Attached files

file filename
EX-32.2 - EX-32.2 - CERES TACTICAL SYSTEMATIC L.P.d712047dex322.htm
EX-10.11(B) - EX-10.11(B) - CERES TACTICAL SYSTEMATIC L.P.d712047dex1011b.htm
EX-31.2 - EX-31.2 - CERES TACTICAL SYSTEMATIC L.P.d712047dex312.htm
EX-32.1 - EX-32.1 - CERES TACTICAL SYSTEMATIC L.P.d712047dex321.htm
EX-31.1 - EX-31.1 - CERES TACTICAL SYSTEMATIC L.P.d712047dex311.htm
EX-10.3(B) - EX-10.3(B) - CERES TACTICAL SYSTEMATIC L.P.d712047dex103b.htm
EXCEL - IDEA: XBRL DOCUMENT - CERES TACTICAL SYSTEMATIC L.P.Financial_Report.xls
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

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 000-50718

TACTICAL DIVERSIFIED FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York   13-4224248
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue – 14th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X    No__

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X    No__

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

 

Large accelerated filer _

     Accelerated filer _         Non-accelerated filer X         Smaller reporting company _   

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

Yes _    No  X

As of April 30, 2014, 349,975.0128 Limited Partnership Redeemable Units were outstanding.

 


Table of Contents

TACTICAL DIVERSIFIED FUTURES FUND L.P.

FORM 10-Q

INDEX

 

            Page
Number

PART I - Financial Information:

  

        Item 1.

    

Financial Statements:

  
    

Statements of Financial Condition
at March 31, 2014 (unaudited) and December 31,
2013

   3
    

Schedule of Investments
at March 31, 2014 (unaudited) and December 31,
2013

   4–5
    

Statements of Income and Expenses
and Changes in Partners’ Capital for the three
months ended March 31, 2014 and 2013
(unaudited)

   6
    

Notes to Financial Statements
(unaudited)

   7–20

        Item 2.

    

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

   21–23

        Item 3.

    

Quantitative and Qualitative
Disclosures about Market Risk

   24–33

        Item 4.

    

Controls and Procedures

   34

PART II - Other Information:

  

        Item 1.

    

Legal Proceedings

   35–41

        Item 1A.

    

Risk Factors

   42

        Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

   43

        Item 5.

    

Other Information

   44

        Item 6.

    

Exhibits

   45–46

 

2


Table of Contents

PART I

Item 1. Financial Statements

Tactical Diversified Futures Fund L.P.

Statements of Financial Condition

 

    (Unaudited)
March 31,
2014
     December 31,
2013
 

Assets:

    

Investment in Funds, at fair value

  $ 322,369,804       $ 381,494,571   

Cash

    356,012         445,020   
 

 

 

    

 

 

 

Total assets

  $ 322,725,816       $ 381,939,591   
 

 

 

    

 

 

 

Liabilities and Partners’ Capital:

    

Liabilities:

    

Accrued expenses:

    

Ongoing selling agent fees

  $ 1,479,159       $ 1,750,572   

Management fees

    348,711         410,796   

Incentive fees

    —           25,100   

Other

    243,556         236,287   

Redemptions payable

    11,966,862         14,140,272   
 

 

 

    

 

 

 

Total liabilities

    14,038,288         16,563,027   
 

 

 

    

 

 

 

Partners’ Capital:

    

General Partner, 5,023.9634 unit equivalents outstanding at March 31, 2014 and December 31, 2013

    4,174,416         4,522,974   

Limited Partners, 366,485.4588 and 400,826.0368 Redeemable Units outstanding at March 31, 2014 and December 31, 2013, respectively

    304,513,112         360,853,590   
 

 

 

    

 

 

 

Total partners’ capital

    308,687,528         365,376,564   
 

 

 

    

 

 

 

Total liabilities and partners’ capital

  $ 322,725,816       $ 381,939,591   
 

 

 

    

 

 

 

Net asset value per unit

  $ 830.90       $ 900.28   
 

 

 

    

 

 

 

See accompanying notes to financial statements.

 

3


Table of Contents

Tactical Diversified Futures Fund, L.P.

Schedule of Investments

March 31, 2014

(Unaudited)

 

     Fair Value      % of Partners’
Capital
 

Investment in Funds

     

CMF Drury Capital Master Fund L.P.

   $ 18,367,651         5.95

CMF Willowbridge Master Fund L.P.

     60,390,953         19.56   

CMF Aspect Master Fund L.P.

     55,996,547         18.14   

CMF Graham Capital Master Fund L.P.

     21,865,450         7.08   

KR Master Fund L.P.

     19,547,959         6.33   

CMF Altis Partners Master Fund L.P.

     59,202,089         19.18   

JEM Master Fund L.P.

     28,390,536         9.20   

Morgan Stanley Smith Barney Boronia I, LLC

     33,764,574         10.94   

Morgan Stanley Smith Barney Kaiser I, LLC

     24,844,045         8.05   
  

 

 

    

 

 

 

Total investment in Funds, at fair value

   $ 322,369,804         104.43
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

4


Table of Contents

Tactical Diversified Futures Fund L.P.

Schedule of Investments

December 31, 2013

 

     Fair Value      % of Partners’
Capital
 

Investment in Funds

     

CMF Drury Capital Master Fund L.P.

   $ 22,182,367         6.07

CMF Willowbridge Master Fund L.P.

     65,560,846         17.94   

CMF Aspect Master Fund L.P.

     71,480,734         19.56   

CMF Graham Capital Master Fund L.P.

     24,893,949         6.81   

KR Master Fund L.P.

     30,264,961         8.28   

CMF Altis Partners Master Fund L.P.

     71,413,502         19.55   

JEM Master Fund L.P.

     31,084,391         8.51   

Morgan Stanley Smith Barney Boronia I, LLC

     36,282,519         9.93   

Morgan Stanley Smith Barney Kaiser I, LLC

     28,331,302         7.76   
  

 

 

    

 

 

 

Total investment in Funds, at fair value

   $ 381,494,571         104.41
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

5


Table of Contents

Tactical Diversified Futures Fund L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months Ended
March 31,
 
     2014     2013  

Investment Income:

    

Interest income from investment in Funds

   $ 17,620      $ 49,883   
  

 

 

   

 

 

 

Total investment income

     17,620        49,883   
  

 

 

   

 

 

 

Expenses:

    

Ongoing selling agent fees

     4,689,336        6,703,426   

Clearing fees allocated from Funds

     798,605        633,306   

Management fees

     1,405,967        2,129,926   

Incentive fees

     1,418        77,475   

Other

     313,538        245,755   
  

 

 

   

 

 

 

Total expenses

     7,208,864        9,789,888   
  

 

 

   

 

 

 

Net investment income (loss)

     (7,191,244     (9,740,005
  

 

 

   

 

 

 

Trading Results:

    

Net gains (losses) on trading of commodity interests and investment in Funds:

    

Net realized gains (losses) on investment in Funds

     (14,016,542     8,699,752   

Change in net unrealized gains (losses) on investment in Funds

     (6,377,143     5,591,106   
  

 

 

   

 

 

 

Total trading results

     (20,393,685     14,290,858   
  

 

 

   

 

 

 

Net income (loss)

     (27,584,929     4,550,853   

Subscriptions — Limited Partners

     1,983,000        2,838,453   

Redemptions — Limited Partners

     (31,087,107     (29,511,595

Redemptions — General Partner

     —          (500,418
  

 

 

   

 

 

 

Net increase (decrease) in Partners’ Capital

     (56,689,036     (22,622,707

Partners’ Capital, beginning of period

     365,376,564        488,182,538   
  

 

 

   

 

 

 

Partners’ Capital, end of period

   $ 308,687,528      $ 465,559,831   
  

 

 

   

 

 

 

Net asset value per unit
(371,509.4222 and 497,411.4712 units outstanding on March 31, 2014 and 2013, respectively)

   $ 830.90      $ 935.97   
  

 

 

   

 

 

 

Net income (loss) per unit*

   $ (69.38   $ 8.56   
  

 

 

   

 

 

 

Weighted average units outstanding

     397,312.9405        516,698.2959   
  

 

 

   

 

 

 

 

* Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

6


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

1.    General:

Tactical Diversified Futures Fund L.P. (the “Partnership”) is a limited partnership organized under the partnership laws of the State of New York on December 3, 2002 to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures contracts, options, swaps and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, lumber, metals and softs. The commodity interests that are traded by the Partnership directly and through its investments in the Funds (as defined in Note 5 “Investment in Funds”) are volatile and involve a high degree of market risk.

Between March 27, 2003 (commencement of the public offering period) and April 30, 2003, 36,616 redeemable units of limited partnership interest (“Redeemable Units”) were publicly offered at $1,000 per Redeemable Unit. The proceeds of the initial public offering were held in an escrow account until April 30, 2003, at which time they were turned over to the Partnership for trading. The Partnership was authorized to publicly offer 300,000 Redeemable Units during the initial public offering period. As of December 4, 2003, the Partnership was authorized to publicly offer an additional 700,000 Redeemable Units. As of October 7, 2004, the Partnership was authorized to publicly offer an additional 1,000,000 Redeemable Units. As of June 30, 2005, the Partnership was authorized to publicly offer the 2,000,000 Redeemable Units previously registered. The public offering of Redeemable Units terminated on November 30, 2008. The Partnership currently privately and continuously offers Redeemable Units to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc.

