrant will be credited with all additional positive returns (or 100% of any losses) on the Registrant’s investment of non-margin assets. If at the end of any calendar year a loss has been incurred on the returns for the non-margin assets, then the loss carry forward will reset to zero for the next calendar year with regards to the calculation of the Managing Owner’s portion of the non-margin asset’s income.

In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. It does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amended guidance is effective for financial statements for fiscal years and interim periods beginning after December 15, 2011. The adoption of this guidance effective January 1, 2012, did not have a material impact on Registrant’s financial statements.

Liquidity and Capital Resources

Registrant commenced operations on December 1, 2005 with gross proceeds of $31,024,443 allocated to commodities trading. Additional contributions raised through the continuous offering of limited interests (“Limited Interests”) and general interests (“General Interests” or “Managing Owner Interests” and, together with the Limited Interests, “Interests”) of beneficial ownership in Registrant for the period from December 1, 2005 (commencement of operations) to March 31, 2012 resulted in additional gross proceeds to Registrant of $193,578,378.

Limited Interests in Registrant may be subscribed or redeemed on a monthly basis.

Subscriptions and Redemptions

First Quarter 2012

Subscriptions of Limited Interests and General Interests for the First Quarter 2012 were $1,833,200 and $0, respectively. Redemptions of Limited Interests and General Interests for the First Quarter 2012 were $9,373,748 and $0, respectively.

First Quarter 2011

Subscriptions of Limited Interests and General Interests for the First Quarter 2011 were $5,399,170 and $0, respectively. Redemptions of Limited Interests and General Interests for the First Quarter 2011 were $3,943,522 and $0, respectively.

Liquidity

A portion of Registrant’s net assets were allocated to commodities trading, publicly-traded mutual funds, and the rest was held in cash, which was used as margin for trading in commodities through its investments in Affiliated Investment Funds. In as much as the sole business of Registrant is to trade in commodities, Registrant continues to own such liquid assets to be used as margin. The clearing brokers and bank

 

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credit Registrant with interest income on 100% of its average daily equity maintained in its accounts with the clearing brokers and bank during each month at competitive interest rates.

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

Since Registrant’s business is to trade futures, forward and option contracts, through its investments in Affiliated Investment Funds, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond Registrant’s experience to date and could ultimately lead to a loss of all or substantially all of investors’ capital. The Managing Owner attempts to minimize these risks by requiring Registrant and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 10 of Registrant’s 2011 Annual Report, attached hereto for further discussion on the credit and market risks associated with Registrant’s futures, forward and option contracts.

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

Market Overview

Following is a market overview for First Quarter 2012 and First Quarter 2011:

First Quarter 2012

The opening quarter of 2012 started on a positive note and ended amid growing buoyancy in the financial markets. The rally in risk assets triggered by the European Central Bank (“ECB”)’s first round of long-term refinancing operations (“LTRO”) on December 21 gathered momentum as it rolled through the first quarter, resulting in the best beginning to a year in a long time. Sovereign spreads narrowed dramatically in Europe and interbank stresses came down thanks to the LTRO. In the meantime, U.S. economic data came in vastly better than expectations. While the GDP growth itself at 3% in the fourth quarter was not spectacular, payroll employment gains were robust, topping 200,000 three months in a row while the unemployment rate declined to 8.2%. Moreover, motor vehicle sales surged past the 15 million mark. Last but not the least, the housing market showed several signs of coming back to life, with housing starts and homebuilder confidence reaching their highest levels since 2008. Relative to the U.S., global economic data was more mixed. Europe remained weak, although the data was better than expected. Meanwhile, emerging markets, notably China and India, showed continued deceleration.

Treasuries experienced their first losing quarter after three consecutive quarters of gains. The yield curve steepened as the flight to safety faded and strong U.S. economic data dampened prospects of monetary easing. The 10-year yield easily surged past the 2.25% mark and came close to the 2.40% level last reached in October 2011 before rallying toward the end of the quarter; it climbed 34 basis points to end the quarter at 2.23%. The 30-year yield soared by 46 basis points to end the quarter at 3.35% while the 5-year yield rose by 21 basis points to 1.04%. The two year yield increased by 8 basis points to 33 basis points. The U.S. Federal Reserve (“Fed”) left policy unchanged during the quarter and notably refrained from indicating any prospect of QE3. The ECB maintained status quo on rates but conducted another round of LTRO on February 21 to provide funding to banks. The Bank of England held rates steady but increased its asset purchase program. The Bank of Japan kept key rates unchanged through the quarter but announced an explicit inflation target (of 1%) for the first time ever.

