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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 June 30, 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: 000-53043

 

 

Man-AHL Diversified I L.P.

(Exact name of registrant as specified in charter)

 

 

 

Delaware   06-1496634

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

c/o Man Investments (USA) Corp.  
452 5th Avenue, 27th Floor  
New York, NY   10018
(Address of principal executive offices)   (Zip Code)

(212) 649-6600

(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 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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.

 

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

 

 

 


Table of Contents

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements.

Man-AHL Diversified I L.P.

 

STATEMENTS OF FINANCIAL CONDITION (a)

     3   

STATEMENTS OF OPERATIONS (b)

     4   

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (c)

     5   

STATEMENTS OF CASH FLOWS (c)

     6   

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

     7   

 

(a) At June 30, 2014 (unaudited) and December 31, 2013
(b) For the three months ended June 30, 2014 and 2013 (unaudited) and for the six months ended June 30, 2014 and 2013 (unaudited)
(c) For the six months ended June 30, 2014 and 2013 (unaudited)

 

2


Table of Contents

MAN-AHL DIVERSIFIED I L.P.

(A Delaware Limited Partnership)

STATEMENTS OF FINANCIAL CONDITION

 

 

     June 30, 2014
(Unaudited)
    December 31, 2013  

ASSETS

    

Investment in Man-AHL Diversified Trading Company L.P.

   $ 174,326,641      $ 202,881,618   

Due from Man-AHL Diversified Trading Company L.P.

     5,778,345        12,263,503   

Cash

     147,000        115,000   
  

 

 

   

 

 

 

Total assets

   $ 180,251,986      $ 215,260,121   
  

 

 

   

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

    

LIABILITIES:

    

Redemptions payable

   $ 4,891,524      $ 11,208,131   

Subscriptions received in advance

     147,000        115,000   

Management fees payable

     435,140        521,567   

Servicing fees payable

     146,243        264,689   

Accrued expenses and other liabilities

     305,438        269,116   
  

 

 

   

 

 

 

Total liabilities

     5,925,345        12,378,503   
  

 

 

   

 

 

 

PARTNERS’ CAPITAL:

    

General Partner - Class A Series 1 (186.37 unit equivalents outstanding at June 30, 2014 and December 31, 2013)

     541,340        504,667   

Limited Partners - Class A Series 1 (40,641.16 and 51,137.49 units outstanding at June 30, 2014 and December 31, 2013, respectively)

     118,046,120        138,471,344   

Limited Partners - Class A Series 2 (5,324.16 and 6,110.49 units outstanding at June 30, 2014 and December 31, 2013, respectively)

     16,517,117        17,561,929   

Limited Partners - Class B Series 1 (13,434.58 and 16,990.84 units outstanding at June 30, 2014 and December 31, 2013, respectively)

     39,022,139        46,008,333   

Limited Partners - Class B Series 2 (64.44 and 116.68 units outstanding at June 30, 2014 and December 31, 2013, respectively)

     199,925        335,345   
  

 

 

   

 

 

 

Total partners’ capital

     174,326,641        202,881,618   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 180,251,986      $ 215,260,121   
  

 

 

   

 

 

 

NET ASSET VALUE PER OUTSTANDING UNIT OF PARTNERSHIP INTEREST - CLASS A Series 1

   $ 2,904.60      $ 2,707.82   
  

 

 

   

 

 

 

NET ASSET VALUE PER OUTSTANDING UNIT OF PARTNERSHIP INTEREST - CLASS A Series 2

   $ 3,102.30      $ 2,874.06   
  

 

 

   

 

 

 

NET ASSET VALUE PER OUTSTANDING UNIT OF PARTNERSHIP INTEREST - CLASS B Series 1

   $ 2,904.60      $ 2,707.83   
  

 

 

   

 

 

 

NET ASSET VALUE PER OUTSTANDING UNIT OF PARTNERSHIP INTEREST - CLASS B Series 2

   $ 3,102.35   $ 2,874.09   
  

 

 

   

 

 

 

 

* Difference in net asset value recalculation and net asset value stated is caused by rounding differences.

See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.

 

3


Table of Contents

MAN-AHL DIVERSIFIED I L.P.

(A Delaware Limited Partnership)

STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2014     2013     2014     2013  

NET INVESTMENT LOSS ALLOCATED FROM MAN-AHL DIVERSIFIED TRADING COMPANY L.P.:

        

Interest income

   $ 37,816      $ 53,104      $ 101,601      $ 103,741   

Brokerage commissions

     (181,730     (244,876     (411,837     (444,371

Other expenses

     (59,642     (62,646     (107,481     (196,284
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss allocated from Man-AHL Diversified Trading Company L.P.

     (203,556     (254,418     (417,717     (536,914
  

 

 

   

 

 

   

 

 

   

 

 

 

PARTNERSHIP EXPENSES:

        

Management fees

     1,302,280        2,462,098        2,697,475        5,203,989   

Servicing fees

     437,619        1,249,690        989,849        2,646,716   

Administration fees

     104,912        111,890        210,263        233,115   

Professional fees

     45,000        55,000        93,333        110,000   

Other expenses

     30,970        46,752        68,276        86,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total partnership expenses

     1,920,781        3,925,430        4,059,196        8,280,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (2,124,337     (4,179,848     (4,476,913     (8,817,669
  

 

 

   

 

 

   

 

 

   

 

 

 

REALIZED AND UNREALIZED GAINS (LOSSES) ON TRADING ACTIVITIES ALLOCATED FROM MAN-AHL DIVERSIFIED TRADING COMPANY L.P.:

        

Net realized trading gains (losses) on closed contracts/agreements and foreign currency transactions

     19,219,205        (13,593,869     20,891,011        2,661,769   

Net change in unrealized trading gains (losses) on open contracts/agreements and translation of foreign currency

     908,660        (4,012,758     (4,516,209     (7,134,233
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains (losses) on trading activities allocated from Man-AHL Diversified Trading Company L.P.

     20,127,865        (17,606,627     16,374,802        (4,472,464
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 18,003,528      $ (21,786,475   $ 11,897,889      $ (13,290,133
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST

        

(based on weighted average units outstanding during the period)

        

CLASS A Series 1

   $ 280.70      $ (206.78 )*    $ 172.86      $ (142.13 )* 
  

 

 

   

 

 

   

 

 

   

 

 

 

CLASS A Series 2

   $ 307.94      $ (208.37 )*    $ 211.14      $ (130.90 )* 
  

 

 

   

 

 

   

 

 

   

 

 

 

CLASS B Series 1

   $ 280.73      $ (206.79 )*    $ 173.07      $ (142.14 )* 
  

 

 

   

 

 

   

 

 

   

 

 

 

CLASS B Series 2

   $ 301.22      $ (208.34 )*    $ 148.11      $ (130.88 )* 
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING DURING THE PERIOD

        

CLASS A Series 1

     43,394.58          46,186.21     
  

 

 

     

 

 

   

CLASS A Series 2

     5,588.58          5,810.48     
  

 

 

     

 

 

   

CLASS B Series 1

     14,530.62          15,449.07     
  

 

 

     

 

 

   

CLASS B Series 2

     75.05          93.16     
  

 

 

     

 

 

   

 

* Based on change in net asset value per unit from the beginning of the period to the end of the period.

See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.

 

4


Table of Contents

MAN-AHL DIVERSIFIED I L.P.

(A Delaware Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 

 

    CLASS A Series 1     CLASS A Series 2     CLASS B Series 1     CLASS B Series 2     TOTAL  
    Limited
Partners
    General
Partner
    Limited
Partners
    Limited
Partners
    Limited
Partners
             
    Amount     Units     Amount     Units     Amount     Units     Amount     Units     Amount     Units     Amount     Units  

PARTNERS’ CAPITAL

                       

January 1, 2014

  $ 138,471,344        51,138      $ 504,667        186      $ 17,561,929        6,110      $ 46,008,333        16,991      $ 335,345        117      $ 202,881,618        74,542   

Subscriptions

    679,100        254        —          —          —          —          317,186        119        —          —          996,286        373   

Redemptions

    (29,051,169     (10,751     —          —          (2,271,635     (786     (9,977,130     (3,675     (149,218     (53     (41,449,152     (15,265

Net Income

    7,946,845        —          36,673        —          1,226,823        —          2,673,750        —          13,798        —          11,897,889        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PARTNERS’ CAPITAL

                       

June 30, 2014

  $ 118,046,120        40,641      $ 541,340        186      $ 16,517,117        5,324      $ 39,022,139        13,435      $ 199,925        64      $ 174,326,641        59,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PARTNERS’ CAPITAL

                       

January 1, 2013

  $ 258,830,984        89,733      $ 537,590        186      $ 33,286,088        11,009      $ 78,224,406        27,119      $ 8,471,919        2,802      $ 379,350,987        130,849   

Subscriptions

    5,869,262        1,982        —          —          —          —          2,152,737        731        —          —          8,021,999        2,713   

Redemptions

    (51,431,247     (17,656     —          —          (11,484,450     (3,587     (10,040,108     (3,436     (8,328,828     (2,535     (81,284,633     (27,214

Net income (loss)

    (10,174,934     —          (26,490     —          (333,444     —          (3,384,505     —          629,240        —          (13,290,133     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PARTNERS’ CAPITAL

                       

June 30, 2013

  $ 203,094,065        74,059      $ 511,100        186      $ 21,468,194        7,422      $ 66,952,530        24,414      $ 772,331        267      $ 292,798,220        106,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Units and dollars have been rounded to the nearest whole number.

See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.

 

5


Table of Contents

MAN-AHL DIVERSIFIED I L.P.

(A Delaware Limited Partnership)

STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

     For the six months ended
June 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 11,897,889      $ (13,290,133

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Purchases of investments in Man-AHL Diversified Trading Company L.P.

     (996,286     (8,021,999

Sales of investments in Man-AHL Diversified Trading Company L.P.

     51,993,506        97,232,793   

Net gain (loss) on trading activities and net investment loss allocated from investments in Man-AHL Diversified Trading Company L.P.

     (15,957,085     5,009,378   

Changes in assets and liabilities:

    

Management fees payable

     (86,427     (218,226

Servicing fees payable

     (118,446     (113,409

Accrued expenses and other liabilities

     36,322        (56,675
  

 

 

   

 

 

 

Net cash provided by operating activities

     46,769,473        80,541,729   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from subscriptions

     1,028,286        11,012,759   

Payments on redemptions

     (47,765,759     (88,608,678
  

 

 

   

 

 

 

Net cash used in financing activities

     (46,737,473     (77,595,919
  

 

 

   

 

 

 

NET INCREASE IN CASH

     32,000        2,945,810   

CASH - Beginning of period

     115,000        961,791   
  

 

 

   

 

 

 

CASH - End of period

   $ 147,000      $ 3,907,601   
  

 

 

   

 

 

 

See accompanying notes and attached financial statements of Man-AHL Diversified Trading Company L.P.

 

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Table of Contents

MAN-AHL DIVERSIFIED I L.P.

(A Delaware Limited Partnership)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Man-AHL Diversified I L.P.’s (a Delaware Limited Partnership) (the “Partnership”) financial condition at June 30, 2014, and the results of its operations for the three and six months ended June 30, 2014 and 2013. These financial statements present the results of interim periods and do not include all of the disclosures normally provided in annual financial statements. These financial statements should be read in conjunction with the audited financial statements and notes included in the Partnership’s annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2013. The December 31, 2013 information has been derived from the audited financial statements as of December 31, 2013.

 

1. ORGANIZATION OF THE PARTNERSHIP

The Partnership was organized in September 1997 under the Delaware Revised Uniform Limited Partnership Act, and commenced operations on April 3, 1998, for the purpose of engaging in the speculative trading of futures and forward contracts and related instruments. The Partnership is a “feeder” fund in a “master-feeder” structure, whereby the Partnership invests substantially all of its assets in Man-AHL Diversified Trading Company L.P. (the “Trading Company”). Man Investments (USA) Corp. (the “General Partner”), a Delaware corporation, serves as the Partnership’s General Partner. The General Partner is a subsidiary of Man Group plc, a United Kingdom public limited company that is listed on the London Stock Exchange. The General Partner oversees the operations and management of the Partnership. The General Partner is registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator and is a member of the National Futures Association (“NFA”) in such capacities.