As of March 31, 2014, all trading decisions were made for the Partnership by Drury Capital, Inc., (“Drury”), Graham Capital Management, L.P., (“Graham”), Willowbridge Associates Inc. (“Willowbridge”), Aspect Capital Limited (“Aspect”), Krom River Trading AG and Krom River Investment Management (Cayman) Limited (collectively, “Krom River”), Altis Partners (Jersey) Limited (“Altis”), J E Moody & Company LLC (“J E Moody”), Boronia Capital Pty. Ltd. (“Boronia”) and Kaiser Trading Group Pty. Ltd. (“Kaiser”) (each an “Advisor” and collectively, the “Advisors”), each of which is a registered commodity trading advisor or exempt from registration. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors indirectly through investments in the Funds.

During the three months ended March 31, 2014, the Partnership’s/Funds’ commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”). During the prior periods included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

During the second quarter of 2013, CMF Graham Capital Master Fund L.P. (“Graham Master”) entered into a futures brokerage account agreement and a foreign exchange brokerage account agreement with MS&Co. In the second quarter of 2013, CMF Aspect Master Fund L.P. (“Aspect Master”) and CMF Drury Capital Master Fund L.P. (“Drury Master”) also entered into a foreign exchange brokerage account agreement with MS&Co. Graham Master, Aspect Master and Drury Master commenced foreign exchange trading through accounts at MS&Co on or about May 1, 2013 and Graham Master commenced futures trading through an account at MS&Co on or about June 17, 2013. During the third quarter of 2013, Drury Master, CMF Willowbridge Master Fund L.P. (“Willowbridge Master”), Aspect Master, KR Master Fund L.P. (“KR Master”) and CMF Altis Partners Master Fund L.P. (“Altis Master”) entered into a futures brokerage account agreement with MS&Co. Dury Master, Willowbridge Master, Aspect Master, KR Master and Altis Master commenced futures trading through accounts at MS&Co on or about July 8, 2013, July 29, 2013, July 15, 2013, August 5, 2013 and July 29, 2013, respectively. JEM Master entered in a futures account agreement with MS&Co and commenced trading through an account at MS&Co on or about October 10, 2013. Morgan Stanley Smith Barney Boronia I, LLC and Morgan Stanley Smith Barney Kaiser I, LLC continue to be parties to a futures brokerage account agreement with MS&Co. Effective September 24, 2013, the Partnership entered into a futures brokerage account agreement with MS&Co and began transferring the brokerage account of the Partnership from CGM to MS&Co. The Partnership, through its investment in the Funds, will pay MS&Co trading fees for the clearing and, where applicable, execution of transactions.

Effective October 1, 2013, the Partnership ceased paying a brokerage fee to CGM and CGM ceased acting as a selling agent for the Partnership. Also effective October 1, 2013, the Partnership entered into a selling agreement with Morgan Stanley Smith Barney LLC (d/b/a Morgan Stanley Wealth Management). Pursuant to the selling agreement, Morgan Stanley Wealth Management will receive a selling agent fee equal to  1/12 of 5.5% (5.5% per year) of the Partnership’s month-end net assets. The selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisers of Morgan Stanley Wealth Management who sell redeemable units in the Partnership.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 5.25% to an annual rate of 3.0%.

Effective April 1, 2014, the management fee paid to Graham was reduced from 2.0% per year to 1.75% per year.

Certain prior period amounts have been reclassified to conform to current period presentation. Amounts reported separately on the Statements of Income and Expenses and Changes in Partners’ Capital as ongoing selling agent fees and clearing fees were previously combined and presented as brokerage fees, including clearing fees.

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions or losses, if any.

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at March 31, 2014 and December 31, 2013, and the results of its operations and changes in partners’ capital for the three months ended March 31, 2014 and 2013. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. You should read these financial statements together with the financial statements and notes included in the Partnership’s annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2013.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

 

7


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

2.    Financial Highlights:

Changes in the net asset value per unit for the three months ended March 31, 2014 and 2013 were as follows:

 

     Three Months Ended
March 31,
 
     2014     2013  

Net realized and unrealized gains (losses) *

   $ (65.10   $ 13.19   

Interest income

     0.05        0.10   

Expenses **

     (4.33     (4.73
  

 

 

   

 

 

 

Increase (decrease) for the period

     (69.38     8.56   

Net asset value per unit, beginning of period

     900.28        927.41   
  

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 830.90      $ 935.97   
  

 

 

   

 

 

 

 

* Includes ongoing selling agent fees & clearing fees.

 

** Excludes ongoing selling agent fees & clearing fees.

 

     Three Months Ended
March 31,
 
     2014     2013  

Ratios to average net assets:***

    

Net investment income (loss)

     (8.6 )%      (8.2 )% 

Incentive fees*****

        
  

 

 

   

 

 

 

Net investment income (loss) before incentive fees****

     (8.6 )%      (8.2 )% 
  

 

 

   

 

 

 

Operating expenses

     8.6     8.2

Incentive fees*****

        
  

 

 

   

 

 

 

Total expenses

     8.6     8.2
  

 

 

   

 

 

 

Total return:

    

Total return before incentive fees

     (7.7 )%      0.9

Incentive fees*****

        
  

 

 

   

 

 

 

Total return after incentive fees

     (7.7 )%      0.9
  

 

 

   

 

 

 

 

*** Annualized (other than incentive fees).

 

**** Interest income less total expenses.

 

***** Due to rounding.

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets.

 

8


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

3.    Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. However, the Partnership’s investments are in other funds. The results of the Partnership’s trading activities resulting from its investments in the Funds are shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The customer agreement among the Partnership, the Funds and MS&Co. gives, and the Customer Agreements between the Partnership, the Funds and CGM gave, the Partnership and the Funds the legal right to net unrealized gains and losses on open futures contracts and open forward contracts. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures and open forward contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification (“ASC”) 210-20, “Balance Sheet,” have been met.

All of the commodity interests owned by the Partnership are held for trading purposes.

Brokerage fees previously paid to CGM were calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and were affected by trading performance, subscriptions and redemptions.

Trading and transaction fees are based on the number of trades executed by the Advisors for the Funds.

 

9


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

4.    Fair Value Measurements:

Partnership’s and the Funds’ Investments. All commodity interests held by the Partnership and the Funds, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses and Changes in Partners’ Capital.

Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Funds’ Level 1 assets and liabilities are actively traded.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Funds’ Level 2 assets and liabilities.

The Partnership and the Funds will separately present purchases, sales, issuances and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation as well as the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

On October 1, 2012, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2012-04 “Technical Corrections and Improvements,” which makes minor technical corrections and clarifications to ASC 820, “Fair Value Measurements and Disclosures”. When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. ASU 2012-04 also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820.

The Partnership and the Funds consider prices for exchange-traded commodity futures, forwards, swaps and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). Investments in funds (other commodity pools) with no rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the periods ended March 31, 2014 and December 31, 2013, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). For the three months ended March 31, 2014 and the year ended December 31, 2013, there were no transfers of assets and liabilities between Level 1 and Level 2.

 

10


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

                                                                                       
     March 31, 2014      Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs (Level 3)
 

Assets

           

Investment in funds

   $ 322,369,804       $     —       $ 322,369,804       $     —   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

   $        322,369,804       $         —       $         322,369,804       $       —   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                       
    December 31, 2013     Quoted Prices in
Active markets

for Identical
Assets and
Liabilities
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs (Level 3)
 

Assets

       

Investment in funds

  $ 381,494,571      $     —      $ 381,494,571      $     —   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

  $ 381,494,571      $      $ 381,494,571      $   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

5.    Investment in Funds:

On March 1, 2005, the assets allocated to Aspect for trading were invested in the CMF Aspect Master Fund L.P. (“Aspect Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 131,340.8450 units of Aspect Master with cash equal to $122,786,448 and a contribution of open commodity futures and forward contracts with a fair value of $8,554,397. Aspect Master permits accounts managed by Aspect using its Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Aspect Master. Individual and pooled accounts currently managed by Aspect, including the Partnership, are permitted to be limited partners of Aspect Master. The General Partner and Aspect believe that trading through this structure should promote efficiency and economy in the trading process.

On July 1, 2005, the assets allocated to Willowbridge for trading were invested in the CMF Willowbridge Master Fund L.P. (formerly CMF Willowbridge Argo Master Fund L.P.) (“Willowbridge Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 95,795.8082 units of Willowbridge Master with cash equal to $85,442,868 and a contribution of open commodity futures and forward contracts with a fair value of $10,352,940. Willowbridge Master permits accounts managed by Willowbridge using its wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Willowbridge have agreed that Willowbridge will trade the assets allocated to Willowbridge at a level up to 3 times the amount of assets allocated. Prior to January 1, 2013, Willowbridge traded the Partnership’s assets pursuant to its Argo Trading System.