Currencies: The greenback lost support as flight to safety faded. The Dollar Index declined 1.16%. The euro gained 2.78% against the dollar. The British pound also benefited from the cooling of fears in Europe, gaining 2.88% against the greenback. The risk-on environment, coupled with the Bank of Japan’s announcement of an explicit inflation target, caused the yen to plummet 7.05%. Growing optimism about the global economy and strengthening commodity prices helped the commodity currencies; the Australian and the Canadian dollars gained 1.13% and 1.75%, respectively.

Indices: U.S. equities enjoyed their best first quarter since 1998. The gains were broad-based. Financials led the way as a result of the dwindling fears of a banking crisis in Europe. Technology had an explosive quarter as well. Utilities lagged,

 

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partly because unusually warm weather placed a dent on utilization rates. The Dow^SM, the S&P 500^®, and NASDAQ^® gained approximately 8.14%, 12.58% and 18.78%, respectively, for the quarter. European stocks too experienced broad-based gains. The STOXX 600, a broad measure of European equities, rose 10.46%, in dollar terms. The CAC^®, the DAX^® and the FTSE 100^® closed the quarter with gains of approximately 8.36%, 17.78%, and 3.52%, respectively. Asian markets were no different. The Nikkei^® soared 19.26%, the Hang Seng^TM surged 11.51%, and the Korean Kospi^® rose 10.31%. The Australian All Ordinaries Index increased 7.52%.

Energies: Commodities rallied for the second consecutive quarter as global purchasing managers’ indices showed that global industrial activity appeared to be stabilizing. While much of the commodity complex gained during the quarter, natural gas, coffee, nickel, lean hogs, and live cattle were the notable exceptions. Crude oil increased 3.49% during the quarter and heating oil gained 8.52%. Gasoline surged 19.35% as several refineries were shut down. Natural gas plummeted by 39.78% to its lowest level since 2002 due to rapidly growing supply.

Metals: Gold ended the quarter with a gain of 6.46%, but experienced some sharp reversals during the quarter, especially following the release of Fed meeting minutes suggesting a diminishing need for further stimulus. Silver recorded a robust gain of 16.33%. Base metals, barring nickel, had a solid quarter. Copper and zinc recorded gains of 11.16% and 8.40%, respectively, but nickel fell 4.73%.

Agriculturals/Softs and Livestock: Grains were among the better performers within the agricultural complex. Soybeans gained 17.69% on contoured strong demand from China. Wheat and corn posted increases of 2.45% and 1.28%, respectively. Lean hogs and live cattle registered losses of 4.03% and 2.55%, respectively.

First Quarter 2011

The first quarter of 2011 was challenging for the financial markets. Geopolitical tensions emanating from the Middle East and North Africa created turmoil and the earthquake and subsequent nuclear crisis in Japan roiled the markets. Despite the volatility, risk assets in general ended the quarter on a high note, maintaining the rally that began in the second half of 2010. U.S. GDP growth accelerated in the final quarter of 2010, to an annualized 3.1% rate. First quarter GDP growth appeared to be tracking below the fourth quarter pace, largely reflecting depressed activity caused by bad weather earlier in the year. In general, the economy carried the momentum from the fourth quarter and business confidence surveys climbed to new highs for the cycle. Hiring picked up and the unemployment rate fell below 9% for the first time since 2009. However, the housing market remained in the doldrums. Rising oil prices and commodity prices in general brought the focus back on inflation. With the ECB taking a hawkish stance on inflation, the markets perceived the Fed to be behind the curve.

Currencies: Increased confidence in the euro, the general rally in risk assets and the perception that the Fed was increasingly falling behind the curve resulted in the greenback’s continued decline in the first quarter. The Dollar Index dropped 4.0%, declining to its lowest level since December 2009. Among the major currencies, the euro realized the largest gains against the dollar, rising 5.9% to close above the 140 level. The British pound experienced more modest gains, appreciating 2.9% for the quarter. The Swiss franc posted a gain of 1.9%. In the immediate aftermath of the earthquake the Japanese yen appreciated to a record high, but subsequent intervention resulted in a sharp decline. The yen ended the quarter down 2.0%. The Australian and the Canadian dollar continued to rally, rising 1.2% and 2.3%, respectively.