AHL Partners LLP (the “Advisor”), a limited liability partnership incorporated in England and Wales, acts as trading advisor to the Partnership. The Advisor is an affiliate of the General Partner and a subsidiary of Man Group plc. The Advisor is registered with the CFTC as a commodity trading adviser and is a member of the NFA in such capacities, in addition to registration with the Financial Conduct Authority in the United Kingdom. Prior to June 1, 2014, Man-AHL (USA) Limited acted as trading advisor. The Advisor implements the same trading program and employs substantially the same personnel as did Man-AHL (USA) Limited.

Man Investments Holdings Limited, a United Kingdom holding company that is part of Man Group plc, is the sole shareholder of the Advisor, and Man Investments Holdings Inc., a Delaware corporation that is part of Man Group plc, is the sole shareholder of the General Partner.

The Partnership’s units are distributed through the Partnership or other selling agents, including Man Investments Inc. (“MII”), an affiliate of the Advisor and General Partner. MII is a registered broker-dealer and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

The Partnership filed a registration statement under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which became effective in March, 2008. The Partnership’s units are not, however, registered for sale through a public offering, and the General Partner does not intend to cause them to be so registered.

The Partnership offers two classes of units of limited partnership interests; Class A units are generally offered and Class B units are offered to retirement plan investors. Within Class A and Class B, units are issued in two separate series. They are Class A Series 1, Class A Series 2, Class B Series 1 and Class B Series 2. Except as described in Note 2 below in respect of fees, the classes of units are identical.

 

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Table of Contents
2. SIGNIFICANT ACCOUNTING POLICIES

The Partnership prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The General Partner has evaluated the structure, objectives and activities of the Partnership and the Trading Company and determined that they meet the characteristics of an investment company. As such, these financial statements have applied the guidance as set forth in Financial Standards Board Topic 946, Financial Services-Investment Companies. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.

Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Investment in Man-AHL Diversified Trading Company L.P. — The Partnership’s investment in the Trading Company is valued at the fair value of the Partnership’s proportionate interest in the net assets of the Trading Company. The fair value of the Partnership’s investment in the Trading Company approximates the carrying amounts presented in the statements of financial condition. The Partnership records its proportionate share of the Trading Company’s income, expenses, and realized and unrealized gains and losses. Investment transactions are recorded on a trade-date basis. In addition, the Partnership accrues its own expenses. The performance of the Partnership is directly affected by the performance of the Trading Company. Attached are the financial statements of the Trading Company, including the condensed schedules of investments, which are an integral part of these financial statements. Valuation of investments held by the Trading Company is discussed in the Trading Company’s notes to financial statements.

At June 30, 2014 and December 31, 2013, the Partnership owned 16,209.13 and 20,694.54 units, respectively, of the Trading Company. The Partnership’s aggregate ownership percentage of the Trading Company at June 30, 2014 and December 31, 2013 was 85.10% and 84.82%, respectively.

The Partnership is able to redeem its investment from the Trading Company on a monthly basis. As of June 30, 2014, the Partnership could redeem its investment without restriction at the month-end net asset value of the Trading Company.

Expenses The Advisor earns a monthly management fee in an amount equal to 0.1667% (2% annually) of the Partnership’s month-end Net Asset Value, as defined in the Limited Partnership Agreement (the “Agreement”). In addition, the General Partner earns a monthly general partner fee in an amount equal to 0.0833% (1% annually) of the month-end Net Asset Value of Class A Series 1 and Class B Series 1 units. The general partner fee is included in management fees in the statements of operations.

The Advisor also earns a monthly incentive fee equal to 20% of any Net New Appreciation, as defined in the Agreement, achieved by the Partnership. The incentive fee is retained by the Advisor even if subsequent losses are incurred; however, no subsequent incentive fees will be paid to the Advisor until any such trading losses are recouped by the Partnership. During the six months ended June 30, 2014 and 2013, no incentive fees were earned by the Advisor.

The Partnership paid a monthly servicing fee to MII, in an amount equal to 0.1250% (1.5% annually) of the month-end Net Asset Value of Class A Series 1 and Class B Series 1 units. The Partnership also paid a monthly servicing fee to MII, in an amount equal to 0.1042% (1.25% annually) of the month-end Net Asset Value of Class A Series 2 and Class B Series 2 units. Effective February 1, 2014, the servicing fee to MII was reduced to 0.8333% (1.00% annually) of the month-end Net Asset Value of Class A Series 1 and Class B Series 1 units and to 0.0625% (0.75% annually) of the month-end Net Asset Value of Class A Series 2 and Class B Series 2 units. For all classes of units, MII serves as the placement agent for the Partnership.

Expenses are recognized on an accrual basis in the period in which they are incurred.

 

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Table of Contents

Derivative Contracts The Partnership’s operating activities involve trading, indirectly through its investment in the Trading Company, in derivative contracts that involve varying degrees of market and credit risk. With respect to the Partnership’s investment in the Trading Company, the Partnership has limited liability, and, therefore, its maximum exposure to either market or credit loss is limited to the carrying value of its investment in the Trading Company, as set forth in the statements of financial condition.

Cash — Cash balances are held with Citibank N.A.

Subscriptions Received in Advance — Subscriptions received in advance are comprised of cash received prior to the statements of financial condition date for which units were issued on the first day of the following month. Subscriptions received in advance do not participate in the earnings of the Partnership until the related units are issued.

Net Income (Loss) Per Unit — Net income (loss) per unit of Class A Series 1, Class A Series 2, Class B Series 1, or Class B Series 2 partnership interest is equal to the net income (loss) per class divided by the weighted average number of units outstanding per class. Weighted average number of units outstanding is the average of the units outstanding for each day during the period.

Income Taxes — The Partnership is not subject to federal, state, or local income tax. Such taxes are the liabilities of the individual partners and the amounts thereof will vary depending on the individual situation of each partner. Accordingly, there is no provision for income taxes in the accompanying financial statements. Accounting Standards Codification 740, Income Taxes, defines how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements and is applied to all open tax years. The Partnership has evaluated tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are more-likely-than-not to be sustained by the applicable tax authority. Based on this analysis of all significant tax jurisdictions and all open tax years subject to examination, there were no material tax positions not deemed to meet a more-likely-than-not-threshold. Therefore, no tax expense, including interest or penalties, was recorded for the six months ended June 30, 2014 and June 30, 2013. To the extent that the Partnership records interest and penalties, they would be included in interest expense and other expenses, respectively, on the statements of operations.

 

3. LIMITED PARTNERSHIP AGREEMENT

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the number of units or unit equivalents held by each partner. However, no limited partner is liable for obligations of the Partnership in excess of its capital subscription and net profits or losses, if any.

The Partnership’s units are continuously offered as of the first business day of each month at net asset value, as defined in the Agreement. Limited partners may redeem any or all of their units as of the end of any month at net asset value per unit on 10 days prior written notice to the General Partner. The Partnership will be dissolved on December 31, 2037, or upon the occurrence of certain events, as specified in the Agreement.

The General Partner is required to make and maintain a general partner investment in the Partnership in an aggregate amount equal to the lesser of 1.01% of the net aggregate capital subscriptions of all partners, or $500,000.

Distributions (other than redemptions of units), if any, are made on a pro-rata basis at the sole discretion of the General Partner. No distributions were declared or paid during the six months ended June 30, 2014 or for the year ended December 31, 2013.

Under the terms of the Agreement, the Partnership is liable for all costs associated with executing its business strategy. These costs include, but are not limited to, expenses associated with operations of the Partnership, such as management and incentive fees and other operating expenses, such as legal, audit, and tax return preparation fees.

 

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Table of Contents
4. FINANCIAL GUARANTEES

The Partnership enters into administrative and other professional service contracts that contain a variety of indemnifications. The Partnership’s maximum exposure under these arrangements is not known; however, the Partnership has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

 

5. FINANCIAL HIGHLIGHTS

The following represents the ratios to average limited partners’ capital and other supplemental information for the periods ended June 30, 2014 and 2013:

 

     For the three months ended June 30, 2014     For the three months ended June 30, 2013  
     Class A
Series 1
    Class A
Series 2
    Class B
Series 1
    Class B
Series 2
    Class A
Series 1
    Class A
Series 2
    Class B
Series 1
    Class B
Series 2
 

Per unit operating performance:

                

Beginning net asset value

   $ 2,622.09      $ 2,791.80      $ 2,622.10      $ 2,791.84      $ 2,949.12      $ 3,100.87      $ 2,949.13      $ 3,100.88   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from investment operations:

                

Net investment loss

     (34.32     (27.07     (34.38     (27.80     (37.84     (30.47     (37.51     (37.23

Net realized and unrealized gains (losses) on trading activities

     316.83        337.57        316.88        338.31        (168.94     (177.90     (169.28     (171.11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     282.51        310.50        282.50        310.51        (206.78     (208.37     (206.79     (208.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net asset value

   $ 2,904.60      $ 3,102.30      $ 2,904.60      $ 3,102.35      $ 2,742.34      $ 2,892.50      $ 2,742.34      $ 2,892.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios to average partners’ capital:1

                

Expenses other than incentive fees

     5.10     3.79     5.11     3.91     5.24     4.02     5.20     4.89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5.10     3.79     5.11     3.91     5.24     4.02     5.20     4.89
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (5.01 )%      (3.70 )%      (5.02 )%      (3.82 )%      (5.18 )%      (3.96 )%      (5.13 )%      (4.82 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:2

                

Total return before incentive fees

     10.77     11.12     10.77     11.12     (7.01 )%      (6.72 )%      (7.01 )%      (6.72 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     10.77     11.12     10.77     11.12     (7.01 )%      (6.72 )%      (7.01 )%      (6.72 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the six months ended June 30, 2014     For the six months ended June 30, 2013  
     Class A
Series 1
    Class A
Series 2
    Class B
Series 1
    Class B
Series 2
    Class A
Series 1
    Class A
Series 2
    Class B
Series 1
    Class B
Series 2
 

Per unit operating performance:

                

Beginning net asset value

   $ 2,707.82      $ 2,874.06      $ 2,707.83      $ 2,874.09      $ 2,884.47      $ 3,023.40      $ 2,884.48      $ 3,023.42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from investment operations:

                

Net investment loss

     (68.39     (54.01     (68.43     (55.93     (75.60     (60.61     (75.04     (67.20

Net realized and unrealized gains (losses) on trading activities

     265.17        282.25        265.20        284.19        (66.53     (70.29     (67.10     (63.68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     196.78        228.24        196.77        228.26        (142.13     (130.90     (142.14     (130.88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending net asset value

   $ 2,904.60      $ 3,102.30      $ 2,904.60      $ 3,102.35      $ 2,742.34      $ 2,892.50      $ 2,742.34      $ 2,892.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios to average partners’ capital:1

                

Expenses other than incentive fees

     5.19     3.87     5.19     4.03     5.28     4.04     5.24     4.48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5.19     3.87     5.19     4.03     5.28     4.04     5.24     4.48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (5.07 )%      (3.76 )%      (5.08 )%      (3.91 )%      (5.22 )%      (3.98 )%      (5.18 )%      (4.42 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:2

                

Total return before incentive fees

     7.27     7.94     7.27     7.94     (4.93 )%      (4.33 )%      (4.93 )%      (4.33 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     7.27     7.94     7.27     7.94     (4.93 )%      (4.33 )%      (4.93 )%      (4.33 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Includes amounts allocated from the Trading Company. Ratios have been annualized.

2 

Total return is for the period indicated and has not been annualized.

Financial highlights are calculated for limited partners taken as a whole for each series. An individual partner’s returns and ratios may vary from these returns and ratios based on the timing of capital transactions.

 

6. SUBSEQUENT EVENTS

The Partnership accepts initial or additional subscriptions for limited partnership interests generally as of the first day of the month and redemption requests from limited partners as of the last business day of each calendar month. For the period subsequent to June 30, 2014 through the date of filing, limited partner subscriptions totaled $175,000, and limited partner redemptions totaled $1,741,289.

The General Partner has evaluated the impact of subsequent events on the Partnership through the date of filing these financial statements, and noted no subsequent events that require adjustment to or disclosure in these financial statements, except as noted above.