On August 1, 2005, the assets allocated to Drury for trading were invested in the CMF Drury Capital Master Fund L.P. (“Drury Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 120,720.7387 units of Drury Master with cash equal to $117,943,206 and a contribution of open commodity futures and forward contracts with a fair value of $2,777,533. Drury Master permits accounts managed by Drury using its Diversified Trend-Following Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Drury Master. Individual and pooled accounts currently managed by Drury, including the Partnership, are permitted to be limited partners of Drury Master. The General Partner and Drury believe that trading through this structure should promote efficiency and economy in the trading process.

 

12


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

On June 1, 2006, the assets allocated to Graham for trading were invested in the CMF Graham Capital Master Fund L.P. (“Graham Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 101,486.0491 units of Graham Master with cash equal to $103,008,482. Graham Master permits accounts managed by Graham using its K4D-15V Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Graham Master. Individual and pooled accounts currently managed by Graham, including the Partnership, are permitted to be limited partners of Graham Master. The General Partner and Graham believe that trading through this structure should promote efficiency and economy in the trading process.

On May 1, 2011, the assets allocated to Krom River for trading were invested in the KR Master Fund L.P. (“KR Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in KR Master with cash equal to $65,000,000. KR Master permits accounts managed by Krom River using the Krom River Commodity Program, a proprietary, discretionary system which will be traded both on a fundamental and technical basis, to invest together in one trading vehicle. The General Partner is also the general partner of KR Master. Individual and pooled accounts currently managed by Krom River, including the Partnership, are permitted to be limited partners of KR Master. The General Partner and Krom River believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Krom River agreed that Krom River will trade the Partnership’s assets allocated to Krom River at a level up to 1.5 times the amount of assets allocated.

On May 1, 2011, the assets allocated to Altis for trading were invested in the CMF Altis Partners Master Fund L.P. (“Altis Master”), a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 21,851.9469 units of Altis Master with cash equal to $70,000,000. Altis Master permits accounts managed by Altis using its Global Futures Portfolio trading system, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Altis Master. Individual and pooled accounts currently managed by Altis, including the Partnership, are permitted to be limited partners of Altis Master. The General Partner and Altis believe that trading through this structure should promote efficiency and economy in the trading process.

On January 1, 2013, the assets allocated to Boronia for trading were invested in the Morgan Stanley Smith Barney Boronia I, LLC (“Boronia I, LLC” or the “Boronia Trading Company”), a limited liability company organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Boronia I, LLC with cash equal to $36,000,000. Boronia I, LLC permits accounts managed by Boronia using the Boronia Diversified Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the manager of Boronia I, LLC. Individual and pooled accounts currently managed by Boronia, including the Partnership, are permitted to be members of Boronia I, LLC. The General Partner and Boronia believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Boronia agreed that Boronia will trade the Partnership’s assets allocated to Boronia at a level up to 1.5 times the amount of assets allocated.

On January 1, 2013, the assets allocated to Kaiser for trading were invested in the Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC” or the “Kaiser Trading Company”), a limited liability company organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in Kaiser I, LLC with cash equal to $30,000,000. Kaiser I, LLC permits accounts managed by Kaiser using the Global Diversified Trading Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the manager of Kaiser I, LLC. Individual and pooled accounts currently managed by Kaiser, including the Partnership, are permitted to be members of Kaiser I, LLC. The General Partner and Kaiser believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and Kaiser agreed that Kaiser will trade the Partnership’s assets allocated to Kaiser at a level up to 2 times the amount of assets allocated.

On August 1, 2013, the assets allocated to J E Moody for trading were invested in JEM Master Fund L.P. (“JEM Master”), a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased 11,968.0895 units of JEM Master with cash equal to $15,820,000. JEM Master permits accounts managed by J E Moody using the JEM Commodity Relative Value Program, a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of JEM Master. Individual and pooled accounts currently managed by J E Moody, including the Partnership, are permitted to be limited partners of JEM Master. The General Partner and J E Moody believe that trading through this structure should promote efficiency and economy in the trading process. The General Partner and JE Moody agreed that JE Moody will trade the Partnership’s assets allocated to JE Moody at a level that is up to 3 times the amount of assets allocated.

 

13


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

The General Partner is not aware of any material changes to the trading programs discussed above during the fiscal quarter ended March 31, 2014.

Aspect Master’s, Drury Master’s, Willowbridge Master’s, Graham Master’s, Altis Master’s, KR Master’s, JEM Master’s, Boronia I, LLC’s and Kaiser I, LLC’s (collectively, the “Funds”) trading of futures, forwards and options contracts, if applicable, on commodities is done primarily on U.S. commodity exchanges and foreign commodity exchanges. During the three months ended March 31, 2014, the Funds engaged in such trading through commodity brokerage accounts maintained with MS&Co. During prior periods included in this report, the Funds also engaged in such trading through commodity brokerage accounts maintained with CGM.

A limited partner/member of the Funds may withdraw all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the General Partner/manager at least 3 days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner elects to redeem and informs the Funds.

Management and incentive fees are charged at the Partnership level, with the exception of Boronia I, LLC and Kaiser I, LLC (collectively the “Trading Companies”), where the Partnership paid, indirectly, its pro rata portion of the management and incentive fees of the Trading Companies. All trading, exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively the “clearing fees”) are borne by Funds and allocated to their limited partners/members including the Partnership. All other fees are charged at the Partnership level.

As of March 31, 2014, the Partnership owned approximately 89.5% of Drury Master, 72.8% of Willowbridge Master, 68.1% of Aspect Master, 44.0% of Graham Master, 69.6% of KR Master, 77.6% of Altis Master, 69.8% of JEM Master, 52.9% of Boronia I, LLC and 55.2% of Kaiser I, LLC. At December 31, 2013, the Partnership owned approximately 90.0% of Drury Master, 69.3% of Willowbridge Master, 69.9% of Aspect Master, 41.5% of Graham Master, 71.1% of KR Master, 77.5% of Altis Master, 69.9% of JEM Master, 55.7% of Boronia I, LLC and 54.8% of Kaiser I, LLC. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of investment in the Funds are approximately the same and the redemption rights are not affected.

 

14


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

Summarized information reflecting the total assets, liabilities and capital for the Funds is shown in the following tables.

 

     March 31, 2014  
     Total Assets      Total Liabilities      Total Capital  

Drury Master

   $ 20,580,533       $ 52,391       $ 20,528,142   

Willowbridge Master

     84,971,415         1,989,600         82,981,815   

Aspect Master

     82,332,268         56,537         82,275,731   

Graham Master

     49,920,841         268,711         49,652,130   

KR Master

     28,930,902         853,357         28,077,545   

Altis Master

     77,075,312         747,129         76,328,183   

JEM Master

     40,714,530         54,168         40,660,362   

Boronia I, LLC

     63,958,888         150,004         63,808,884   

Kaiser I, LLC

     45,137,450         104,594         45,032,856   
     December 31, 2013  
     Total Assets      Total Liabilities      Total Capital  

Drury Master

   $ 24,999,558       $ 345,693       $ 24,653,865   

Willowbridge Master

     95,699,725         7,316,065         88,383,660   

Aspect Master

     102,342,493         31,944         102,310,549   

Graham Master

     59,948,792         2,996,936         56,951,856   

KR Master

     44,043,845         1,456,785         42,587,060   

Altis Master

     93,798,364         1,680,201         92,118,163   

JEM Master

     44,509,274         32,554         44,476,720   

Boronia I, LLC

     66,134,764         914,259         65,220,505   

Kaiser I, LLC

     52,158,601         439,951         51,718,650   

Summarized information reflecting the net investment income (loss), total trading results and net income (loss) for the Funds is shown in the following tables.

 

     For the three months ended March 31, 2014  
     Net Investment
Income (Loss)
    Total Trading
Results
    Net Income (Loss)  

Drury Master

   $ (37,211   $ (2,646,969   $ (2,684,180

Willowbridge Master

     (109,462     (2,209,110     (2,318,572

Aspect Master

     (80,498     (4,728,957     (4,809,455

Graham Master

     (75,682     (5,807,290     (5,882,972

KR Master

     (52,751     957,264        904,513   

Altis Master

     (88,817     (7,819,046     (7,907,863

JEM Master

     (284,127     (2,712,553     (2,996,680

Boronia I, LLC

     (827,981     746,729        (81,252

Kaiser I, LLC

     (509,701     (6,943,118     (7,452,819
     For the three months ended March 31, 2013  
     Net Investment
Income (Loss)
    Total Trading
Results
    Net Income (Loss)  

Drury Master

   $ (67,444   $ 5,876,203      $ 5,808,759   

Willowbridge Master

     (109,276     2,076,675        1,967,399   

Aspect Master

     (70,209     3,619,206        3,548,997   

Graham Master

     (72,893     7,535,558        7,462,665   

KR Master

     (76,659     (1,654,722     (1,731,381

Altis Master

     (143,123     3,324,078        3,180,955   

Boronia I, LLC

     (785,573     398,598        (386,975

Kaiser I, LLC

     (521,148     1,041,328        520,180   

 

15


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

Summarized information reflecting the Partnership’s investment in, and the operations of, the Funds is shown in the following tables.