Indices: The rally in U.S. equities continued in the first quarter, with the Dow^SM recording its best first quarter since 1999. Earnings continued to exceed expectations. The gains were broad based across all sectors, with technology leading the way. The Dow Jones Industrial Average^SM, S&P 500^® and NASDAQ^® gained approximately 6.4%, 5.4% and 4.8%, respectively for the quarter. European stocks were less exuberant. The STOXX 600, a broad measure of European equities, gained 5.8% in dollar terms, although in euro terms it was flat. The CAC, FTSE 100^® and DAX^® closed the quarter up approximately 4.9%, 0.2% and 1.8%, respectively. Asian markets were mixed. Japan fell, although the decline of 4.6% belied the scale of the tragedy. The Hang Seng rose 2.1% and the Korean Kospi^® gained 2.7%. The Australian All Ordinaries Index posted a 1.7% increase.

Energies: Commodities had a robust quarter, not surprising given the broad based increase in global industrial demand. However, some commodities experienced corrections in the quarter after massive surges in the second half of 2010. Cotton, silver and the energy complex were among the leaders while base metals lagged. The turmoil in the Middle East sent crude oil soaring above $100 per barrel to its highest level since the summer of 2008. Crude gained 12.9% during the quarter. Heating oil and gasoline surpassed crude, rising 21.3% and 20.8%, respectively. Natural gas declined 2.8% as the market remained oversupplied.

Metals: Silver garnered the headlines in the first quarter, rising 22.6% to its highest level since 1980. Gold eked out a modest gain of 1.2%. Base metals were mixed. While aluminum and nickel recorded gains of 7.2% and 5.4%, respectively, copper and zinc suffered losses of 3.2% and 3.8%, respectively.

 

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Agriculturals /Softs and Livestock: Cotton realized the largest gains among agricultural commodities rising 39.4%, surpassing the record high set during the Civil War. Corn registered a strong gain of 9.9% as higher gasoline prices created more demand for ethanol. Live cattle and lean hogs also recorded strong gains. Soybeans, wheat and sugar lost ground during the quarter.

Sector Performance

Due to the nature of Registrant’s trading activities, a period-to-period comparison of its trading results is not meaningful. However, set forth below are the following:

 

(a)

the major sectors to which Registrant’s assets were allocated as of First Quarter 2012 and 2011, measured as a percentage of the “gross speculator margin” (i.e., the minimum amount of cash or marginable securities a speculator must post when buying or selling futures assets); and

 

(b)

discussion of Registrant’s trading results for the major sectors in which Registrant traded for the First Quarter 2012 and 2011.

First Quarter 2012

As of March 31, 2012, the allocation of Registrant’s assets, through its investments in Affiliated Investment Funds, to major sectors was as follows:

 

Sector		Allocation
Currencies			35.42	%
Energies			21.44	%
Grains			5.76	%
Indices			18.06	%
Interest Rates			11.30	%
Meats			1.07	%
Metals			6.20	%
Tropicals			0.75	%
TOTAL			100.00	%

Trading results for the major sectors in which Registrant traded for First Quarter 2012 were as follows:

Currencies: (-) Registrant experienced a majority of its gains in the Norwegian krone and Swedish krone. The majority of losses were experienced in the Euro, Japanese yen, and Canadian dollar.

Energies: (+) Registrant experienced the majority of its gains in brent crude and natural gas. The majority of losses were experienced in crude oil.

Grains: (-) Registrant experienced the majority of its gains in soybeans. The majority of losses were experienced in corn and wheat.

Indices: (+) Registrant experienced a majority of its gains in the Nikkei, Nasdaq 100 (E-Mini), and S&P 500 Mini. Losses were incurred in the FTSE 100, IBEX 35, and Hang Seng.

Interest Rates: (-) Registrant experienced gains in the Euribor, Eurodollar, and Canadian bond. The majority of losses were experienced in the U.S. 5-year Treasury note, London gilt, and German bobl.

Meats: (-) Registrant experienced losses in live cattle. Live hogs traded flat.