 

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MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

Financial Statements

 

STATEMENTS OF FINANCIAL CONDITION (a)

     13   

CONDENSED SCHEDULES OF INVESMENTS (a)

     14   

STATEMENTS OF OPERATIONS (b)

     16   

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (c)

     17   

STATEMENTS OF CASH FLOWS (c)

     18   

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

     22   

 

(a) At June 30, 2014 (unaudited) and December 31, 2013
(b) For the three months ended June 30, 2014 and 2013 (unaudited) and for the six months ended June 30, 2014 and 2013 (unaudited)
(c) For the six months ended June 30, 2014 and 2013 (unaudited)

 

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Table of Contents

MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

STATEMENTS OF FINANCIAL CONDITION

 

 

     June 30, 2014
(Unaudited)
     December 31,
2013
 

ASSETS

     

Equity in trading accounts:

     

Net unrealized trading gains on open futures contracts

   $ 10,232,782       $ 9,757,518   

Net unrealized trading gains on open forward contracts

     711,144         885,769   

Net unrealized trading gains on open swap agreements

     338,560         12,520,347   

Premiums paid on credit default swap agreements

     5,913,910         3,357,116   

Due from brokers

     33,140,405         43,649,109   
  

 

 

    

 

 

 

Total equity in trading accounts

     50,336,801         70,169,859   

Cash and cash equivalents

     167,236,527         200,653,548   

Interest receivable

     28,395         31,670   
  

 

 

    

 

 

 

Total assets

   $ 217,601,723       $ 270,855,077   
  

 

 

    

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

     

LIABILITIES:

     

Net unrealized trading losses on open forward contracts

   $ 1,032,934       $ —     

Net unrealized trading losses on open swap agreements

     1,712,360         8,936,971   

Premiums received on credit default swap agreements

     —           5,175,526   

Redemptions payable

     9,883,332         17,453,462   

Accrued expenses and other liabilities

     119,510         103,473   
  

 

 

    

 

 

 

Total liabilities

     12,748,136         31,669,432   
  

 

 

    

 

 

 

PARTNERS’ CAPITAL:

     

Limited Partners (19,047.57 and 24,397.67 units outstanding at June 30, 2014 and December 31, 2013, respectively)

     204,853,587         239,185,645   
  

 

 

    

 

 

 

Total partners’ capital

     204,853,587         239,185,645   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 217,601,723       $ 270,855,077   
  

 

 

    

 

 

 

NET ASSET VALUE PER OUTSTANDING UNIT OF PARTNERSHIP INTEREST

   $ 10,754.84       $ 9,803.63   
  

 

 

    

 

 

 

See notes to financial statements.

 

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Table of Contents

MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

CONDENSED SCHEDULES OF INVESTMENTS

 

 

     June 30, 2014 (Unaudited)     December 31, 2013  
     Fair Value     Percent of Partners’
Capital
    Fair Value     Percent of Partners’
Capital
 

FUTURES CONTRACTS - Long:

        

Agricultural

   $ 1,574,797        0.8   $ (378,972     (0.2 )% 

Currencies

     780,961        0.4        (250,642     (0.1

Energy

     663,995        0.3        180,567        0.1   

Indices

     576,454        0.3        7,850,513        3.3   

Interest Rates

     2,376,192        1.1        (1,418,192     (0.6

Metals

     1,177,939        0.6        (18,266     0.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total futures contracts - long

     7,150,338        3.5        5,965,008        2.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

FUTURES CONTRACTS - Short:

        

Agricultural

     602,785        0.3        1,409,672        0.6   

Currencies

     (43,687     (0.0     27,532        0.0   

Energy

     905,404        0.4        75,410        0.0   

Indices

     1,616,879        0.8        1,216,943        0.5   

Interest Rates

     479,798        0.2        609,658        0.3   

Metals

     (478,735     (0.2     453,295        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total futures contracts - short

     3,082,444        1.5        3,792,510        1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET UNREALIZED TRADING GAINS ON OPEN FUTURES CONTRACTS

   $ 10,232,782        5.0   $ 9,757,518        4.1
  

 

 

   

 

 

   

 

 

   

 

 

 

FORWARD CONTRACTS - Long:

        

Australian dollars

   $ 1,031,074        0.5   $ (639,768     (0.2 )% 

British pounds

     2,173,370        1.1        1,005,261        0.4   

Euro

     741,412        0.4        323,916        0.1   

Gold bullion

     228,576        0.1        5,336        0.0   

Japanese yen

     581,466        0.3        (1,521,183     (0.6

New Zealand dollars

     648,904        0.3        (141,605     (0.1

Other

     2,722,161        1.3        (184,265     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total forward contracts - long

     8,126,963        4.0        (1,152,308     (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

FORWARD CONTRACTS - Short:

        

Australian dollars

     (749,257     (0.4     619,919        0.3   

British pounds

     (1,951,223     (1.0     (849,091     (0.3

Euro

     (1,291,195     (0.6     (275,708     (0.1

Gold bullion

     (993,789     (0.5     449,803        0.2   

Japanese yen

     (847,781     (0.4     2,678,558        1.1   

New Zealand dollars

     (508,743     (0.2     79,803        0.0   

Other

     (2,106,765     (1.0     (665,207     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total forward contracts - short

     (8,448,753     (4.1     2,038,077        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET UNREALIZED TRADING GAINS (LOSSES) ON OPEN FORWARD CONTRACTS

   $ (321,790     (0.1 )%    $ 885,769        0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

SWAP AGREEMENTS - Long:

        

Credit default swaps - centrally cleared (upfront premiums received $0 and $20,241,913, respectively)

   $ —          —     $ (26,328,625     (11.0 )% 

Interest rate swaps

     (4,025,166     (2.0     15,877,039        6.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total swap agreements - long

     (4,025,166     (2.0     (10,451,586     (4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

SWAP AGREEMENTS - Short:

        

Credit default swaps - centrally cleared (upfront premiums paid $5,913,910 and $18,423,503, respectively)

     (768,731     (0.4     37,081,732        15.5   

Interest rate swaps

     3,420,097        1.7        (23,046,770     (9.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total swap agreements - short

     2,651,366        1.3        14,034,962        5.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET UNREALIZED TRADING GAINS (LOSSES) ON OPEN SWAP AGREEMENTS

   $ (1,373,800     (0.7 )%    $ 3,583,376        1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

NET UNREALIZED TRADING GAINS ON OPEN CONTRACTS/AGREEMENTS

   $ 8,537,192        4.2   $ 14,226,663        6.0
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to financial statements.

 

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Table of Contents

MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

CONDENSED SCHEDULES OF INVESTMENTS (continued)

 

 

The following is a schedule of the investments in which the fair value of the investment is greater than 5% of partners’ capital.

As of June 30, 2014 (unaudited), there are no investments in which the fair value of the investment is greater than 5% of partners’ capital.

As of December 31, 2013:

 

Swap Agreements

   Maturity Date Range      Fair Value      Percent of
Partners’
Capital
 

Credit default swaps - centrally cleared - Short

        

iTraxx Crossover Index (upfront premiums paid $7,775,832)

     6/20/18-12/20/18       $ 15,365,485         6.4

iTraxx Europe Index (upfront premiums received $1,002,207)

     6/20/18-12/20/18         14,842,610         6.2   

See notes to financial statements.

 

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Table of Contents

MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2014     2013     2014     2013  

NET INVESTMENT INCOME:

        

Interest income

   $ 45,045      $ 63,984      $ 120,611      $ 125,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

        

Brokerage commissions

     216,481        294,631        489,663        536,652   

Interest expense - brokers

     19,445        22,673        24,197        135,026   

Administration fees

     2,500        2,500        5,000        5,000   

Professional fees

     37,656        37,156        75,312        74,312   

Other expenses

     11,467        13,064        23,319        23,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     287,549        370,024        617,491        774,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (242,504     (306,040     (496,880     (649,233
  

 

 

   

 

 

   

 

 

   

 

 

 

NET REALIZED AND UNREALIZED GAINS (LOSSES) ON TRADING ACTIVITIES:

        

Net realized trading gains (losses) on closed contracts/agreements and foreign currency transactions

     22,925,451        (16,332,693     24,949,705        3,384,679   

Net change in unrealized gains (losses) on translation of foreign currency

     41,728        199,901        288,626        (527,153

Net change in unrealized trading gains (losses) on open contracts/agreements

     1,037,522        (4,777,834     (5,689,471     (7,847,862
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) on trading activities

     24,004,701        (20,910,626     19,548,860        (4,990,336
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 23,762,197      $ (21,216,666   $ 19,051,980      $ (5,639,569
  

 

 

   

 

 

   

 

 

   

 

 

 

NET GAIN (LOSS) PER UNIT OF PARTNERSHIP INTEREST

        

(based on weighted average units outstanding during the period)

   $ 1,146.36      $ (607.48 )*    $ 862.31      $ (263.08 )* 
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING DURING THE PERIOD

     20,728.40          22,094.21     
  

 

 

     

 

 

   

 

* Based on change in net asset value per unit from the beginning of the period to the end of the period.

See notes to financial statements.

 

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MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

 

 

     Limited Partners     General Partner      Total  
     Amount     Units     Amount      Units      Amount     Units  

PARTNERS’ CAPITAL - January 1, 2014

   $ 239,185,645        24,398      $ —           —         $ 239,185,645        24,398   

Subscriptions

     996,286        102        —           —           996,286        102   

Redemptions

     (54,380,324     (5,452     —           —           (54,380,324     (5,452

Net income

     19,051,980        —          —           —           19,051,980        —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

PARTNERS’ CAPITAL - June 30, 2014

   $ 204,853,587        19,048      $ —           —         $ 204,853,587        19,048   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

PARTNERS’ CAPITAL - January 1, 2013

   $ 457,308,203        45,937      $ —           —         $ 457,308,203        45,937   

Subscriptions

     9,121,999        889        —           —           9,121,999        889   

Redemptions

     (109,097,467     (10,539     —           —           (109,097,467     (10,539

Net loss

     (5,639,569     —          —           —           (5,639,569     —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

PARTNERS’ CAPITAL - June 30, 2013

   $ 351,693,166        36,287      $ —           —         $ 351,693,166        36,287   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Units and dollars have been rounded to the nearest whole number.

See notes to financial statements.

 

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MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

     For the six months ended June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

   $ 19,051,980      $ (5,639,569

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Net change in unrealized trading (gains) losses on open contracts/agreements

     5,689,471        7,847,862   

Changes in assets and liabilities:

    

Due from brokers

     10,508,704        24,555,903   

Interest receivable

     3,275        (11,664

Premiums received (paid) on credit default swap agreements

     (7,732,320     5,807,215   

Accrued expenses and other liabilities

     16,037        (39,949
  

 

 

   

 

 

 

Net cash provided by operating activities

     27,537,147        32,519,798   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from subscriptions

     996,286        9,121,999   

Payments on redemptions

     (61,950,454     (117,367,492
  

 

 

   

 

 

 

Net cash used in financing activities

     (60,954,168     (108,245,493
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (33,417,021     (75,725,695

CASH AND CASH EQUIVALENTS - Beginning of period

     200,653,548        372,563,159   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ 167,236,527      $ 296,837,464   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITY:

    

CASH PAID FOR INTEREST DURING THE PERIOD:

   $ 24,197      $ 135,026   
  

 

 

   

 

 

 

See notes to financial statements.

 

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MAN-AHL DIVERSIFIED TRADING COMPANY L.P.

(A Delaware Limited Partnership)

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited financial statements, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of Man-AHL Diversified Trading Company L.P.’s (a Delaware Limited Partnership) (the “Trading Company”) financial condition at June 30, 2014, and the results of its operations for the three and six months ended June 30, 2014 and 2013. These financial statements present the results of interim periods and do not include all of the disclosures normally provided in annual financial statements. These financial statements should be read in conjunction with the audited financial statements and notes included in Man-AHL Diversified I L.P.’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013. The December 31, 2013 information has been derived from the audited financial statements as of December 31, 2013.

 

1. ORGANIZATION OF THE TRADING COMPANY

The Trading Company was organized in November 1997 under the Delaware Revised Uniform Limited Partnership Act, and commenced operations on April 3, 1998, for the purpose of engaging in the speculative trading of futures and forward contracts and related instruments. Man Investments (USA) Corp. (the “General Partner”), a Delaware corporation, serves as the Trading Company’s general partner. The General Partner is a subsidiary of Man Group plc, a United Kingdom public limited company that is listed on the London Stock Exchange. The General Partner oversees the operations and management of the Trading Company. The General Partner is registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator and is a member of the National Futures Association (“NFA”) in such capacities.