 

    March 31, 2014     For the three months ended March 31, 2014            
    % of                 Expenses     Net
Income
(Loss)
           

Funds

  Partnership’s
Net

Assets
    Fair
Value
    Income
(Loss)
    Clearing Fees     Other     Management
Fee
    Incentive
Fee
      Investment
Objective
  Redemptions
Permitted
 

Drury Master

    5.95   $ 18,367,651      $ (2,375,184   $ 16,667      $ 18,027      $      $      $ (2,409,878   Commodity

Portfolio

    Monthly   

Willowbridge Master

    19.56     60,390,953        (1,589,434     70,490        13,845                      (1,673,769   Commodity
Portfolio
    Monthly   

Aspect Master

    18.14     55,996,547        (3,221,893     40,820        18,356                      (3,281,069   Commodity
Portfolio
    Monthly   

Graham Master

    7.08     21,865,450        (2,550,985     15,621        19,131                      (2,585,737   Commodity
Portfolio
    Monthly   

KR Master

    6.33     19,547,959        662,979        31,299        15,332                      616,348      Commodity
Portfolio
    Monthly   

Altis Master

    19.18     59,202,089        (6,011,136     62,533        10,123                      (6,083,792   Commodity
Portfolio
    Monthly   

JEM Master

    9.20     28,390,536        (1,892,471     183,935        16,532                      (2,092,938   Commodity
Portfolio
    Monthly   

Boronia Trading Company

    10.94     33,764,574        419,936        257,794        30,066        161,069        1,418        (30,411   Commodity
Portfolio
    Monthly   

Kaiser Trading Company

    8.05     24,844,045        (3,817,877     119,446        24,484        139,908               (4,101,715   Commodity
Portfolio
    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

    $ 322,369,804      $ (20,376,065   $ 798,605      $ 165,896      $ 300,977      $ 1,418      $ (21,642,961    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    December 31, 2013     For the three months ended March 31, 2013            
    % of                 Expenses     Net
Income
(Loss)
           

Funds

  Partnership’s
Net

Assets
    Fair
Value
    Income
(Loss)
    Clearing Fees     Other     Management
Fee
    Incentive
Fee
      Investment
Objective
  Redemptions
Permitted
 

Drury Master

    6.07   $ 22,182,367      $ 4,901,328      $ 50,975      $ 13,508      $      $      $ 4,836,845      Commodity

Portfolio

    Monthly   

Willowbridge Master

    17.94     65,560,846        1,024,115        43,554        13,402                      967,159      Commodity
Portfolio
    Monthly   

Aspect Master

    19.56     71,480,734        2,632,277        45,276        17,376                      2,569,625      Commodity
Portfolio
    Monthly   

Graham Master

    6.81     24,893,949        3,796,693        30,369        10,911                      3,755,413      Commodity
Portfolio
    Monthly   

KR Master

    8.28     30,264,961        (1,366,156     65,001        17,319                      (1,448,476   Commodity
Portfolio
    Monthly   

Altis Master

    19.55     71,413,502        2,502,840        100,938        18,969                      2,382,933      Commodity
Portfolio
    Monthly   

JEM Master

    8.51     31,084,391                                                Commodity
Portfolio
    Monthly   

Boronia Trading Company

    9.93     36,282,519        233,938        243,968        31,442        168,438        346        (210,256   Commodity
Portfolio
    Monthly   

Kaiser Trading Company

    7.76     28,331,302        615,706        53,225        26,410        150,430        77,128        308,513      Commodity
Portfolio
    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

    $ 381,494,571      $ 14,340,741      $ 633,306      $ 149,337      $ 318,868      $ 77,474      $ 13,161,756       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

16


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

6.    Financial Instrument Risks:

In the normal course of business, the Partnership, through its investments in the Funds, is a party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index or reference rate, and generally represent future commitments to exchange currencies or cash balances, to purchase or sell other financial instruments on specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forwards, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 18.3% to 26.2% of the Funds’ contracts are traded OTC.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

Market risk is the potential for changes in the value of the financial instruments traded by the Funds due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Funds are exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds had credit risk and concentration risk during the reporting period and prior periods included in this report as MS&Co. and/or CGM or their affiliates were the sole counterparties or brokers with respect to the Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that through MS&Co. or CGM, the Partnership’s/Funds’ counterparty is an exchange or clearing organization. The Partnership/Funds continue to be subject to such risks with respect to MS&Co.

As both a buyer and seller of options, the Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Funds to potentially unlimited liability; for purchased options, the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Funds do not consider these contracts to be guarantees.

The General Partner/Manager monitors and attempts to control the Partnership’s/Funds’ risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Funds may be subject. These monitoring systems generally allow the General Partner/Manager to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options contracts by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Funds’ businesses, these instruments may not be held to maturity.

 

17


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

7.    Critical Accounting Policies:

Use of Estimates. The preparation of financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Partnership’s and the Funds’ Investments. All commodity interests held by the Funds, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described below) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Statements of Financial Condition. Net realized gains or losses and any change in net unrealized gains or losses from the preceding period are reported in the Statements of Income and Expenses.

Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management has concluded that based on available information in the marketplace, the Funds’ Level 1 assets and liabilities are actively traded.

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. Management has concluded that based on available information in the marketplace, there has not been a significant decrease in the volume and level of activity in the Partnership’s and the Funds’ Level 2 assets and liabilities.

The Partnership and the Funds will separately present purchases, sales, issuances, and settlements in their reconciliation of Level 3 fair value measurements (i.e., to present such items on a gross basis rather than on a net basis), and make disclosures regarding the level of disaggregation as well as the inputs and valuation techniques used to measure fair value for measurements that fall within either Level 2 or Level 3 of the fair value hierarchy as required under GAAP.

The Partnership and the Funds consider prices for exchange-traded commodity futures, forwards, swaps and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of non-exchange-traded forwards, swaps and certain options contracts for which market quotations are not readily available are priced by broker-dealers who derive fair values for those assets and liabilities from observable inputs (Level 2). Investments in funds (other commodity pools) with no rights or obligations inherent within the ownership interest held by the Partnership are priced based on the end of the day net asset value (Level 2). The value of the Partnership’s investments in the Funds reflects its proportional interest in the Funds. As of and for the periods ended March 31, 2014 and December 31, 2013, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of management’s assumptions and internal valuation pricing models (Level 3). For the three months ended March 31, 2014 and the year ended December 31, 2013, there were no transfers of assets and liabilities between Level 1 and Level 2.

Futures Contracts. The Funds trade futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Funds. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and changes in net unrealized gains (losses) on futures contracts are included in the Statements of Income and Expenses.

 

18


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Funds agree to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. Forward foreign currency contracts are valued daily, and the Funds’ net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Statements of Income and Expenses.

The Funds do not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations due to changes in market prices of investments held. Such fluctuations are included in net gain (loss) on investments in the Statements of Income and Expenses.

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Funds are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Funds. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and changes in net unrealized gains (losses) on metal contracts are included in the Statements of Income and Expenses.

 

19


Table of Contents

Tactical Diversified Futures Fund L.P.

Notes to Financial Statements

March 31, 2014

(Unaudited)

 

Options. The Funds may purchase and write (sell) both exchange listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Funds write an option, the premium received is recorded as a liability in the Statements of Financial Condition and marked to market daily. When the Funds purchase an option, the premium paid is recorded as an asset in the Statements of Financial Condition and marked to market daily. Net realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the Statements of Income and Expenses.

Investment Company Status. Effective January 1, 2014, the Partnership adopted, ASU 2013-08, “Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements.” ASU 2013-08 changes the approach to the investment company assessment, requires non-controlling ownership interests in other investment companies to be measured at fair value, and requires additional disclosures about the investment company’s status as an investment company. ASU 2013-08 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this ASU did not have a material impact on the Partnership’s financial statements. Based on management’s assessment, the Partnership has been deemed to be an investment company since inception. It has all of the fundamental and typical characteristics of an investment company.

Income Taxes. Income taxes have not been provided as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses.

GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnership’s financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to tax at the Partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements.

The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2010 through 2013 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Net Income (Loss) per Unit. Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 2, “Financial Highlights”.

Subsequent Events. The General Partner evaluates events that occur after the balance sheet date but before financial statements are issued. The General Partner has assessed the subsequent events through the date of issuance and determined that, other than that referenced in Note 1 to the financial statements, there were no subsequent events requiring adjustment of or disclosure in the financial statements.

 

20


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in the sale of goods or services. Its only assets are its investment in Funds and cash. The Funds’ only assets are their equity in trading accounts, consisting of cash and cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on forward contracts and commodity options purchased, if applicable, and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investments in the Funds. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the first quarter of 2014.