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

Softs: (-) Registrant experienced losses in sugar, coffee, and rubber. Cocoa traded flat.

 

 

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First Quarter 2011

As of March 31, 2011, the allocation of Registrant’s assets to major sectors was as follows:

 

Sector		Allocation
Currencies			51.69	%
Energies			5.73	%
Grains			7.21	%
Indices			10.25	%
Interest Rates			11.33	%
Meats			0.26	%
Metals			12.10	%
Tropicals			1.43	%
TOTAL			100.00	%

Trading results for the major sectors in which Registrant traded for First Quarter 2011 were as follows:

Currencies: (-) Registrant experienced a majority of its gains in the Australian dollar, Canadian dollar, Euro and the Swedish krona. The majority of losses were experienced in the Japanese yen as well as the Swiss franc and British pound.

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

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

Indices: (-) Registrant experienced gains in the S&P 500^® and NASDAX. The majority of losses were incurred in the Nikkei^®, DJ STOXX 50^® and DAX^®.

Interest Rates: (-) Registrant experienced small gains short sterling. The majority of losses were experienced in Eurodollar, Treasury Notes, Japanese Government Bonds and German Bund.

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

Metals: (-) Registrant experienced gains in silver, zinc and nickel. Losses were incurred in gold, aluminum and copper.

Softs: (-) Registrant experienced gains in coffee and cocoa. Losses were incurred in sugar.

Results of Operations

First Quarter 2012

The Net Asset Value per Interest of Class I as of March 31, 2012 was $112.42, a decrease of $4.85 from the December 31, 2011 Net Asset Value of $117.27.

The Net Asset Value per Interest of Class II as of March 31, 2012 was $122.85, a decrease of $4.75 from the December 31, 2011 Net Asset Value of $127.60.

 

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The following table discloses each trading advisors contribution to the Net Asset Values of Class I and Class II as of March 31, 2012, as well as the allocation of Registrants assets to each trading advisor at March 31, 2012.

 

WMT III Series J - Class I Beginning UNAV			$  117.27			WMT III Series J - Class II Beginning UNAV			$  127.60				Allocation of Assets as of March 31,2012
BEAM			(1.08	)		BEAM			(1.17	)			14.24%
BLKW			(0.88	)		BLKW			(0.96	)			14.11%
CRABL-PV			(0.44	)		CRABL-PV			(0.48	)			14.05%
EAGL			(0.38	)		EAGL			(0.42	)			7.50%
EGLG			0.19			EGLG			0.21				7.94%
KRM			(0.32	)		KRM			(0.35	)			14.44%
ORT			(1.11	)		ORT			(1.21	)			13.46%
SAXN			(0.15	)		SAXN			(0.17	)			14.26%
Net Expenses			(0.66	)		Net Expenses			(0.20	)
ENDING UNAV		$	112.42			ENDING UNAV		$	122.85				100.00%

 

 

*	The above table is based on the effect for an investor who held the unit for the entire First Quarter 2012, and is based on the average contribution per trader and net expenses for the relevant class of shares.

Registrant’s average net asset levels during the First Quarter 2012 were approximately $140,112,000, a decrease of approximately $10,180,000 as compared to the First Quarter 2011, primarily due to the effect of redemptions and negative trading performance.

Registrant’s performance for Class I and Class II for the First Quarter 2012 was (4.14)% and (3.72)%, respectively. Performance includes the percentage change in Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of trading gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

Registrant’s trading gains before commissions and related fees for First Quarter 2012 were approximately $160,000. Registrant loss from its investments in Affiliated Investment Funds was approximately $4,936,000.

Dividend income for the First Quarter 2012 was approximately $313,000, a decrease of approximately $287,000, as compared to the First Quarter 2011.

Brokerage Commissions and other transaction fees for the First Quarter 2012 were $0, a decrease of approximately $136,000 as compared to the First Quarter 2011, primarily due to the change in structure as Registrant transitioned from investments in direct managed accounts to accessing the Trading Advisors through the Company’s managed account platform.

Management fees to the Trading Advisors for the First Quarter 2012 were $0, a decrease of approximately $433,000 as compared to the First Quarter 2011, primarily due to the change in structure as Registrant transitioned from investments in direct managed accounts to accessing the Trading Advisors through the Company’s managed account platform. The Registrant through its investment in the Affiliated Investment Funds continues to pay management fees to the Trading Advisors.