The Trading Company was formed to serve as a trading vehicle for certain limited partnerships sponsored by the General Partner in a “master-feeder” structure. The limited partners, Man-AHL Diversified I L.P. and Man-AHL Diversified II L.P., are limited partnerships whose general partner is the General Partner.

AHL Partners LLP (the “Advisor”), a limited liability partnership incorporated in England and Wales, acts as trading advisor to the Trading Company. The Advisor is an affiliate of the General Partner and a subsidiary of Man Group plc. The Advisor is registered with the CFTC as a commodity trading adviser and is a member of the NFA in such capacities, in addition to registration with the Financial Conduct Authority in the United Kingdom. Prior to June 1, 2014, Man-AHL (USA) Limited acted as trading advisor. The Advisor implements the same trading program and employs substantially the same personnel as did Man-AHL (USA) Limited. The Trading Company has engaged Man Investments Limited, a company organized under the Laws of the United Kingdom, to manage the foreign currency forward trading component of the AHL Diversified Program, at no additional cost to the Trading Company. The personnel of Man Investments Limited responsible for implementing the foreign currency forward trading component of the AHL Diversified Program on behalf of the Trading Company are the same as those of the Advisor who implement the AHL Diversified Program.

 

2. SIGNIFICANT ACCOUNTING POLICIES

The Trading Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The General Partner has evaluated the structure, objectives and activities of the Trading Company and determined that is meets the characteristics of an investment company. As such, these financial statements have applied the guidance as set forth in the Accounting Standards Codification (“ASC”) 946, Financial Services-Investment Companies. The following is a summary of the significant accounting and reporting policies used in preparing the financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Due from Brokers — Due from brokers consists of balances due from Credit Suisse (“CS”), JPMorgan Chase (“JPM”), Royal Bank of Scotland (“RBS”), Deutsche Bank (“DB”) and Bank of America Merrill Lynch (“ML”). In general, the brokers pay the Trading Company interest monthly, based on agreed upon rates, on the Trading Company’s average daily balance.

Amounts due from brokers include cash held at brokers and cash posted as collateral. The amount of cash restricted as collateral held and included in due from brokers on the statements of financial condition is $12,403,588 and $16,906,001 as of June 30, 2014 and December 31, 2013, respectively.

Expenses — Expenses are recognized on an accrual basis in the period in which they are incurred.

Derivative Contracts — In the normal course of business, the Trading Company enters into derivative contracts (“derivatives”) for trading purposes. Derivatives traded by the Trading Company include futures and forward contracts and swap agreements. The Trading Company records derivatives at fair value. Futures contracts, which are traded on a national exchange, are valued at the close price as of the valuation day, or if no sale occurred on such day, at the close price on the most recent date on which a sale occurred. Forward contracts, which are not traded on a national exchange, are valued at fair value using independent pricing services, which use market observable inputs in their valuations. Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts. The Trading Company’s swap agreements consist of interest rate swaps and credit default swaps. Swap agreements are valued at fair value using independent pricing services, which use market observable inputs in their valuations.

Realized and unrealized changes in fair values are included in realized and unrealized gains and losses on contracts/agreements, respectively, on trading activities in the statements of operations. All trading activities are accounted for on a trade-date basis.

Foreign Currency — All assets and liabilities of the Trading Company denominated in foreign currencies are translated into U.S. dollar amounts at the mean between the bid and ask market rates for such currencies on the date of valuation. Purchases and sales of foreign investments are converted at the prevailing rate of exchange on the respective date of such transactions. The Trading Company does not isolate that portion of gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices of the investments. Such changes are included with the net realized and unrealized gains or losses on trading activities.

Cash and Cash Equivalents — Cash and cash equivalents include cash, short-term interest-bearing money market accounts, and bank time deposits with original maturities of 90 days or less, held with Citibank N.A., JPMorgan Chase Bank, N.A., Bank of America and BNP Paribas.

Income Taxes — The Trading Company is treated as a partnership for tax purposes and therefore is not subject to federal, state, or local income tax. Such taxes are the liabilities of the individual partners and the amounts thereof will vary depending on the individual situation of each partner. Accordingly, there is no provision for income taxes in the accompanying financial statements. ASC 740, Income Taxes, defines how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements and is applied to all open tax years. The Trading Company has evaluated tax positions taken or expected to be taken in the course of preparing the Trading Company’s tax returns to determine whether the tax positions are more likely than not to be sustained by the applicable tax authority. Based on this analysis of all significant tax jurisdictions and all open tax years subject to examination, there were no material tax positions not deemed to meet a more-likely-than-not-threshold. Therefore, no tax expense, including interest or penalties, was recorded for the six months ended June 30, 2014 and June 30, 2013. To the extent that the Trading Company records interest and penalties, they would be included in interest expense and other expenses, respectively, on the statements of operations.

 

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Net Income (Loss) Per Unit — Net income (loss) per unit of partnership interest is equal to the net income (loss) divided by the weighted average number of units outstanding. Weighted average number of units outstanding is the average of the units outstanding for each day during the period.

 

3. PARTNERSHIP AGREEMENT

The Advisor is the sole trading advisor to the Trading Company.

The General Partner and limited partners share in the profits and losses of the Trading Company in proportion to the number of units or unit equivalents held by each partner. However, no limited partner is liable for obligations of the Trading Company in excess of its capital contribution and net profits or losses, if any. The General Partner owned no direct interest in the Trading Company during the six months ended June 30, 2014 and year ended December 31, 2013.

Distributions (other than redemption of units), if any, are made on a pro-rata basis at the sole discretion of the General Partner.

Partner contributions occur as of the first day of any month at the opening net asset value. Limited partners may redeem any or all of their units as of the end of any month at net asset value per unit on 10 days prior written notice to the General Partner. The General Partner may suspend redemptions of units of the Trading Company if the Trading Company’s ability to withdraw capital from any investment is restricted. The Trading Company will be dissolved on December 31, 2037, or upon the occurrence of certain events, as specified in the Trading Company’s limited partnership agreement.

 

4. FAIR VALUE MEASUREMENTS

The Trading Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date under current market conditions. The fair value of the Trading Company’s assets and liabilities which qualify as financial instruments approximates the carrying amounts presented on the statements of financial condition.

The inputs used to determine the fair value of the Trading Company’s investments are summarized in the three broad levels listed below:

 

   

Level 1 — quoted prices in active markets for identical assets or liabilities

 

   

Level 2 — investments with other significant observable inputs

 

   

Level 3 — investments with significant unobservable inputs, which may include the Trading Company’s own assumptions in determining the fair value of investments

Futures contracts are valued based on end of day quoted prices from the exchange and are categorized as Level 1 investments in the fair value hierarchy. Forward contracts and swap agreements are valued at fair value using independent pricing services, which use market observable inputs in their valuations, and are categorized as Level 2 investments in the fair value hierarchy. As of June 30, 2014 and December 31, 2013, the Trading Company did not have any positions categorized as Level 3 investments in the fair value hierarchy.

 

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The following is a summary categorization as of June 30, 2014 and December 31, 2013, of the Trading Company’s investments based on the level of inputs utilized in determining the value of such investments:

 

     Fair Value Measurements  

Investments

   As of
June 30, 2014
    Level 1     Level 2     Level 3  
Assets         

Futures contracts

   $ 13,067,147      $ 13,067,147     $ —        $ —     

Forward contracts

     9,546,731        —          9,546,731        —     

Swap agreements

     25,523,329        —          25,523,329        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

     48,137,207        13,067,147       35,070,060        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities         

Futures contracts

     (2,834,365     (2,834,365 )     —          —     

Forward contracts

     (9,868,521     —          (9,868,521     —     

Swap agreements

     (26,897,129     —          (26,897,129     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

     (39,600,015     (2,834,365 )     (36,765,650     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Fair Value

   $ 8,537,192      $ 10,232,782     $ (1,695,590   $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 
      Fair Value Measurements  

Investments

   As of
December 31, 2013
    Level 1     Level 2     Level 3  
Assets         

Futures contracts

   $ 13,161,532      $ 13,161,532     $ —        $ —     

Forward contracts

     8,431,935        —          8,431,935        —     

Swap agreements

     62,465,065        —          62,465,065        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

     84,058,532        13,161,532       70,897,000        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities         

Futures contracts

     (3,404,014     (3,404,014 )     —          —     

Forward contracts

     (7,546,166     —          (7,546,166     —     

Swap agreements

     (58,881,689     —          (58,881,689     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

     (69,831,869     (3,404,014 )     (66,427,855     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Fair Value

   $ 14,226,663      $ 9,757,518     $ 4,469,145      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

The Trading Company discloses the amounts of transfers and reasons for those transfers between Levels of the fair value hierarchy, based on the Levels assigned under the hierarchy at the reporting period end. There were no transfers between Levels as of June 30, 2014 based on the levels assigned at December 31, 2013.

 

5. DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

The Trading Company sought to achieve its investment objective by participation in the AHL Diversified Program directed on behalf of the Trading Company by the Advisor. The AHL Diversified Program is a price trend-following trading system, entirely quantitative in nature, and implements trading positions on the basis of statistical analyses of past price histories. The objective of the AHL Diversified Program is to deliver substantial capital growth for commensurate levels of volatility over the medium term, independent of the movement of the stock and bond markets, through the speculative trading, directly and indirectly, of physical commodities, futures contracts, spot and forward contracts, swaps and options on the foregoing, exchanges of futures for physical transactions and other investments on domestic and international exchanges and markets (including the interbank and over-the-counter markets (“OTC”)). The AHL Diversified Program trades globally in several market sectors, including, without limitation, currencies, bonds, energies, stock indices, interest rates, metals and agriculture.

All the strategies and systems of the AHL Diversified Program are designed to target defined volatility levels rather than returns, and the investment process is underpinned by computer-supported analytical instruments and disciplined real-time risk and management information systems. A proprietary risk measurement method similar to the industry standard “value-at-risk” helps ensure that the rule-based decisions that drive the investment process remain within pre-defined risk parameters. Margin-to-equity ratios are monitored daily, and the level of exposure in each market is quantifiable at any time and is adjusted in accordance with market volatility. Market correlation is closely monitored to prevent over-concentration of risk and ensure optimal portfolio weightings. Market liquidity is examined with the objective of ensuring that the Trading Company will be able to initiate and close out trades as indicated by AHL Diversified Program’s systems at market prices, while brokerage selection and trade execution are continually monitored with the objective of ensuring quality market access.

Futures contracts, forward contracts and swap agreements are recorded on the trade date. Upon entering into futures contracts, forward contracts and swap agreements, the Trading Company is required to deposit cash or collateral with the brokers. Gains or losses are realized when contracts are matured or closed. Unrealized gains or losses on open contracts (the difference between contract trade price and fair value) are reported in the statements of financial condition.

Interest rate swaps relate to agreements taken out by the Trading Company with major brokers in which the Trading Company either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest, on the same notional amount for a specified period of time. The payment flows are usually netted against each other, with the difference being paid by one party to the other. Changes in the value of the interest rate swap agreements and amounts received or paid in connection with those changes, are recognized as unrealized trading gains (losses) on open contracts/agreements in the statements of operations. The risks related to trading in interest rate swaps include changes in market value and the possible inability of the counterparty to fulfill its obligations under the agreement.

The Trading Company may enter into credit default swap agreements to provide a measure of protection against the default of an issuer (as buyer of protection) and/or gain credit exposure to an issuer to which it is not otherwise exposed (as seller of protection). Credit default swaps are agreements in which one party

 

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pays fixed periodic payments to a counterparty in consideration for a guarantee from the counterparty to make a specific payment should a negative credit event take place (e.g. default, bankruptcy, debt restructuring, etc.). The Trading Company may either buy or sell (write) credit default swaps. As a buyer, upon the occurrence of a specified negative credit event, the Trading Company will either receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising an index or receive a net settlement of cash equal to the notional amount of the swap less the agreed upon recovery value of the security or underlying securities comprising an index. As a seller (writer), upon the occurrence of a specified negative credit event, the Trading Company will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities comprising an index or pay a net settlement of cash equal to the notional amount of the swap less the agreed upon recovery value of the security or underlying securities comprising an index. In the event of default by the counterparty, the Trading Company may recover amounts paid under the agreement either partially or in total by offsetting any payables and/or receivables with collateral held or pledged. The counterparty risk for centrally-cleared credit default swap agreements is generally lower than for credit default swap agreements not centrally-cleared. However, there can be no assurance that the clearing organization, or its members, will satisfy its obligations to the Trading Company.