The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by gains or losses on trading and by subscriptions, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the three months ended March 31, 2014, Partnership capital decreased 15.5% from $365,376,564 to $308,687,528. This decrease was attributable to redemptions of 36,572.3790 Redeemable Units resulting in an outflow of $31,087,107, coupled with the net loss of $27,584,929, which was partially offset by the subscriptions of 2,231.8010 Redeemable Units totaling $1,983,000. Future redemptions could impact the amount of funds available for investment in funds in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Management believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 7 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and change in net unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

21


Table of Contents

Results of Operations

During the first quarter of 2014, the Partnership’s net asset value per unit decreased 7.7% from $900.28 to $830.90 as compared to an increase of 0.9% in the same period of 2013. The Partnership experienced a net trading loss before fees and expenses in the first quarter of 2014 of $20,393,685. Losses were primarily attributable to the Funds’ trading in currencies, energy, softs, metals, U.S. and non-U.S. interest rates and indices and were partially offset by gains in grains and livestock. The Partnership experienced a net trading gain before fees and expenses in the first quarter of 2013 of $14,290,858. Gains were primarily attributable to the Funds’ trading in currencies, livestock, metals, softs and indices and were partially offset by losses in energy, grains and U.S. and non-U.S. interest rates.

In the energy markets, losses were incurred during March from long positions in crude oil and its related products as prices declined during the first half of the month on reports of higher-than-expected inventory levels in the U.S. Additional energy losses were incurred during January from long positions in crude oil and its related products as prices dropped sharply during the first half of the month due to an increase in production from Libya. Within the global stock index sector, losses were experienced primarily during January from long positions in U.S., European, and Asian equity index futures as prices declined as economic growth momentum in China weakened and the U.S. Federal Reserve announced measures to further taper its quantitative easing program. Losses within the metals complex were recorded primarily during February from short positions in gold and silver futures as precious metals prices moved higher after geo-political turmoil and concern over the strength of the U.S. economy increased demand for the precious metals. Additional losses were incurred during January from long positions in copper futures as weakening manufacturing reports from China reduced demand for the industrial metal, thus pushing prices lower. Within the global interest rate markets, losses were experienced during March from long positions in U.S. Treasury note futures as prices declined after comments made by newly appointed Federal Reserve Chair Janet Yellen indicated the Fed may raise interest rates in the future. Long futures positions in Japanese government bonds also recorded losses during March. Losses in the currency sector were recorded primarily during January from short positions in the Japanese yen as the relative value of the yen increased as investors sought out the Asian currency as a store of value. The Partnership’s trading losses for the first quarter were offset by trading gains achieved within the agricultural complex during January from short positions in wheat futures as prices decreased after the release of a report by the U.S. Department of Agriculture indicated wheat stockpiles in the U.S. could reach record levels in 2014. Additional gains were recorded during February and March from long positions in lean hog futures as prices advanced over concern of limited U.S. pig herds.

Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility of profit. The profitability of the Partnership/Funds depends on the existence of major price trends and the ability of the Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisors are able to identify them, the Partnership expects to increase capital through operations.

Interest income on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s, other than Boronia I, LLC and Kaiser I, LLC) brokerage account during each month was earned at a 30-day U.S. Treasury bill yield determined weekly by CGM, based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury discount rate. MS&Co. credits Boronia I, LLC and Kaiser I, LLC on 100% of the average daily equity maintained in cash in the account of Boronia I, LLC or Kaiser I, LLC during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount less 0.15% during such month. Interest income for the three months ended March 31, 2014 decreased by $32,263, as compared to the corresponding period in 2013. The decrease in interest income is primarily due to lower average daily equity maintained in the Partnership’s account and lower U.S. Treasury bill rates during the three months ended March 31, 2014, as compared to the corresponding period in 2013. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s and the Funds’ accounts and upon interest rates over which neither the Partnership/the Funds nor CGM/MS&Co. has control.

 

22


Table of Contents

Brokerage fees/ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Brokerage fees/ongoing selling agent fees for the three months ended March 31, 2014 decreased $2,014,090 as compared to the corresponding period in 2013. The decrease in brokerage fees/ongoing selling agent fees is due to a decrease in average net assets for the three months ended March 31, 2014, as compared to the corresponding period in 2013.

Certain clearing fees are based on the number of trades executed by the Advisors for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees for the three months ended March 31, 2014 increased by $165,299 as compared to the corresponding period in 2013. The increase in clearing fees is primarily due to an increase in the number of trades during the three months ended March 31, 2014, as compared to the corresponding period in 2013.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three months ended March 31, 2014 decreased $723,959 as compared to the corresponding period in 2013. The decrease in management fees is due to a decrease in average net assets for the three months ended March 31, 2014, as compared to the corresponding period in 2013.

Incentive fees are based on the new trading profits generated by each Advisor at the end of the quarter as defined in the respective management agreements between the Partnership, the General Partner and each Advisor. Trading performance for the three months ended March 31, 2014 resulted in incentive fees of $1,418. Trading performance for the three months ended March 31, 2013 resulted in incentive fees of $77,475. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

In allocating the assets of the Partnership among the Advisors, the General Partner considers past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time.

As of March 31, 2014 and December 31, 2013, the Partnership’s assets were allocated among the trading Advisors in the following approximate percentages:

 

Advisor

   March 31, 2014      December 31, 2013  

Drury Capital, Inc.

     6   $ 18,276,307         6   $ 24,653,865   

Graham Capital Management, L.P.

     7   $ 21,752,305         7   $ 56,951,856   

Aspect Capital Limited

     18   $ 55,697,136         18   $ 102,310,549   

Willowbridge Associates Inc.

     19   $ 60,057,410         18   $ 88,383,660   

Krom River Trading AG and Krom River Investment Management (Cayman) Limited

     5   $ 14,457,211         8   $ 42,587,060   

Altis Partners (Jersey) Limited

     17   $ 51,910,612         18   $ 92,118,163   

J E Moody & Company LLC.

     9   $ 28,209,555         8   $ 44,476,720   

Boronia Capital Pty. Ltd.

     11   $ 33,603,095         9   $ 65,220,505   

Kaiser Trading Group Pty. Ltd.

     8   $ 24,723,897         8   $ 51,718,650   

 

23


Table of Contents

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by them are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

Market movements result in frequent changes in the fair value of the Partnership’s/Funds’ open positions and, consequently, in their earnings and cash balances. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership’s/Funds’ open contracts and the liquidity of the markets in which they trade.

The Partnership/Funds rapidly acquire and liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s/Funds’ past performance is not necessarily indicative of their future results.

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

Exchange margin requirements have been used by the Partnership/Funds as the measure of their Value at Risk. 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 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.

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The Advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the masters over which they have been granted limited authority to make trading decisions. The first two trading Value at Risk tables reflects the market sensitive instruments held by the Partnership indirectly, through its investment in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments, held by each Fund separately. There have been no material changes in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2013.

The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category, through its investment in Funds, as of March 31, 2014 and December 31, 2013. As of March 31, 2014, the Partnership’s total capitalization was $308,687,528.

 

    March 31, 2014  

Market Sector

  Value at
Risk
    % of Total
Capitalization
 

Commodities

  $ 16,034,186        5.20

Currencies

    10,991,614        3.56

Indices

    8,890,177        2.88

Interest Rates

    7,575,388        2.45
 

 

 

   

 

 

 

Total

  $ 43,491,365        14.09
 

 

 

   

 

 

 

 

24


Table of Contents

As of December 31, 2013, the Partnership’s total capitalization was $365,376,564.

 

     December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
 

Commodities

   $ 20,771,546         5.69

Currencies

     13,330,914         3.65

Indices

     8,232,208         2.25

Interest Rates

     7,755,077         2.12
  

 

 

    

 

 

 

Total

   $ 50,089,745         13.71 % 
  

 

 

    

 

 

 

 

25


Table of Contents

The following tables indicate the trading Value at Risk associated by the Partnership’s investments in Funds by market category as of March 31, 2014 and December 31, 2013 and the highest and lowest value at any point and the average value during the three months ended March 31, 2014 and for the twelve months ended December 31, 2013. All open position trading risk exposures of the Funds have been included in calculating the figures set forth below.

As of March 31, 2014, Drury Master’s total capitalization was $20,528,142. The Partnership owned approximately 89.5% of Drury Master. As of March 31, 2014, Drury Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Drury for trading) was as follows:

March 31, 2014

 

                  Three Months Ended March 31, 2014  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Currencies

   $ 618,479         3.01   $ 844,567       $ 322,518       $ 472,521   

Energy

     288,754         1.41     830,885         59,232         320,048   

Grains

     186,146         0.91     670,275         186,146         440,785   

Indices

     791,035         3.85     1,613,236         782,239         1,030,951   

Interest Rates U.S.

     323,054         1.57     349,212         145,386         337,706   

Interest Rates Non-U.S.

     773,610         3.77     817,587         474,769         699,456   

Metals

     755,231         3.68     1,084,824         553,571         725,574   

Softs

     150,861         0.74     196,458         108,314         172,810   
  

 

 

    

 

 

         

Total

   $ 3,887,170         18.94        
  

 

 

    

 

 

         
* Average of month-end Values at Risk.