Management fees to the Managing Owner for the First Quarter 2012 were approximately $177,000, a decrease of approximately $14,000 as compared to the First Quarter 2011, primarily due to the decrease in average net asset levels discussed above.

ClariTy Managed Account fees for the First Quarter 2012 were $0, a decrease of approximately $95,000 as compared to the First Quarter 2011, as the Registrant is no longer paying this fee directly. The Registrant through its investment in the Affiliated Investment Funds continues to pay the fee.

Service Fees for the First Quarter 2012 were approximately $546,000, a decrease of approximately $124,000 as compared to the First Quarter 2011, primarily due to the decrease in average net asset levels discussed above.

 

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Sales Commissions for the First Quarter 2012 were approximately $359,000, a decrease of approximately $22,000 as compared to the First Quarter 2011, primarily due to the decrease in average net asset levels discussed above.

Incentive fees are based on the “New High Net Trading Profits” generated by the Trading Advisors, as defined in the Trading Advisory Agreements between Registrant and the Trading Advisors. Incentive fees for the First Quarter 2012 were $0, primarily due to the change in structure as discussed above. The Registrant through its investment in the Affiliated Investment Funds continues to pay incentive fees to the Trading Advisors.

Managing Owner interest earned on investment funds for the First Quarter 2012 was approximately $65,000, a decrease of approximately $126,000 as compared to the First Quarter 2011, primarily due to negative trading performance.

Operating expenses were approximately $136,000 for the First Quarter 2012. These expenses include accounting, audit, registrar, and transfer agent, tax and legal fees as well as printing and postage costs related to reports sent to limited owners.

Offering costs were approximately $70,000 for the First Quarter 2012.

First Quarter 2011

The Net Asset Value per Interest of Class I as of March 31, 2011 was $124.79, a decrease of $3.18 from the December 31, 2010 Net Asset Value per Interest of $127.97.

The Net Asset Value per Interest of Class II as of March 31, 2011 was $133.83, a decrease of $2.72 from the December 31, 2010 Net Asset Value per Interest of $136.55.

Registrant’s average net asset level during the First Quarter 2011 was approximately $150,292,000, an increase of approximately $21,040,000 as compared to the First Quarter 2010, primarily due to the effect of additional subscriptions and positive trading performance during 2010.

Registrant’s performance for Class I and Class II for the First Quarter 2011 was (2.48)% and (1.99)%, respectively. Performance includes the percentage change in Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of trading gains (losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

Registrant’s trading losses before commissions and related fees for the First Quarter 2011 were approximately $(1,039,000). Registrant losses from its investment in an affiliated investment fund were approximately $(474,000).

Dividend income for the First Quarter 2011 was approximately $600,000, an increase of approximately $600,000, as compared to the First Quarter 2010, as the Registrant began earning dividend income on the investment of non-margin assets in investment funds starting October 2010. For a further discussion of these investments, see Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

Brokerage Commissions and other transaction fees for the First Quarter 2011 were approximately $136,000, a decrease of approximately $98,000 as compared to the First Quarter 2010, primarily due to decreased trading volumes and the change in structure regarding GRM as discussed above.

Management fees to the Trading Advisors for the First Quarter 2011 were approximately $433,000, a decrease of approximately $218,000 as compared to the First Quarter 2010, primarily due change in management fee rates charged by the Trading Advisors and the change in structure regarding GRM as discussed above.

Management fees to the Managing Owner for the First Quarter 2011 were approximately $191,000, an increase of approximately $27,000 as compared to the First Quarter 2010, primarily due to increase in average net asset levels discussed above.

ClariTy Managed Account fees for the First Quarter 2011 were approximately $95,000, an increase of approximately $95,000 as compared to the First Quarter 2010, as the Registrant began paying a fee to ClariTy in October 2010. For a further discussion of this fee, See Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

Service Fees for the First Quarter 2011 were approximately $670,000, a decrease of approximately $23,000 as compared to First Quarter 2010, primarily due to the decrease in initial upfront 2% sales commission earned on Class I units

 

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sold. Sales Commissions for the First Quarter 2011 were approximately $381,000, an increase of approximately $54,000 as compared to the First Quarter 2010, primarily due to increase in average net asset levels discussed above.