These periodic payments received or made under swap agreements by the Trading Company are included in net realized trading gains (losses) on closed contracts/agreements in the statements of operations. When the swap is terminated, the Trading Company will record a realized gain (loss) equal to the difference between the proceeds from (or cost of) the closing transaction and the Trading Company’s basis in the contract, if any. Swap transactions involve, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the statements of financial condition. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty or the clearing organization to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.

As of June 30, 2014 and December 31, 2013, the total fair value and notional amounts of credit default swaps on indices where the Trading Company is the seller is presented in the following table by contract terms:

 

      Fair Value and Notional Amounts by Contract Term  
      June 30, 2014      December 31, 2013  
      1-5 years      1-5 years  
Credit spread (in basis points)    Fair Value     Notional Amount      Fair Value      Notional Amount  

0-100

   $ (471,977   $ 136,614,000       $ 19,549,532       $ 1,558,937,500   

101-250

     (265,631     13,692,000         12,453,749         158,044,500   

251-350

     (31,123     10,000,000         5,078,451         123,715,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ (768,731   $ 160,306,000       $ 37,081,732       $ 1,840,697,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

The notional amount represents the maximum potential pay out that the Trading Company could be required to make if a credit event were to occur under each agreement. The credit spread of the underlying indices, derived from the fair value at June 30, 2014 of each credit default swap where the Trading Company is a seller, ranged between 59 basis points and 303 basis points. The credit spread of the underlying indices, derived from the fair value at December 31, 2013 of each credit default swap where the Trading Company is a seller, ranged between 54 basis points and 307 basis points. The credit spread is generally indicative of the status of the underlying risk of default by the applicable reference entity and is likely to be different than the contractual spread on the credit default swap. Higher credit spreads are indicative of a higher likelihood of performance by the Trading Company. As of June 30, 2014 the Trading Company did not post cash collateral, and as of December 31, 2013, the Trading Company posted cash collateral of $4,952,334, with respective counterparties of these agreements in the normal course of business. As of June 30, 2014, all open credit default swap agreements on selling protection have a maturity date of June 20, 2019. As of December 31, 2013, the maturity dates for open credit default swaps on selling protection ranged from June 20, 2018 through December 20, 2018.

During the quarter ended June 30, 2014, the Trading Company traded 115,555 exchange-traded futures contracts and settled 16,968 forward contracts and 1,806 swap agreements. During the six months ended June 30, 2014, the Trading Company traded 227,277 exchange-traded futures contracts and settled 34,612 forward contracts and 2,890 swap agreements. During the quarter ended June 30, 2013, the Trading Company traded 67,052 exchange-traded futures contracts and settled 19,882 forward contracts and 1,516 swap agreements. During the six months ended June 30, 2013, the Trading Company traded 93,779 exchange-traded futures contracts and settled 35,169 forward contracts and 2,902 swap agreements.

 

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The Trading Company trades derivative financial instruments that involve varying degrees of market and credit risk. Market risks may arise from unfavorable changes in interest rates, foreign exchange rates, or the fair values of the instruments underlying the contracts. All contracts are stated at fair value, and changes in those values are reflected in the net change in unrealized trading gains (losses) on open contracts/agreements in the statements of operations. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of a contract. The credit risk for OTC derivative contracts is limited to the net unrealized gain plus any collateral posted net of unrealized losses or upfront fees posted, if any, for each counterparty for which a netting agreement exists and is included in the statements of financial condition. Upfront fees are listed on the statements of financial condition as net premiums paid/received on credit default swap agreements and are shown net by counterparty for which a netting agreement exists. Counterparty relationships are governed by various contracts. These contracts can be based on industry standard agreements, such as International Swap and Derivatives Association agreements for OTC contracts. These agreements set forth each party’s basic rights, responsibilities, and duties. These agreements also contain information regarding financial terms and conditions, as well as termination and events of default provisions. Certain agreements contain provisions that require the Trading Company to post additional collateral upon the occurrence of specific credit risk related events or upon notice from the counterparty. As the Trading Company’s trading strategies are dependent upon the existence of these agreements, the Trading Company’s counterparties usually have multiple specified events under which they can terminate individual transactions or the entire agreement. These are most commonly related to declines in assets under management and performance below certain thresholds during a specified period. It is not guaranteed that counterparties will move to terminate individual transactions or entire agreements if a “trigger event” were to occur; however, it is their right to do so, and such a move could severely impact the Trading Company’s portfolio. At June 30, 2014, the OTC contracts subject to such trigger events in a net liability position were the interest rate swaps and credit default swaps. The details of the net liability positions by counterparty are disclosed later in this note on the additional disclosures regarding the offsetting of derivative liabilities table. The ultimate amounts that may be required as payment to settle the derivative instruments in connection with the triggering of such credit contingency features as of June 30, 2014, may differ from the net liability amounts recorded as of June 30, 2014, and such differences can be material.

For exchange-traded futures contracts, the clearing organization functions as the central counterparty for each transaction and, therefore, bears the risk of delivery to and from counterparties, which mitigates the credit risk of these instruments.

For centrally cleared swaps, immediately following execution of the swap agreement, the swap agreement is novated to a central clearing counterparty (the “CCP”) and the Trading Company faces the CCP through a broker. Upon entering into a centrally cleared swap, the Trading Company is required to deposit initial margin with the broker in the form of cash in an amount that varies depending on the size and risk profile of the particular swap. With centrally cleared swaps, there is less counterparty credit risk since the exchange or clearinghouse stands between the buyer and seller of the swaps.

The following table presents the fair value of the Trading Company’s derivative instruments and statements of financial condition location:

 

    

June 30, 2014

 
    

Asset Derivatives

    

Liability Derivatives

 

Primary Risk Exposure

  

Statements of Financial Condition

   Fair Value     

Statements of Financial Condition

   Fair Value  

Open forward contracts

   Gross unrealized trading gains on open forward contracts       Gross unrealized trading losses on open forward contracts   

Currencies

      $ 9,154,002          $ (8,453,509

Metals

        392,729            (1,415,012
     

 

 

       

 

 

 

Total open forward contracts

        9,546,731            (9,868,521
     

 

 

       

 

 

 

Open futures contracts

   Gross unrealized trading gains on open futures contracts       Gross unrealized trading losses on open futures contracts   

Agricultural

        2,580,089            (402,507

Currencies

        781,533            (44,259

Energy

        2,243,484            (674,085

Indices

        2,969,182            (775,849

Interest rates

        3,314,920            (458,930

Metals

        1,177,939            (478,735
     

 

 

       

 

 

 

Total open futures contracts

        13,067,147            (2,834,365
     

 

 

       

 

 

 

Open swap agreements

   Gross unrealized trading gains on open swap agreements       Gross unrealized trading losses on open swap agreements   

Credit

        11,574            (780,305

Interest rates

        25,511,755            (26,116,824
     

 

 

       

 

 

 

Total open swap agreements

        25,523,329            (26,897,129
     

 

 

       

 

 

 

Total Derivatives

   $ 48,137,207          $ (39,600,015
     

 

 

       

 

 

 
    

December 31, 2013

 
    

Asset Derivatives

    

Liability Derivatives

 

Primary Risk Exposure

  

Statements of Financial Condition

   Fair Value     

Statements of Financial Condition

   Fair Value  

Open forward contracts

   Gross unrealized trading gains on open forward contracts       Gross unrealized trading losses on open forward contracts   

Currencies

      $ 7,958,109          $ (7,473,578

Metals

        473,826            (72,588
     

 

 

       

 

 

 

Total open forward contracts

        8,431,935            (7,546,166
     

 

 

       

 

 

 

Open futures contracts

   Gross unrealized trading gains on open futures contracts       Gross unrealized trading losses on open futures contracts   

Agricultural

        1,981,983            (951,283

Currencies

        35,616            (258,726

Energy

        399,933            (143,956

Indices

        9,124,763            (57,307

Interest rates

        1,041,240            (1,849,774

Metals

        577,997            (142,968
     

 

 

       

 

 

 

Total open futures contracts

        13,161,532            (3,404,014
     

 

 

       

 

 

 

Open swap agreements

   Gross unrealized trading gains on open swap agreements       Gross unrealized trading losses on open swap agreements   

Credit

        37,243,040            (26,489,933

Interest rates

        25,222,025            (32,391,756
     

 

 

       

 

 

 

Total open swap agreements

        62,465,065            (58,881,689
     

 

 

       

 

 

 

Total Derivatives

   $ 84,058,532          $ (69,831,869
     

 

 

       

 

 

 

The following table presents the impact of derivative instruments on the statements of operations:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
   2014     2013     2014     2013  

Location of loss or gain recognized in income on derivatives

   Gain (Loss) on
derivatives
    Gain (Loss) on
derivatives
    Gain (Loss) on
derivatives
    Gain (Loss) on
derivatives
 

Forward contracts

        

Currencies

   $ 2,453,587      $ (6,287,433   $ 2,389,277      $ 4,978,523   

Metals

     160,267        5,216,941        (1,382,487     4,856,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized trading gains (losses) on closed contracts/agreements

   $ 2,613,854      $ (1,070,492   $ 1,006,790      $ 9,835,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Currencies

   $ (289,616   $ 325,725      $ 215,962      $ (6,040,778

Metals

     (817,330     2,357,197        (1,423,521     3,937,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized trading gains (losses) on open contracts/agreements

   $ (1,106,946   $ 2,682,922      $ (1,207,559   $ (2,103,371
  

 

 

   

 

 

   

 

 

   

 

 

 

Futures contracts

        

Agricultural

   $ 899,174      $ 280,998      $ 1,720,565      $ 826,471   

Currencies

     718,000        (340,479     2,025,445        (463,650

Energy

     (2,284,242     (6,257,182     (3,643,603     (10,046,527

Indices

     5,063,810        2,566,518        6,365,363        26,749,291   

Interest rates

     4,994,685        (13,431,346     9,615,204        (22,054,435

Metals

     (1,722,550     2,947,573        (2,846,578     (532,101
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized trading gains (losses) on closed contracts/agreements

   $ 7,668,877      $ (14,233,918   $ 13,236,396      $ (5,520,951
  

 

 

   

 

 

   

 

 

   

 

 

 

Agricultural

   $ 1,876,045      $ 476,884      $ 1,146,882      $ 322,265   

Currencies

     830,402        (966,060     960,384        (622,358

Energy

     793,875        19,877        1,313,422        (864,246

Indices

     1,309,004        (1,009,117     (6,874,123     (1,279,272

Interest rates

     2,736,053        (7,840,400     3,664,524        (2,842,610

Metals

     1,161,238        214,862        264,175        3,935,343   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized trading gains (losses) on open contracts/agreements

   $ 8,706,617      $ (9,103,954   $ 475,264      $ (1,350,878
  

 

 

   

 

 

   

 

 

   

 

 

 

Swap agreements

        

Credit default swaps

   $ 12,172,325      $ 2,119,929      $ 12,652,946      $ 706,112   

Interest rate swaps

     719,965        (2,600,337     (1,754,383     (109,965
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized trading gains (losses) on closed contracts/agreements

   $ 12,892,290      $ (480,408   $ 10,898,563      $ 596,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit default swaps

   $ (10,366,114   $ 6,589,608      $ (11,521,838   $ 5,859,636   

Interest rate swaps

     3,803,965        (4,946,410     6,564,662        (10,253,249
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized trading gains (losses) on open contracts/agreements

   $ (6,562,149   $ 1,643,198      $ (4,957,176   $ (4,393,613
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in the table above exclude foreign exchange spot contracts.