As of December 31, 2013, Drury Master’s total capitalization was $24,653,865. The Partnership owned approximately 90.0% of Drury Master. As of December 31, 2013, Drury Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Drury for trading) was as follows:

December 31, 2013

 

                  Twelve Months Ended December 31, 2012  

Market Sector

   Value at
Risk
     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Currencies

   $ 449,643         1.82   $ 6,180,278       $ 80,961       $ 3,221,290   

Energy

     818,235         3.32     2,358,990         386,597         1,216,610   

Grains

     643,950         2.61     1,773,466         401,229         980,984   

Indices

     1,437,862         5.83     4,201,799         1,424,364         2,884,651   

Interest Rates U.S.

     158,896         0.65     1,010,675         28,605         453,294   

Interest Rates Non-U.S.

     586,327         2.38     2,686,679         251,496         1,319,415   

Metals

     992,098         4.02     4,353,776         596,149         2,563,271   

Softs

     136,949         0.56     729,373         135,351         460,088   
  

 

 

    

 

 

         

Total

   $ 5,223,960         21.19        
  

 

 

    

 

 

         

 

* Annual average of month-end Value at Risk.

 

26


Table of Contents

As of March 31, 2014, Willowbridge Master’s total capitalization was $82,981,815. The Partnership owned approximately 72.8% of Willowbridge Master. As of March 31, 2014, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

March 31, 2014

 

                Three Months Ended March 31, 2014  
Market Sector   Value at Risk    

% of Total

Capitalization

   

High

Value at Risk

    

Low

Value at Risk

    

Average

Value at Risk*

 

Currencies

  $ 154,241        0.19   $ 3,732,814       $ 154,241       $ 732,501   

Energy

    1,563,212        1.88     2,399,584         59,187         1,168,501   

Interest Rates U.S.

    1,240,817        1.50     2,747,588         537,550         1,468,628   

Interest Rates Non-U.S.

    1,254,087        1.51     1,457,323         179,050         993,578   
 

 

 

   

 

 

         

Total

  $ 4,212,357        5.08        
 

 

 

   

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, Willowbridge Master’s total capitalization was $94,615,651. The Partnership owned approximately 69.3% of Willowbridge Master. As of December 31, 2013, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

   $ 3,210,939         3.63   $ 4,945,148       $ 148,500       $ 1,861,929   

Energy

     726,752         0.82     2,264,273         46,200         424,936   

Indices

     684,033         0.77     6,842,689         21,635         594,408   

Interest Rates U.S.

     537,550         0.61     3,564,310         8,280         911,307   

Interest Rates Non-U.S.

     289,287         0.33     1,216,176         2,178         337,625   
  

 

 

    

 

 

         

Total

   $ 5,448,561         6.16 %         
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

27


Table of Contents

As of March 31, 2014, Aspect Master’s total capitalization was $82,275,731. The Partnership owned approximately 68.1% of Aspect Master. As of March 31, 2014, Aspect Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Aspect for trading) was as follows:

March 31, 2014

 

                 Three Months Ended March 31, 2014  

Market Sector

   Value at Risk     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Currencies

   $ 6,910,007        8.40   $ 8,988,668       $ 6,002,252       $ 7,591,331   

Energy

     1,087,405        1.32     2,217,050         419,448         1,465,051   

Grains

     362,429        0.44     1,084,329         362,429         660,626   

Indices

     2,879,823        3.50     3,786,974         2,333,169         3,141,378   

Interest Rates U.S.

     93,537        0.11     802,798         88,708         245,704   

Interest Rates Non-U.S.

     1,613,422        1.96     3,729,772         1,510,450         2,350,732   

Livestock

     189,473        0.23     217,350         72,563         179,550   

Metals

     1,116,928        1.36     1,569,663         1,022,631         1,235,653   

Softs

     425,132        0.52     478,791         299,484         401,134   
  

 

 

   

 

 

         

Total

   $ 14,678,156        17.84        
  

 

 

   

 

 

         

 

 

* Average of month-end Values at Risk.

As of December 31, 2013, Aspect Master’s total capitalization was $102,310,549. The Partnership owned approximately 69.9% of Aspect Master. As of December 31, 2013, Aspect Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Aspect for trading) was as follows:

December 31, 2013

 

           Twelve Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average *
Value at Risk
 

Currencies

   $ 8,074,032         7.89   $ 10,780,103       $ 67,390       $ 7,332,185   

Energy

     1,210,979         1.18     2,869,850         458,957         1,477,925   

Grains

     1,084,329         1.06     1,315,867         80,838         897,343   

Indices

     3,403,187         3.33     4,335,369         1,159,866         3,389,186   

Interest Rates U.S.

     682,636         0.67     805,234         118,357         431,818   

Interest Rates Non-U.S.

     3,296,581         3.22     4,524,738         863,953         2,810,624   

Livestock

     75,938         0.07     219,100         36,925         148,985   

Metals

     1,246,907         1.22     3,199,261         734,739         2,161,501   

Softs

     478,791         0.47     884,459         367,449         603,860   
  

 

 

    

 

 

         

Total

   $ 19,553,380         19.11        
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

28


Table of Contents

As of March 31, 2014, Graham Master’s total capitalization was $49,652,130. The Partnership owned approximately 44.0% of Graham Master. As of March 31, 2014, Graham Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Graham for trading) was as follows:

March 31, 2014

 

                Three Months Ended March 31, 2014  

Market Sector

  Value at Risk     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Currencies

  $ 4,614,830        9.29   $ 5,811,070       $ 3,004,489       $ 4,663,562   

Energy

    298,292        0.60     1,178,507         266,739         566,092   

Grains

    291,868        0.59     710,585         243,600         498,228   

Indices

    2,367,933        4.77     3,599,947         2,133,473         2,956,299   

Interest Rates U.S.

    437,898        0.88     656,096         375,684         522,428   

Interest Rates Non-U.S.

    1,412,222        2.85     1,883,371         1,048,993         1,468,376   

Metals

    1,105,807        2.23     2,154,978         667,136         1,304,546   

Softs

    169,101        0.34     584,007         169,101         324,150   
 

 

 

   

 

 

         

Total

  $ 10,697,951        21.55        
 

 

 

   

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, Graham Master’s total capitalization was $56,951,856. The Partnership owned approximately 41.5% of Graham Master. As of December 31, 2013, Graham Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Graham for trading) was as follows:

December 31, 2013

 

                Twelve Months Ended December 31, 2013  

Market Sector

  Value at Risk     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Currencies

  $ 5,451,393        9.57   $ 6,263,455       $ 2,692,964       $ 3,780,586   

Energy

    918,449        1.61     1,447,490         398,490         924,600   

Grains

    707,595        1.24     746,819         350,474         585,416   

Indices

    3,480,698        6.11     5,882,185         1,786,311         4,253,445   

Interest Rates U.S.

    579,675        1.02     947,075         219,252         551,160   

Interest Rates Non-U.S.

    1,218,251        2.14     2,659,126         449,052         1,491,188   

Metals

    2,082,858        3.66     2,293,849         545,530         1,461,478   

Softs

    284,243        0.50     511,259         231,428         390,411   
 

 

 

   

 

 

         

Total

  $ 14,723,162        25.85        
 

 

 

   

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

29


Table of Contents

As of March 31, 2014, KR Master’s total capitalization was $28,077,545. The Partnership owned approximately 69.6% of KR Master. As of March 31, 2014, KR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to KR for trading) was as follows:

March 31, 2014

 

                Three months ended March 31, 2014  

Market Sector

  Value at Risk     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at  Risk*
 

Energy

  $ 85,675        0.30   $ 282,511       $ 85,675       $ 145,622   

Grains

    170,100        0.61     676,624         85,050         227,723   

Livestock

    325        0.00 %**      106,068         325         31,709   

Metals

    514,553        1.83     2,662,167         513,407         1,005,921   

Softs

    103,950        0.37     500,787         11,948         71,215   
 

 

 

   

 

 

         

Total

  $ 874,603        3.11        
 

 

 

   

 

 

         

 

 

* Average of month-end Values at Risk.
** Due to rounding

As of December 31, 2013, KR Master’s total capitalization was $42,587,060. The Partnership owned approximately 71.1% of KR Master. As of December 31, 2013, KR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Krom River for trading) was as follow:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  

Market Sector

   Value at
Risk
     % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Energy

   $ 278,432         0.65   $ 1,380,251       $ 278,432       $ 690,943   

Grains

     288,241         0.68     1,297,380         1,487         404,464   

Livestock

     75,063         0.18     803,000         9,905         93,680   

Metals

     2,271,706         5.33     5,810,837         456,425         2,867,697   
  

 

 

    

 

 

         

Total

   $ 2,913,442         6.84 %         
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

30


Table of Contents

As of March 31, 2014, Altis Master’s total capitalization was $76,328,183. The Partnership owned approximately 77.6% of Altis Master. As of March 31, 2014, Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follows:

March 31, 2014

 

                Three Months Ended March 31, 2014  

Market Sector

  Value at Risk     % of Total
Capitalization
    High
Value at  Risk
     Low
Value at  Risk
     Average
Value at Risk  *
 

Currencies

  $ 1,210,907        1.59   $ 1,889,702       $ 897,120       $ 1,115,875   

Energy

    599,283        0.79     2,075,884         599,283         1,236,237   

Grains

    1,460,654        1.91     3,309,847         1,159,058         1,759,540   

Indices

    3,404,128        4.46     4,747,619         1,575,007         3,646,814   

Interest Rates U.S.