Incentive fees are based on the “New High Net Trading Profits” generated by the Trading Advisors, as defined in the Trading Advisory Agreements between Registrant and the Trading Advisors. Incentive fees for the First Quarter 2011 were approximately $406,000.

Managing Owner fees earned on investment funds for the First Quarter 2011 were approximately $191,000, an increase of approximately $191,000 as compared to the First Quarter 2010, as the Managing Owner began earning a fee on the return of the investment of non-margin assets in October 2010. For a further discussion of this fee, See Note 4 of Registrant’s 2010 Annual Report, which is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended December 31, 2010.

Operating expenses were approximately $191,000 for the First Quarter 2011. These expenses include accounting, audit, registrar, and transfer agent, tax and legal fees as well as printing and postage costs related to reports sent to limited owners.

Offering costs were approximately $94,000 for the First Quarter 2011.

Inflation

Inflation has had no material impact on the operations or on the financial condition of Registrant from inception through March 31, 2012.

Off-Balance Sheet Arrangements and Contractual Obligations

Registrant does not have any off-balance-sheet arrangements (as defined in Regulation S-K 303(a)(4)(ii)) that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Registrant’s contractual obligations are with the Managing Owner, the Trading Advisors and its commodity broker. Management fees payable by Registrant to the Trading Advisors and the Managing Owner are calculated as a fixed percentage of Registrant’s Net Asset Value. Incentive fees payable by the Registrant to the Trading Advisors are at a fixed rate, calculated as a percentage of Registrant’s “New High Net Trading Profits” (as defined in the Advisory Agreements). As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and “New High Net Trading Profits” are not known until a future date. Commissions payable to Registrant’s commodity broker are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. Additionally, Registrant does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations or other long-term liabilities that would otherwise be reflected on Registrant’s Statement of Financial Condition, a table of contractual obligations has not been presented. For a further discussion of Registrant’s contractual obligations, see Notes 1, 3, 4, 5 and 7 to Registrant’s financial statements for the year ended December 31, 2011, which is filed as an exhibit to Registrant’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Introduction

Past Results Not Necessarily Indicative of Future Performance

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

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

 

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

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

Standard of Materiality

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

Quantifying Registrant’s Trading Value at Risk

Quantitative Forward-Looking Statements

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

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

Exchange maintenance margin requirements have been used by Registrant as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. The maintenance margin levels are established by dealers 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 that are not exchange-traded (almost exclusively currencies in the case of Registrant), the margin requirements for the approximate estimated equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, estimated dealers’ margins have been used.

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

Registrant’s Trading Value at Risk in Different Market Sectors

The following table presents the trading value at risk associated with Registrant’s open positions by market sector, through its investments in Affiliated Investment Funds, at March 31, 2012 and December 31, 2011. All open position trading risk exposures of Registrant have been included in calculating the figure set forth below. At March 31, 2012 and December 31, 2011, Registrant had total capitalizations of approximately $131 million and $144 million, respectively.

 

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		March 31, 2012								December 31, 2011
Market Sector		Value at Risk				% of Total Capitalization				Value at Risk				% of Total Capitalization
Interest rates		$	1,922,158				1.46	%		$	2,298,633				1.59	%
Currencies			6,026,414				4.59	%			4,519,030				3.12	%
Commodities			5,992,835				4.57	%			3,885,282				2.69	%
Stock indices			3,072,195				2.34	%			1,219,897				0.84	%
Total		$	17,013,602				12.96	%		$	11,922,842				8.24	%

The following table presents the average trading value at risk of Registrant’s open positions by market sector for First Quarter 2012 and 2011 based upon Registrant’s total average capitalization of approximately $138 million and $150 million, respectively.

 

		First Quarter 2012								First Quarter 2011
Market Sector		Value at Risk				% of Total Capitalization				Value at Risk				% of Total Capitalization
Interest rates		$	2,338,856				1.69	%		$	1,450,134				0.96	%
Currencies			7,379,592				5.33	%			6,536,559				4.35	%
Commodities			5,921,226				4.28	%			3,878,837				2.58	%
Stock indices			3,514,359				2.54	%			2,585,096				1.72	%
Total		$	19,154,033				13.84	%		$	14,460,626				9.61	%

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

The notional value of the market sector instruments held by Registrant (directly/indirectly) is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 10% of the face value) as well as many times the total capitalization of Registrant. The magnitude of Registrant’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions, although unusual, but historically recurring from time to time, could cause Registrant to incur severe losses over a short period of time. The foregoing Value at Risk table, as well as the past performance of Registrant give no indication of this “risk of ruin.”