 

24


Table of Contents

As described above, the Trading Company may enter into netting agreements with its derivative contract counterparties whereby the Trading Company may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. As of June 30, 2014 and December 31, 2013, the Trading Company was subject to netting agreements that allowed for amounts owed between the Trading Company and its counterparty to be netted. The party that has the larger payable pays the excess of the larger amount over the smaller amount to the other party. The netting agreements do not apply to amounts owed to or from different counterparties. The following table provides additional disclosures regarding the offsetting of derivative assets presented in the statements of financial condition:

 

     Gross Amounts
of Recognized
Assets
     Gross Amount
Offset in the
Statements of
Financial
Condition
    Net Amounts
of Assets
presented in
the Statements
of Financial
Condition
     Gross Amounts Not
Offset in the Statements
of Financial Condition
     Net Amount  
             Financial
Instruments
     Cash
Collateral
Pledged
    

As of June 30, 2014

                

Open futures contracts

                

Credit Suisse

   $ 8,118,837       $ (1,932,159   $ 6,186,678       $ —         $ —         $ 6,186,678   

JPMorgan Chase

     3,184,729         (563,514     2,621,215         —           —           2,621,215   

Bank of America Merrill Lynch

     1,763,581         (338,692     1,424,889         —           —           1,424,889   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open futures contracts

   $ 13,067,147       $ (2,834,365   $ 10,232,782       $ —         $ —         $ 10,232,782   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open forward contracts

                

Credit Suisse USA LLC

   $ 52       $ —        $ 52       $ —         $ —         $ 52   

Deutsche Bank

     3,762,289         (3,762,289     —           —           —           —     

Royal Bank of Scotland

     5,784,390         (5,073,298     711,092         —           —           711,092   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open forward contracts

   $ 9,546,731       $ (8,835,587   $ 711,144       $ —         $ —         $ 711,144   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open swap agreements

                

Credit Suisse

   $ 11,575       $ (11,575   $ —         $ —         $ —         $ —     

Deutsche Bank

     491,039         (152,479     338,560         —           —           338,560   

Royal Bank of Scotland

     25,020,715         (25,020,715     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open swap agreements

   $ 25,523,329       $ (25,184,769   $ 338,560       $ —         $ —         $ 338,560   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

                

Open futures contracts

                

Credit Suisse

   $ 6,395,998       $ (1,480,381   $ 4,915,617       $ —         $ —         $ 4,915,617   

JPMorgan Chase

     5,281,158         (1,004,751     4,276,407         —           —           4,276,407   

Bank of America Merrill Lynch

     1,484,376         (918,882     565,494         —           —           565,494   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open futures contracts

   $ 13,161,532       $ (3,404,014   $ 9,757,518       $ —         $ —         $ 9,757,518   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open forward contracts

                

Deutsche Bank

   $ 4,689,157       $ (4,241,771   $ 447,386       $ —         $ —         $ 447,386   

Royal Bank of Scotland

     3,742,778         (3,304,395     438,383         —           —           438,383   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open forward contracts

   $ 8,431,935       $ (7,546,166   $ 885,769       $ —         $ —         $ 885,769   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open swap agreements

                

Credit Suisse

   $ 25,882,027       $ (13,361,680   $ 12,520,347       $ —         $ —         $ 12,520,347   

JPMorgan Chase

     11,361,013         (11,361,013     —           —           —           —     

Royal Bank of Scotland

     25,222,025         (25,222,025     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open swap agreements

   $ 62,465,065       $ (49,944,718   $ 12,520,347       $ —         $ —         $ 12,520,347   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides additional disclosures regarding the offsetting of derivative liabilities presented in the statements of financial condition:

 

     Gross Amounts
of Recognized
Liabilities
     Gross Amount
Offset in the
Statements of
Financial
Condition
    Net Amounts
of Liabilities
Presented in
the Statements
of Financial
Condition
     Gross Amounts Not
Offset in the Statements
of Financial Condition
     Net Amount  
             Financial
Instruments
     Cash
Collateral
Pledged
    

As of June 30, 2014

                

Open futures contracts

                

Credit Suisse

   $ 1,932,159       $ (1,932,159   $ —         $ —         $ —         $ —     

JPMorgan Chase

     563,514         (563,514     —           —           —           —     

Bank of America Merrill Lynch

     338,692         (338,692     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open futures contracts

   $ 2,834,365       $ (2,834,365   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open forward contracts

                

Deutsche Bank

   $ 4,795,223       $ (3,762,289   $ 1,032,934       $ —         $ 1,032,934       $ —     

Royal Bank of Scotland

     5,073,298         (5,073,298     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open forward contracts

   $ 9,868,521       $ (8,835,587   $ 1,032,934       $ —         $ 1,032,934       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open swap agreements

                

Credit Suisse

   $ 533,659       $ (11,575   $ 522,084       $ —         $ —         $ 522,084   

JPMorgan Chase

     246,647         —          246,647         —           —           246,647   

Deutsche Bank

     152,479         (152,479     —           —           —           —     

Royal Bank of Scotland

     25,964,344         (25,020,715     943,629         —           943,629         —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open swap agreements

   $ 26,897,129       $ (25,184,769   $ 1,712,360       $ —         $ 943,629       $ 768,731   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2013

                

Open futures contracts

                

Credit Suisse

   $ 1,480,381       $ (1,480,381   $ —         $ —         $ —         $ —     

JPMorgan Chase

     1,004,751         (1,004,751     —           —           —           —     

Bank of America Merrill Lynch

     918,882         (918,882     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open futures contracts

   $ 3,404,014       $ (3,404,014   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open forward contracts

                

Deutsche Bank

   $ 4,241,771       $ (4,241,771   $ —         $ —         $ —         $ —     

Royal Bank of Scotland

     3,304,395         (3,304,395     —           —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open forward contracts

   $ 7,546,166       $ (7,546,166   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Open swap agreements

                

Credit Suisse

   $ 13,361,680       $ (13,361,680   $ —         $ —         $ —         $ —     

JPMorgan Chase

     13,128,253         (11,361,013     1,767,240         —           1,767,240         —     

Royal Bank of Scotland

     32,391,756         (25,222,025     7,169,731         —           7,169,731         —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total open swap agreements

   $ 58,881,689       $ (49,944,718   $ 8,936,971       $ —         $ 8,936,971       $ —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Only the amount of the collateral up to the net amount of liabilities presented on the statements of financial condition is disclosed above. The table below lists additional amounts of collateral pledged:

 

     Additional
Collateral
Pledged
 

As of June 30, 2014

  

Open forward contracts

  

Deutsche Bank

   $ 2,925,705   

Open swap agreements

  

Royal Bank of Scotland

   $ 7,501,320   

As of December 31, 2013

  

Open swap agreements

  

JPMorgan Chase

   $ 2,140,326   

Royal Bank of Scotland

     5,828,704   

 

6. FINANCIAL GUARANTEES

The Trading Company enters into administrative and other professional service contracts that contain a variety of indemnifications. The Trading Company’s maximum exposure under these arrangements is not known; however, the Trading Company has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.

 

7. FINANCIAL HIGHLIGHTS

The following represents the ratios to average partners’ capital and other supplemental information for the periods ended June 30, 2014 and 2013:

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2014     2013     2014     2013  

Per unit operating performance:

        

Beginning net asset value

   $ 9,602.35      $ 10,299.45      $ 9,803.63      $ 9,955.05   

Income (loss) from investment operations:

        

Net investment loss

     (11.80     (8.12     (22.79     (16.01

Net realized and unrealized gains (losses) on trading activities and translation of foreign currency

     1,164.29        (599.36     974.00        (247.07
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income (loss) from investment operations

     1,152.49        (607.48     951.21        (263.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending net asset value

   $ 10,754.84      $ 9,691.97      $ 10,754.84      $ 9,691.97   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratios to average partners’ capital1:

        

Expenses

     0.55     0.38     0.57     0.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

     (0.47 )%      (0.32 )%      (0.46 )%      (0.31 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return2

     12.00     (5.90 )%      9.70     (2.64 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1 

Ratios have been annualized.

2 

Total return is for the period indicated and has not been annualized.

Financial highlights are calculated for all partners taken as a whole. An individual partner’s returns and ratios may vary from these returns and ratios based on the timing of capital transactions.

 

8. SUBSEQUENT EVENTS

The Trading Company accepts initial or additional subscriptions for limited partnership interests generally as of the first day of the month and redemption requests from limited partners as of the last business day of each calendar month. For the period subsequent to June 30, 2014 through the date of filing, limited partner subscriptions totaled $175,000, and limited partner redemptions totaled $2,285,542.

The General Partner has evaluated the impact of subsequent events on the Trading Company through the date of filing these financial statements, and noted no subsequent events that require adjustment to or disclosure in these financial statements, except as noted above.

 

25


Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

Reference is made to Item 1, “Financial Statements.” The information contained therein is essential to, and should be read in conjunction with, the following analysis.

Operational Overview

Man-AHL Diversified I L.P. (the “Partnership”) is a speculative managed futures fund which trades through its investment in Man-AHL Diversified Trading Company L.P. (the “Trading Company”) pursuant to the AHL Diversified Program, directed on behalf of the Trading Company by AHL Partners LLP (the “Advisor”). Prior to June 1, 2014, trading on behalf of the Trading Company was directed by Man-AHL (USA) Limited. The Advisor implements the same trading program and employs substantively the same personnel as did Man-AHL (USA) Limited. The AHL Diversified Program is a price trend-following trading system, entirely quantitative in nature, and implements trading positions on the basis of statistical analyses of past price histories. The objective of the AHL Diversified Program is to deliver substantial capital growth for commensurate levels of volatility over the medium term, independent of the movement of the stock and bond markets, through the speculative trading, directly and indirectly, of physical commodities, futures contracts, spot and forward contracts, swaps and options on the foregoing, exchanges of futures for physical transactions and other investments on domestic and international exchanges and markets (including the interbank and over-the-counter markets). The AHL Diversified Program is proprietary and confidential, so that substantially the only information that can be furnished regarding the Partnership’s results of operations is contained in the performance record of its trading through the Trading Company. Past performance is not necessarily indicative of its futures results. Man Investments (USA) Corp., the general partner of the Partnership (the “General Partner”) does believe, however, that there are certain market conditions, for example, markets with pronounced price trends, in which the Partnership has a greater likelihood of being profitable than in other market environments.

Capital Resources and Liquidity

Units of limited partnership interests (“Units”) of the Partnership may be offered for sale as of the beginning, and may be redeemed as of the end, of each month.

The Partnership raises additional capital only through the sale of Units and capital is increased through trading profits (if any) and interest income. The Partnership does not engage in borrowing. The Partnership, not being an operating company, does not incur capital expenditures. It functions solely as a passive trading vehicle, investing the substantial majority of its assets in the Trading Company. Its remaining capital resources are used only as assets available to make further investments in the Trading Company and to pay Partnership level expenses. Accordingly, the amount of capital raised for the Partnership should not have a significant impact on its operations.

Partnership assets not invested in the Trading Company are maintained in cash and cash equivalents in bank accounts or accounts with JPMorgan Chase Bank, N.A. and Citibank, N.A. and are readily available to the Partnership. The Partnership may redeem any part or all of its limited partnership interest in the Trading Company at any month-end at the net asset value per unit of the Trading Company. The Trading Company’s assets are generally held as due from brokers which is used to margin futures and provide collateral for forward contracts and other over-the-counter contract positions and is withdrawn, as necessary, to pay redemptions (to the Partnership and other investors in the Trading Company). Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Trading Company’s futures trading, the Trading Company’s assets are highly liquid and are expected to remain so.

There have been no material changes with respect to the Partnership’s critical accounting policies, off-balance sheet arrangements or disclosure of contractual obligations as reported in the Partnership’s Form 10-K filed March 31, 2014.

 

26


Table of Contents

Results of Operations

Due to the nature of the Partnership’s trading, the results of operations for the interim period presented should not be considered indicative of the results that may be expected for the entire year.

Periods Ended June 30, 2014:

 

     30-June-14  

Ending Equity

   $ 174,326,641   

Six months ended June 30, 2014:

Net assets decreased $28,554,977 for the six months ended June 30, 2014. This decrease was attributable to subscriptions in the amount of $996,286, redemptions in the amount of $41,499,152 and a net gain from operations of $11,897,889.

Management Fees of $2,697,475 and servicing fees of $989,849 were paid or accrued, and interest of $101,601 was earned or accrued on the Partnership’s cash and cash equivalent investments and broker balances, for the six months ended June 30, 2014.

The Partnership’s other expenses paid or accrued for the six months ended June 30, 2014 were $371,872.