    297,240        0.39     1,592,113         185,336         732,655   

Interest Rates Non -U.S.

    763,594        1.00     2,147,638         763,594         1,006,057   

Livestock

    509,490        0.67     636,728         349,076         505,643   

Metals

    4,399,127        5.76     4,399,127         1,977,681         3,095,794   

Softs

    1,047,677        1.37     1,336,257         726,615         980,068   
 

 

 

   

 

 

         

Total

  $ 13,692,100        17.94        
 

 

 

   

 

 

         

 

 

* Average of month-end Values at Risk.

As of December 31, 2013, Altis Master’s total capitalization was $92,118,163. The Partnership owned approximately 77.5% of Altis Master. As of December 31, 2013, Altis Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Altis for trading) was as follow:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk *
 

Currencies

   $ 1,889,702         2.05   $ 3,262,183       $ 1,086,832       $ 2,035,100   

Energy

     1,746,745         1.90     3,490,181         352,794         1,608,526   

Grains

     3,309,847         3.59     3,572,846         584,900         2,114,477   

Indices

     1,862,430         2.02     5,629,558         610,945         2,904,403   

Interest Rates U.S.

     374,179         0.41     1,814,375         97,248         407,842   

Interest Rates Non -U.S.

     2,083,654         2.26     3,353,969         568,721         2,072,859   

Livestock

     371,993         0.40     775,238         134,110         478,816   

Metals

     3,839,916         4.17     6,827,422         219,248         9,104   

Softs

     1,075,961         1.17     2,338,466         952,510         3,716,633   
  

 

 

    

 

 

         

Total

   $ 16,554,427         17.97 %         
  

 

 

    

 

 

         

 

 

* Annual average month-end Value at Risk.

 

31


Table of Contents

As of March 31, 2014, JEM Master’s total capitalization was $40,660,362. The Partnership owned approximately 69.8% of JEM Master. As of March 31, 2014, JEM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to JE Moody for trading) was as follows:

March 31, 2014

 

                  Three Months Ended March 31, 2014  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value  at Risk
     Low
Value  at
Risk
     Average
Value  at Risk*
 
             

Energy

   $ 2,651,506         6.52   $ 4,200,379       $ 1,118,252       $ 2,700,028   

Grains

     29,970         0.07     631,126         6,008         178,785   

Livestock

     310,095         0.77     1,089,315         32,400         215,888   

Metals

     98,313         0.24     103,785         3,465         98,533   

Softs

     37,950         0.09     267,465         37,950         74,965   
  

 

 

    

 

 

         

Total

   $ 3,127,834         7.69        
  

 

 

    

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, JEM Master’s total capitalization was $44,476,720. The Partnership owned approximately 69.9% of JEM Master. As of December 31, 2013, JEM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to JE Moddy for trading) was as follows:

December 31, 2013

 

                  Three Months Ended December 31, 2013  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average *
Value at Risk
 

Energy

     1,546,563         3.48     3,347,583         1,298,733         1,815,100   

Grains

     275,940         0.62     606,150         196,290         397,605   

Livestock

     588,634         1.32     1,130,423         304,526         788,235   

Softs

     109,560         0.25     206,085         11,495         154,107   
  

 

 

    

 

 

         

Total

   $ 2,520,697         5.67 %         
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

 

32


Table of Contents

As of March 31, 2014, Boronia I, LLC’s total capitalization was $63,808,884. The Partnership owned approximately 52.9% of Boronia I, LLC. As of March 31, 2014, Boronia I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Boronia for trading) was as follows:

March 31, 2014

 

                  Three Months Ended March 31, 2014  
            % of Total     High      Low      Average  

Market Sector

   Value at Risk      Capitalization     Value at Risk      Value at Risk      Value at Risk *  

Currencies

   $ 4,034,300         6.32   $ 6,972,472       $ 984,987       $ 3,320,844   

Interest Rates

     1,534,501         2.41     3,709,161         647,220         1,631,758   

Equity

     3,748,738         5.88     4,479,828         1,177,058         2,504,949   

Commodity

     2,573,336         4.03     4,210,047         1,840,388         2,861,206   
  

 

 

    

 

 

         

Total

   $ 11,890,875         18.64        
  

 

 

    

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, Boronia I, LLC’s total capitalization was $65,220,505. The Partnership owned approximately 55.7% of Boronia I, LLC. As of December 31, 2013, Boronia I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Boronia for trading) was as follows:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  
     Value at
Risk
     % of Total
Capitalization
    High Value
at Risk
     Low Value
at Risk
     Average*
Value at
Risk
 

Currencies

   $ 1,686,465         2.59   $ 6,014,107       $ 251,044       $ 2,188,362   

Interest Rates

     1,335,142         2.05     3,815,651         258,654         1,509,121   

Equity

     1,905,034         2.92     5,076,611         443,259         2,245,443   

Commodity

     2,706,808         4.15     4,896,991         557,636         3,083,483   
  

 

 

    

 

 

         

Total

   $ 7,633,449         11.71        
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

As of March 31, 2014, Kaiser I, LLC’s total capitalization was $45,032,856. The Partnership owned approximately 55.2% of Kaiser I, LLC. As of March 31, 2014, Kaiser I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Kaiser for trading) was as follows:

March 31, 2014

 

                  Three Months Ended March 31, 2014  
            % of Total     High      Low      Average  

Market Sector

   Value at Risk      Capitalization     Value at Risk      Value at Risk      Value at Risk *  

Currencies

   $ 934,311         2.08   $ 4,738,918       $ 470,706       $ 1,782,034   

Interest Rates

     2,112,561         4.69     3,217,413         282,258         1,446,609   

Equity

     1,004,465         2.23     4,555,079         220,990         1,660,129   

Commodity

     542,023         1.20     951,286         102,308         431,447   
  

 

 

    

 

 

         

Total

   $ 4,593,360         10.20        
  

 

 

    

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, Kaiser I, LLC’s total capitalization was $51,718,650. The Partnership owned approximately 54.8% of Kaiser I, LLC. As of December 31, 2013, Kaiser I, LLC’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Kaiser for trading) was as follows:

December 31, 2013

 

                  Twelve Months Ended December 31, 2013  
     Value at
Risk
     % of Total
Capitalization
    High Value
at Risk
     Low Value
at Risk
     Average*
Value at
Risk
 

Currencies

   $ 713,683         1.38   $ 7,336,691       $ 22,992       $ 1,488,345   

Interest Rates

     611,810         1.18     4,218,857         2,475         1,332,205   

Equity

     248,710         0.48     7,192,355         129,192         2,475,745   

Commodity

     103,658         0.20     1,479,103         —           433,522   
  

 

 

    

 

 

         

Total

   $ 1,677,861         3.24        
  

 

 

    

 

 

         

 

 

* Annual average of month-end Value at Risk.

 

 

33


Table of Contents

Item 4.     Controls and Procedures.

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2014 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s President and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:

 

   

pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

 

   

provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

 

   

provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended March 31, 2014 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

34


Table of Contents

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings.

There are no material legal proceedings pending against the Partnership nor the General Partner.

The following information supplements and amends the discussion set forth under Part I, Item 3. “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC.

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the Securities and Exchange Commission as required by the Exchange Act, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2013, 2012, 2011, 2010 and 2009.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of NFA.

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through

 

35


Table of Contents

certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied MS&Co.’s individual motion to dismiss the amended complaint. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against MS&Co. and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s claims brought under the Securities Act of 1933, as amended, were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. A bellwether trial is currently scheduled to begin in September 2014. MS&Co. is not a defendant in connection with the securitizations at issue in that trial. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $309 million, and the certificates had incurred actual losses of approximately $5 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $309 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

36


Table of Contents

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. MS&Co. filed its answer on December 21, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $57 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $57 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle, were named as defendants in a purported class action related to securities issued by the special purpose vehicle in Singapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and is pending in the United States District Court for the Southern District of New York (“SDNY”). An amended complaint was filed on October 22, 2012. The court denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted class certification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal the court’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amended complaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraud investors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. In addition, the second amended complaint alleges that the securities’ offering materials contained material misstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interest between the defendants and the investors. The second amended complaint asserts common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On March 25, 2014, the court denied defendants’ petition seeking permission to appeal the court’s decision granting class certification. Plaintiffs seek damages of approximately $138.7 million, rescission, punitive damages, and interest.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co.