Non-Trading Risk

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

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding Registrant’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how Registrant manages its primary market risk exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Registrant’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner and the Trading Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of Registrant’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of Registrant. There can be no assurance that Registrant’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in Registrant.

Based on trading value at risk during the First Quarter 2012, Registrant experienced an increase in its value at risk, relative to capitalization levels, as compared with the value at risk at December 31, 2011. Increases in trading value at risk were experienced across currencies, commodities and stock indices during First Quarter 2012.

 

 

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Qualitative Disclosures Regarding Means of Managing Risk Exposure

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

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

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

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

The Managing Owner’s management, under the supervision and with the participation of certain officers of the Managing Owner (including the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration), has evaluated the effectiveness of Registrant’s disclosure controls and procedures as of March 31, 2012. Based on the evaluation, the Managing Owner’s Co-Chief Executive Officers and Director of Fund Administration have concluded that, Registrant’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in Registrant’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during the First Quarter 2012 that have materially affected, or are reasonably likely to materially affect, Registrant’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

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There are no material legal proceedings pending, on appeal, or concluded to which Registrant is a party or to which any of its assets are subject.

 

Item 1.A.

Risk Factors

There have been no changes from risk factors as previously disclosed in Registrant’s Form 10-K for the fiscal year ended December 31, 2011.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents sales of unregistered interests (i.e., Managing Owner interests) exempt from registration under Section 4(2) of the Securities Act of 1933 during the period from September 28, 2004 (inception) through March 31, 2012.

 

		Amount of
Date of Sale		Units Sold				Cash Received
March 10, 2005			10			$	1,000
December 1, 2005			3,080			$	308,000
January 1, 2006			765			$	74,535
February 1, 2006			416			$	40,000
March 1, 2006			256			$	24,489
April 1, 2006			223			$	21,560
May 1, 2006			265			$	27,537
June 1, 2006			454			$	47,400
July 1, 2006			575			$	59,000
August 1, 2006			530			$	52,350
September 1, 2006			403			$	39,200
October 1, 2006			374			$	36,000
November 1, 2006			189			$	18,000
December 1, 2006			11			$	1,000
January 1, 2007			62			$	6,000
February 1, 2007			217			$	21,000
March 1, 2007			109			$	10,000
August 1, 2007			30			$	3,000
September 1, 2007			10			$	1,000
October 1, 2007			49			$	5,000
November 1, 2007			28			$	3,000
December 1, 2007			19			$	2,000
January 1, 2008			265			$	29,000
March 1, 2008			113			$	15,000
April 1, 2008			258			$	40,000
May 1, 2008			419			$	50,000
June 1, 2008			329			$	40,000
July 1, 2008			497			$	61,000
August 1, 2008			294			$	35,000
September 1, 2008			347			$	40,000
October 1, 2008			196			$	22,000

Prior to December 1, 2008 Registrant was a publicly offered commodity pool and the Managing Owner was required to hold an interest in Registrant; therefore, sales of the Managing Owner’s interest qualified as unregistered sales of securities. From December 1, 2008 through March 31, 2012, all sales of interest qualify as unregistered sales due to Registrant offered as a private placement. The aggregate sale of Units in this time period was approximately 670,478.75 Units amounting to approximately $82,789,800.

 

Item 3.

Defaults Upon Senior Securities

None

 

Item 5.

Other Information

None

 

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Item 6.

Exhibits:

 

 

 

 

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In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

[Remainder of page left blank intentionally.]

 

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SIGNATURES

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

 

WORLD MONITOR TRUST III – SERIES J
By:		Kenmar Preferred Investments Corp.,
		its Managing Owner
		By:		/s/ Kenneth A. Shewer				Date: May 15, 2012
				Name:		Kenneth A. Shewer
				Title:		Co-Chief Executive Officer (Principal Executive Officer)
		By:		/s/ David K. Spohr				Date: May 15, 2012
				Name:		David K. Spohr
				Title:		Senior Vice President and Director of Fund Administration (Principal Financial/Accounting Officer)

 

 

 

 

 

 

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