Three months ended June 30, 2014:

Net assets decreased $148,716 for the three months ended June 30, 2014. This decrease was attributable to subscriptions in the amount of $204,700, redemptions in the amount of $18,356,944 and a net gain from operations of $18,003,528.

Management Fees of $1,302,280 and servicing fees of $437,619 were paid or accrued, and interest of $37,816 was earned or accrued on the Partnership’s cash and cash equivalent investments and broker balances, for the three months ended June 30, 2014.

The Partnership’s other expenses paid or accrued for the three months ended June 30, 2014 were $180,882.

The Partnership posted modest trading profits in April as positive performance in the bond, credit, agricultural and currency markets outdistanced losses from equity, energy and metals trading. The Partnership’s long positions in European and Canadian bonds proved particularly successful in connection with the European Central Bank’s (“ECB”) accommodative monetary policy relative to the U.S. Federal Reserve’s continued stimulus tapering. Holdings in Swedish interest rate swaps also benefitted from the renewed European confidence. Currency trading produced smaller gains, however, as the lack of substantial movement in the currency markets prevented the Partnership’s positions from realizing higher levels of return. Commodity trading similarly produced more modest returns as gains in long soybean and coffee contracts were offset by losses on short wheat positions. The bursting of a mini-tech bubble in April caused losses for the Partnership which held long positions in NASDAQ futures. Energy trading also produced losses as crude oil prices remained relatively range bound and an increase in European power prices made short positions in Germany and Scandinavia unprofitable.

The Partnership experienced a notable net trading gain in May with the fixed income, equity and currency markets serving as the strongest contributors to performance. With respect to fixed income trading, the Partnership benefitted the most from its long positions in U.S. and Australian bonds as low yields in the European bond market and expectations of additional ECB stimulus increased investor demand back to the U.S. and other bond markets. The continued low interest rate environment in both the U.S. and Europe had the additional effect of buoying equities in both markets, which in combination with the Partnership’s long stakes in U.S. and European equities, produced significant gains for the Partnership.

 

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Currency trading resulted in more moderate returns as the Partnership’s short position against emerging markets and long positions in the Indian rupee and non-dollar crosses each produced small gains. Commodity and energy trading, in turn, produced small losses attributable to long positions in cotton and natural gas and the shorting of aluminum.

June provided another positive month of trading returns with the strongest performances achieved in the equity, bond and commodities markets. Both the U.S. and European equity markets saw sizeable gains on account of the U.S. Federal Reserve’s continuing support of monetary stimulus as expressed by Federal Reserve Chair, Janet Yellen, in her mid-month address. With the S&P 500 and the DAX index both reaching their highest levels to date, the Partnership’s long positions in equities similarly produced noteworthy profits. Although a long stake in U.S. Treasuries did result in a loss, corresponding long positions in European bonds helped to offset these losses as the European bond markets rallied in light of the ECB’s continuing accommodative policy. Commodity trading also proved profitable as long positions in live cattle and short corn and wheat positions were well-timed to take advantage of record-high futures prices for cattle and the downward trend of corn and wheat prices which had spiked earlier on concerns over the cold weather impact on summer harvests. In contrast to these positive gains, the Partnership’s energy contract positioning provided mixed results following geopolitical developments in Iraq which raised concerns of the future delivery of crude oil from the region. Gains from longs in Brent and WTI crude were tempered by losses from shorts in the gasoil market. The instability in Iraq, moreover, had a negative impact on the Partnership’s metal trading. Prices of gold and silver both increased sharply over the news of the instability resulting in losses for the Partnership’s short gold and silver positions.

Three months ended March 31, 2014:

Poor performance in the equities markets resulted in a net trading loss in January as both the European and U.S. equity markets experienced declines. Jumps in credit premiums and a long exposure to industrial metals further contributed to these losses. On the positive side, renewed demand for developed market bonds brought noteworthy gains. Existing long positions in French and Italian bond futures, as well as Euro-bund and Canadian contracts, provided the most significant returns. Commodity trading also added positive returns as short positions in sugar and wheat benefitted from continued weak demand, a record Canadian wheat harvest, and increased sugar production from Brazil and Thailand.

In February, trading in the bond, commodity, and energy markets generated modest overall performance with long positions in Italian bond futures, soy beans, and natural gas contributing most to the positive returns. Long positions in Italian bonds were particularly profitable as demand increased for such bonds in spite of other key bond yields remaining relatively stagnant. On the commodity side, trading results were mixed. Although an unusually cold winter across the eastern half of North America made long exposure to natural gas profitable, short exposure to wheat and sugar offset these gains. A drought in Brazil increased the price of soft commodities such as sugar, and concerns of lower wheat production on account of the harsh U.S. winter drove up prices for wheat. Trading in the currency markets also provided mixed results. While short positions in the Russian rouble provided positive gains in light of the political turmoil in Ukraine, a slightly weaker U.S. dollar caused losses for the Partnership’s positions in Brazilian real, Korean won and Malaysian ringgit.

Against a backdrop of increased volatility for equities, energies and rates, the Partnership sustained negative returns in March as losses in stocks and fixed income exposures outweighed gains in currency positions. Regarding equities, the Dax Index in Germany experienced sharp market reversals in light of lingering uncertainty from the Russian-Ukrainian political conflict. During this reversal, the Partnership cut positions at the time of sell-off yet did not participate in the return upward swing. Sharp reversals in both the Eurodollar and U.S. Treasury bond markets similarly resulted in negative returns which were offset by gains on long positions in French and Italian government bonds. The losses in the equity and bond markets were further tempered by the Partnership’s currency trading with respect to the Indian rupee and New Zealand dollar, which both yielded positive results.

 

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Periods Ended June 30, 2013:

 

     30-June-13  

Ending Equity

   $ 292,798,220   

Six months ended June 30, 2013:

Net assets decreased $86,552,767 for the six months ended June 30, 2013. This decrease was attributable to subscriptions in the amount of $8,021,999, redemptions in the amount of $81,284,633 and a net loss from operations of $13,290,133.

Management Fees of $5,203,989 and servicing fees of $2,646,716 were paid or accrued, and interest of $103,741 was accrued on the Partnership’s cash and cash equivalent investments and broker balances, for the six months ended June 30, 2013.

The Partnership’s other expenses paid or accrued for the six months ended June 30, 2013 were $430,050.

Three months ended June 30, 2013:

Net assets decreased $60,887,331 for the three months ended June 30, 2013. This decrease was attributable to subscriptions in the amount of $2,816,848, redemptions in the amount of $41,917,704 and a net loss from operations of $21,786,475.

Management Fees of $2,462,098 and servicing fees of $1,249,690 were paid or accrued, and interest of $53,104 was accrued on the Partnership’s cash, cash equivalent investments and broker balances, for the three months ended June 30, 2013.

The Partnership’s other expenses paid or accrued for the three months ended June 30, 2013 were $213,642.

The Partnership generated positive performance in April. A long exposure to fixed income assets added a large share of returns with European bonds, US Treasuries and Eurodollar contracts all delivering profits, although long exposure to Japanese bonds detracted slightly. Profits were added by a short allocation to both precious and base metals, although platinum and palladium gave back some performance. However, the agricultural sector detracted because of exposure to wheat and corn. Negative performance came from currencies as well. Short GBP positions caused a loss with the pound moving higher as the UK avoided triple-dip recession.

The Partnership generated a notable loss in May with a long exposure to fixed income assets being the primary driver of negative performance. US Treasuries were among the most notable losers. Further negative performance came from UK gilts and bonds from commodity focused economies. Long exposure to interest rate holdings also incurred a loss following a cut in Eurozone rates; Eurodollar significantly detracted with Euribor and Short Sterling contracts also ending May in negative territory. Currency trading delivered a loss as a rising greenback weighed on short US dollar versus a number of commodity-linked currency trades.

Stock trading was the largest positive contributor as long US and European holdings benefitted from the equity rally before returns were trimmed in the final week. Agricultural trading added a gain, primarily via long soybeans and short sugar positions. Energies were slightly negative with long natural gas adding a loss. Short electricity and coat contracts helped partially offset sector losses.

The Partnership posted a loss in June with long holdings of fixed income and equities being the primary negatives, particularly early in the month. US Treasuries were a significant detractor as yields jumped. European bonds were also loss-making, coming under pressure from the general sell-off in fixed income. Eurodollar, Euribor and Short Sterling contracts were all notable losers.

 

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Equities detracted significantly; European indices were the biggest losers after US markets rebounded at the end of the month, helping long holdings recover some performance. Short metals added a notable gain as prices of both base and precious metals fell sharply over the period.

Three months ended March 31, 2013:

January began with noteworthy results from long equity exposure across all regions, but particularly in US and European indices. However, this was nullified by losses on long fixed income exposure, with US Treasuries, French bonds, Short Sterling and Eurodollar being the main detractors. Commodity allocations generated a gain, largely due to short electricity contracts as milder, wetter weather drove prices down, but long exposure to oil and oil derivatives and short gold exposure also returned positive numbers. Short exposure to European and US credit default protection captured gains over the past months as the cost of default insurance fell. Currency trading also added positive returns largely by way of short exposure to Japanese yen which fell 6% (on a trade-weighted basis) following the announcement of a stimulus and deflation control.

Commodity and currency trading were major factors in losses in February. Energy trading took a hit in February, with all positions contributing to the loss. Long positions in crude oil and its by-products was the main theme. The story was similar within the metals sector as long exposure to base metals suffered from the pull back in growth sensitive commodities over the month. Currency trading provided mixed performance. Short GBP positions performed well on the back of the UK rating downgrade and prospects for further quantitative easing. However, this was offset by losses from short USD positions as the dollar rose 3.3% on a trade weighted basis. On the positive side, long exposure to both bonds and short term interest rates performed positively over the month, reversing some of the sector’s losses from last month as markets returned to a more cautious state, following the overwhelmingly bullish nature of January. As such safe haven bonds (US Treasuries in particular) returned some of the larger gains, but with further returns coming from emerging market bonds as well. On the interest rate side, long positions in Eurodollar, Euribor and Short Sterling all contributed positive performances as there continued to be no immediate end in sight to the relaxed monetary policies of the major central banks.

Long exposure to rising stock markets generated good performance in March. US equities added the largest contribution with main European indices and Japanese stocks also performing. The only notable negative came from a long exposure to the Korean Kospi. Further positive returns were also added by long holdings of bonds. Yields on most European debt fell, benefitting the portfolio, as investor sought safety in light of Eurozone issues. A small portion of the gain was given back via Italian long dated bonds and US Treasuries. Currency trading had a positive month, due largely to a continuing short exposure to the US dollar. The credit sector detracted as short exposure to the rising cost of European default protection resulted in a loss. The allocation to commodities also delivered negative performance on the whole, driven predominantly by a long exposure to energy markets. Crude oil and its derivatives caused the most pain. AHL was positioned long at the start of the period and suffered as oil prices fell, but reduced this exposure and did not participate in some of the upward movement towards the end of the period.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Introduction

Past Results Are Not Necessarily Indicative of Future Performance

The Partnership is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

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

The Partnership can rapidly acquire and/or 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 past performance is not necessarily indicative of its future results.

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

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

Quantifying the Partnership’s Trading Value at Risk

Quantitative Forward-Looking Statements

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

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

For regulatory purposes, exchange initial margin requirements have been used by the Partnership as the measure of its Value at Risk. For trading and internal risk monitoring purposes, a different approach based on simulated market movements is used. Initial margin requirements include a credit risk factor and a maintenance margin factor and thus overstate the maximum one-day loss reflected by the maintenance

 

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margin requirement by the amount of the credit risk factor used in setting initial margin requirements. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one-day losses in the fair value of any given contract incurred during the time period over which historical price fluctuations are researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

In the case of market sensitive instruments that are not exchange traded (almost exclusively currencies in the case of the Partnership), dealers’ margins have been used as Value at Risk.

The fair value of the Partnership’s futures and forward positions does not have any optionality component. However, the General Partner may also trade commodity options on behalf of the Partnership. The Value at Risk associated with options would be reflected in the margin requirement attributable to the instrument underlying each option.

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

The Partnership’s Trading Value at Risk in Different Market Sectors

The following table indicates the amount of trading Value at Risk associated with the Partnership’s open positions by market category as of the period ended June 30, 2014. As of June 30, 2014, the Partnership’s average capitalization was $174,400,999.