 

37


Table of Contents

or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $78 million, and the certificates had incurred actual losses of $1 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $78 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to plaintiffs by MS&Co. was approximately $104 million. The complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order MS&Co. appealed on April 11, 2013. On May 3, 2013, MS&Co. filed its answer to the amended complaint. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $99 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $99 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. The amended

 

38


Table of Contents

complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. MS&Co. filed its answer on August 17, 2012. Trial is currently scheduled to begin in May 2015. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $115 million, and the certificates had incurred actual losses of approximately $1 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $115 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B., filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B. v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to the plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. The complaints each raised claims under both federal securities law and the Texas Securities Act and each seeks, among other things, compensatory damages associated with plaintiff’s purchase of such certificates. On March 20, 2012, MS&Co. filed answers to the complaints in both cases. On June 7, 2012, the two cases were consolidated. On January 10, 2013, MS&Co. filed a motion for summary judgment and special exceptions with respect to plaintiff’s claims. On February 6, 2013, the FDIC filed an amended consolidated complaint. On February 25, 2013, MS&Co. filed a motion for summary judgment and special exceptions, which motion was denied in substantial part on April 26, 2013. On May 3, 2013, the FDIC filed a second amended consolidated complaint. Trial is currently scheduled to begin in November 2014. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $52 million, and the certificates had incurred actual losses of approximately $5 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $52 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The

 

39


Table of Contents

total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory and/or rescissionary damages, as well as punitive damages, associated with plaintiffs’ purchases of such certificates. On January 23, 2014, the parties reached an agreement in principle to settle the litigation. On April 25, 2014, the parties filed a stipulation of voluntary discontinuance of the action with prejudice.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. is approximately $1 billion. The complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud and tortious interference with contract and seeks, among other things, compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’ purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among other things, increases the total amount of the certificates at issue by approximately $80 million, adds causes of action for fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On April 26, 2013, the defendants filed an answer to the amended complaint. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $636 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $636 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On April 22, 2014, the defendants’ motion to dismiss was denied in substantial part. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at

 

40


Table of Contents

issue in this action was approximately $76 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $76 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs.

On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs was approximately $417 million. The complaint alleges causes of action against MS&Co. for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things, rescissionary and compensatory damages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014, the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended, and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. At March 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $220 million, and the certificates had incurred actual losses of $25 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $220 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

 

41


Table of Contents

Item 1A.    Risk Factors.

There have been no material changes to the risk factors set forth under Part 1, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

42


Table of Contents

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

The public offering of Redeemable Units terminated on November 30, 2008.

For the three months ended March 31, 2014, there were additional subscriptions of 2,231.8010 Redeemable Units totaling 1,983,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as described in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

Proceeds of net offering were used for the trading of commodity interests including futures contracts, options and forward contracts.

The following chart sets forth the purchases of Redeemable Units by the Partnership.

 

Period   (a) Total Number
of Redeemable
Units Purchased*
    (b) Average
Price Paid per
Redeemable Unit**
   

(c) Total Number
of Redeemable Units
Purchased as Part
of Publicly
Announced

Plans or Programs

    (d) Maximum Number
(or Approximate
Dollar Value) of
Redeemable Units that
May Yet Be
Purchased Under the
Plans or Programs
 

January 1, 2014 –

January 31, 2014

    8,965.1410      $ 868.45        N/A        N/A   

February 1, 2014 –

February 28, 2014

    13,204.9490      $ 858.35        N/A        N/A   

March 1, 2014 –

March 31, 2014

    14,402.2890      $ 830.90        N/A        N/A   
      36,572.3790      $ 850.02                   

 

* Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

 

** Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

 

Item 3.    Defaults Upon Senior Securities - None.

Item 4.    Mine Safety Disclosures - Not Applicable.

 

43


Table of Contents

Item 5.    Other Information. – None.

 

44


Table of Contents

Item 6.  Exhibits

 

  3.1

   Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.2 to the Registration on Form S-1 filed on December 20, 2002 and incorporated herein by reference).

        (a)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 99.2 to the Form 8-K filed on November 3, 2009 and incorporated herein by reference).

        (b)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 99.3 to the Form 8-K filed on November 3, 2009 and incorporated herein by reference).

        (c)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 99.4 to the Form 8-K filed on November 3, 2009 and incorporated herein by reference).

        (d)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 24, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on September 30, 2009 and incorporated herein by reference).

        (e)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 30, 2010 (filed as Exhibit 3.1(e) to the Form 8-K filed on July 2, 2010 and incorporated herein by reference).

        (f)

   Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Form 8-K filed on September 7, 2011 and incorporated herein by reference).

        (g)

   Certificate of Amendment to the Certificate of Limited Partnership dated August 7, 2013 (filed as Exhibit 3.1(g) to the Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

  3.2

   Limited Partnership Agreement (filed as Exhibit A to the Post-Effective Amendment No. 5 to the Registration on Form S-1 filed on April 22, 2008 and incorporated herein by reference).

        (a)

   Amendment to the Limited Partnership Agreement, dated May 31, 2009 (filed as Exhibit 99.1 to the Form 8-K filed on November 3, 2009 and incorporated herein by reference).

  10.1(a)

   Amended and Restated Customer Agreement among the Partnership and Salomon Smith Barney Inc. (filed as Exhibit 10.1 to the Pre-Effective Amendment No. 2 to the Registration on Form S-1 filed on March 18, 2003 and incorporated herein by reference).

        (b)

   Commodity Futures Customer Agreement between the Partnership and MS&Co., effective September 24, 2013 (filed as exhibit 10.1(B) to the Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

  10.2

   Escrow Agreement among the Partnership, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.2 on the Form 10-K filed on March 27, 2013 and incorporated herein by reference).

        (a)

   Fifth amendment to the Escrow Agreement among The Bank of New York, the General Partner and Morgan Stanley Smith Barney LLC (filed as Exhibit 10.2(a) on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

  10.3

   Management Agreement among the Partnership, the General Partner and Graham (filed as Exhibit 10.5 to the Registration on Form S-1 filed on December 20, 2002 and incorporated herein by reference).

        (a)

   Letter from the General Partner extending Management Agreement with Graham from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.3(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

        (b)

   Amendment No. 1 to the Management Agreement between the Partnership, the General Partner and Graham, effective April 1, 2014 (filed herewith).

  10.4

   Management Agreement among the Partnership, the General Partner and Willowbridge (filed as Exhibit 10.7 to the Registration on Form S-1 filed on December 20, 2002 and incorporated herein by reference).

        (a)

   Amendment to the Management Agreement, dated January 1, 2013, by and among the Partnership, the General Partner and Willowbridge (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 7, 2013).

        (b)

   Letter from the General Partner extending Management Agreement with Willowbridge from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.4(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

  10.5

   Management Agreement among the Partnership, the General Partner and Drury (filed as Exhibit 10.4 to the Pre-Effective Amendment No. 1 to the Registration on Form S-1 filed on February 14, 2003 and incorporated herein by reference).

        (a)

   Letter from the General Partner extending Management Agreement with Drury from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.5(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

 

45


Table of Contents

  10.8

   Management Agreement among the Partnership, the General Partner and Aspect (filed as Exhibit 10.4 to the Form 10-K filed on March 16, 2005 and incorporated herein by reference).

        (a)

   Letter from the General Partner extending Management Agreement with Aspect from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.8(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

  10.9

   Management Agreement among the Partnership, the General Partner and Altis (filed as Exhibit 10.13 to the Form 8-K filed on May 3, 2011 and incorporated herein by reference).

        (a)

   Letter from the General Partner extending Management Agreement with Altis from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.9(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

  10.10

   Management Agreement among the Partnership, the General Partner and Krom River (filed as Exhibit 10.14 to the Form 8-K filed on May 3, 2011 and incorporated herein by reference).

        (a)

   Letter from the General Partner extending Management Agreement with Krom River from June 30, 2013 through June 30, 2014 (filed as Exhibit 10.10(a) to the Form 10-K filed on March 31, 2014 and incorporated herein by reference).

        (b)

   Amendment to the Management Agreement dated October 1, 2013 by and among the Partnership, the General Partner and Krom River (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 7, 2013 and incorporated herein by reference).

  10.11(a)

  

Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management effective October 1, 2013 (filed as Exhibit 10.11(b) to the Form 10-Q filed on November 13, 2013 and incorporated herein by reference).

        (b)

   Letter from the General Partner amending the Alternate Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective April 1, 2014 (filed herewith).

  10.12

   Form of Subscription Agreement (filed as Exhibit 10.12 to the Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

  10.13

   Management Agreement among the Partnership, the General Partner, and JE Moody (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2013 and incorporated herein reference).

31.1 — Rule 13a-14(a)/15d-14(a) Certification (Certification of President)

31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer)

32.1 — Section 1350 Certification (Certification of President)

32.2 — Section 1350 Certification (Certification of Chief Financial Officer)

101. INS    XBRL Instance Document.

101. SCH   XBRL Taxonomy Extension Schema Document.

101. CAL   XBRL Taxonomy Extension Calculation Linkbase Document.

101. LAB   XBRL Taxonomy Extension Label Linkbase Document.

101. PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

101. DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

46


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TACTICAL DIVERSIFIED FUTURES FUND L.P.

By:

  Ceres Managed Futures LLC
  (General Partner)
By:  

/s/ Alper Daglioglu

  Alper Daglioglu
  President and Director

Date:    

 

May 14, 2014

By:

 

/s/ Alice Lonero

 

Alice Lonero

  Chief Financial Officer
  (Principal Accounting Officer)

Date:

 

May 14, 2014

 

47