 

Quarter-Ended June 30, 2014

 

Market Sector

   Average
Value at Risk
     % of Average
Capitalization
    Highest Value
at Risk
     Lowest Value
at Risk
 

Agriculturals

   $ 3,078,620         1.77   $ 3,401,883       $ 2,755,357   

Bonds

   $ 6,285,353         3.60   $ 6,509,766       $ 6,060,940   

Credit

   $ 3,898,135         2.24   $ 7,124,706       $ 671,564   

Currencies

   $ 5,069,286         2.91   $ 5,296,550       $ 4,842,023   

Energies

   $ 3,077,043         1.76   $ 3,305,440       $ 2,848,646   

Interest rates

   $ 6,394,265         3.67   $ 9,186,362       $ 3,602,167   

Metals

   $ 2,190,790         1.26   $ 2,707,026       $ 1,674,554   

Stock indices

   $ 9,386,235         5.37   $ 11,240,974       $ 7,531,497   

Total

   $ 39,379,727         22.58   $ 48,772,707       $ 29,986,748   

Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts for the six months ended June 30, 2014. Average capitalization is the Partnership’s average quarter-end capitalization at the end of the six months ended June 30, 2014.

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

The face value of the market sector instruments held by the Partnership is typically many times the applicable initial or maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain

 

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market conditions — unusual, but historically recurring from time to time — could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table — as well as the past performance of the Partnership — gives no indication of this “risk of ruin.”

Non-Trading Risk

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

The Partnership also has non-trading cash flow risk as a result of holding a substantial portion (over 80%) of its assets in deposits, an AAA - rated Money Market Fund and interest-bearing bank accounts. This cash is placed with highly rated counterparties with a priority placed on preservation of capital and reputation (i.e., appropriate level of credit risk, market risk and reputation risk) and liquidity (i.e., appropriate level of liquidity risk).

Qualitative Disclosures Regarding Primary Trading Risk Exposures

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

The following were the primary trading risk exposures of the Partnership as of June 30, 2014, by market sector.

Financial Instruments. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States, Germany, the UK, Australia and Japan. However, the Partnership also may take positions in futures contracts on the government debt of smaller nations. The General Partner anticipates that G-7 interest rates, both long-term and short-term, will remain the primary market exposure of the Partnership for the foreseeable future.

Currencies. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Partnership trades in a large number of currencies, including cross-rates — i.e., positions between two currencies other than the U.S. dollar. As of June 30, 2014 the Partnership’s primary currency exposures were in the U.S. dollar versus the Euro, UK Sterling, Brazilian Real, Mexican Peso and Singapore Dollar. The primary exposures in the currency crosses were in the Euro versus Australian Dollar, Euro versus UK Sterling, UK Sterling versus Australian Dollar, Euro versus Swedish Krona and Australian Dollar versus Japanese Yen.

 

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Stock Indices. The Partnership’s primary equity exposure, through stock index futures, is to equity price risk in the G-7 countries. As of June 30, 2014, the Partnership’s primary exposures were in the Dax, Nikkei, Korean Kospi, S&P 500 and Hang Seng. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices. (Static markets would not cause major market changes but could make it difficult for the Partnership to avoid numerous small losses.)

Metals. The Diversified Portfolio used for the Partnership trades precious and base metals. As of June 30, 2014, the Partnership’s primary metals market exposures were in aluminum, gold, silver, copper, nickel and zinc.

Agricultural. The Partnership’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Wheat, coffee, soybeans, cotton and corn accounted for the substantial bulk of the Partnership’s commodities exposure as of June 30, 2014.

Energy. The Partnership’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market. As of June 30, 2014, the main exposures were in crude oil, heating oil, gasoline, natural gas and gas oil.

Qualitative Disclosures Regarding Non-Trading Risk Exposure

The following were the only non-trading risk exposures of the Partnership as of June 30, 2014.

Foreign Currency Balances. The Partnership’s primary foreign currency balances are in Euro, Australian dollar, British pounds, Swedish Krona and Japanese yen. The Partnership controls the non-trading risk of these balances by regularly converting these balances back into U.S. dollars (no less frequently than twice a month).

Cash Positions. The Partnership’s only market exposure in instruments held other than for trading is in its cash portfolio. The Partnership holds only cash in deposits, an AAA rated Money Market Fund and interest-bearing bank accounts. This cash is placed with highly rated counterparties with a priority placed on preservation of capital and reputation (i.e. appropriate level of credit risk, market risk and reputation risk) and liquidity (i.e. appropriate level of liquidity risk) with durations no longer than 1 year.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

Risk management is an essential component of AHL’s investment management process. AHL has put in place a risk management framework which is designed to identify, monitor and mitigate the portfolio, operational and outsourcing risks relevant to its operations. AHL’s risk management framework is part of, and is supported by, the overarching risk management framework of its parent company, Man Group plc. Key principles of AHL’s risk management framework include the segregation of functions and duties where material conflicts of interest may arise and having an appropriate degree of independent and senior management oversight of business activities. As part of this independent oversight, AHL’s activities are subject to regular review by an internal audit function.

The AHL Diversified Program employs a systematic, statistically based investment strategy that is designed to identify and capitalize on inefficiencies in markets around the world. The trading systems are quantitative and primarily directional in nature, meaning that investment decisions are entirely driven by mathematical models based on market trends and other historic relationships. Portfolio risk management consists primarily of monitoring risk measures and ensuring the systems remain within prescribed limits. The major risk monitoring measures and focus areas include value-at-risk, stress testing, implied volatility, leverage, margin-to-equity ratios and net exposures to sectors and different currencies.

 

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Diversification is also a key feature of AHL’s risk management, as well as its investment, process. The AHL Diversified Program is diversified across over 100 markets covering a wide range of sectors including, without limitation, currencies, bonds, energies, stock indices, interest rates, metals and agriculturals. As well as emphasizing sector and market diversification, the AHL Diversified Program has been constructed to achieve diversification by combining various systems driven by powerful computerized trading algorithms, most of which work by sampling prices in real time and measuring price momentum and breakouts. Another important aspect of diversification is the fact that the various systems generate signals across different timeframes, ranging from two to three days to several months, which helps to reduce the risk of the AHL Diversified Program. In line with the principle of diversification, the approach to portfolio construction and asset allocation is premised on the importance of deploying investment capital across the full range of sectors and markets. Particular attention is paid to correlation of markets and sectors, expected returns, trading costs and market liquidity. Portfolios are regularly reviewed and, when necessary, adjusted to reflect changes in these factors. AHL also has a process for adjusting its market risk exposure in real time to reflect changes in the volatility, a measure of risk, of individual markets.

 

ITEM 4. Controls and Procedures.

The General Partner, with the participation of the General Partner’s Chief Executive Officer and Principal Financial Officer with respect to the Partnership, has evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures as of the end of the fiscal quarter ended June 30, 2014. Based on such evaluation, the Partnership’s Chief Executive Officer and Principal Financial Officer with respect to the Partnership have concluded that the Partnership’s disclosure controls and procedures were effective as of the fiscal quarter ended June 30, 2014.

Changes in Internal Control over Financial Reporting

There were no significant changes in the Partnership’s internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

Risk of Loss. Investing in the Partnership is speculative and involves substantial risks. You should not invest unless you can afford to lose your entire investment.

General. The transactions in which the Advisor generally will engage on behalf of the Partnership involve significant risks. Growing competition may limit the Advisor’s ability to take advantage of trading opportunities in rapidly changing markets. No assurance can be given that investors will realize a profit on their investment. Moreover, investors may lose all or some of their investment. Because of the nature of the trading activities, the results of the Partnership’s operations may fluctuate from month to month and from period to period. Accordingly, investors should understand that the results of a particular period will not necessarily be indicative of results in future periods.

Model and Data Risk. The Advisor relies heavily on quantitative models (both proprietary models developed by the Advisor (or affiliates), and those supplied by third parties, collectively “Models”) and information and data both developed by the Advisor and those supplied by third parties (collectively, “Data”) rather than granting trade-by-trade discretion to the Advisor’s investment professionals. Models and Data are used to construct sets of transactions and investments, to value investments or potential investments (including, without limitation, for trading purposes and for purposes of determining the Net Asset Value of the Partnership), to provide risk management insights and to assist in hedging the Partnership’s investments. Models and Data are known to have errors, omissions, imperfections and malfunctions (collectively, “System Events”). System Events in third-party Models are generally entirely outside of the control of the Advisor.

The Advisor seeks to reduce the incidence and impact of System Events through a certain degree of internal testing and real-time monitoring, and the use of independent safeguards in the overall portfolio management system and often, with respect to proprietary models, in the software code itself. Despite such testing, monitoring and independent safeguards, System Events will result in, among other things, the execution of unanticipated trades, the failure to execute anticipated trades, delays to the execution of anticipated trades, the failure to properly allocate trades, the failure to properly gather and organize available data, the failure to take certain hedging or risk reducing actions and/or the taking of actions which increase certain risk(s) — all of which may have materially negative effects on the Partnership and/or its returns.

The investment strategies of the Partnership are highly reliant on the gathering, cleaning, culling and analysis of large amounts of Data. Accordingly, Models rely heavily on appropriate Data inputs. However, it is not possible or practicable to factor all relevant, available Data into forecasts and/or trading decisions of the Models. The Advisor will use its discretion to determine what Data to gather with respect to each investment strategy and what subset of that Data the Models take into account to produce forecasts which may have an impact on ultimate trading decisions. In addition, due to the automated nature of Data gathering, the volume and depth of Data available, the complexity and often manual nature of Data cleaning, and the fact that the substantial majority of Data comes from third-party sources, it is inevitable that not all desired and/or relevant Data will be available to, or processed by, the Advisor at all times. If incorrect Data is fed into even a well-founded Model, it may lead to a System Event subjecting the Partnership to loss. Further, even if Data is input correctly, “model prices” anticipated by the Data through the Models may differ substantially from market prices, especially for securities with complex characteristics, such as derivatives.

 

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Where incorrect or incomplete Data is available, the Advisor may, and often will, continue to generate forecasts and make trading decisions based on the Data available to it. Additionally, the Advisor may determine that certain available Data, while potentially useful in generating forecasts and/or making trade decisions, is not cost effective to gather due to either the technology costs or third-party vendor costs and, in such cases, the Advisor will not utilize such Data. Limited Partners should be aware that there is no guarantee that any specific Data or type of Data will be utilized in generating forecasts or making trading decisions with respect to the Models, nor is there any guarantee that the Data actually utilized in generating forecasts or making trading decisions underlying the Models will be (i) the most accurate data available or (ii) free of errors. Limited Partners should assume that the Data set used in connection with the Models is limited and should understand that the foregoing risks associated with gathering, cleaning, culling and analysis of large amounts of Data are an inherent part of investing with a process-driven, systematic adviser such as the Advisor.

When Models and Data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose the Partnership to potential risks. For example, by relying on Models and Data, the Advisor may be induced to buy certain investments at prices that are too high, to sell certain other investments at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty Models and Data may prove to be unsuccessful and when determining the Net Asset Value of the Partnership, any valuations of the Partnership’s investments that are based on valuation Models may prove to be incorrect. In addition, Models may incorrectly forecast future behavior, leading to potential losses on a cash flow and/or a mark-to-market basis. Furthermore, in unforeseen or certain low-probability scenarios (often involving a market disruption of some kind), Models may produce unexpected results which may or may not be System Events.

Errors in Models and Data are often extremely difficult to detect, and, in the case of proprietary models and third-party models, the difficulty of detecting System Events may be exacerbated by the lack of design documents or specifications. Regardless of how difficult their detection appears in retrospect, some System Events will go undetected for long periods of time and some will never be detected. The degradation or impact caused by these System Events can compound over time. Finally, the Advisor will detect certain System Events that it chooses, in its sole discretion, not to address or fix, and the third party software will lead to System Events known to the Advisor that it chooses, in its sole discretion, not to address or fix. The Advisor believes that the testing and monitoring performed on its models and third party models will enable the Advisor to identify and address those System Events that a prudent person managing a process-driven, systematic and computerized investment program would identify and address by correcting the underlying issue(s) giving rise to the System Events or limiting the use of proprietary and third party models, generally or in a particular application. Limited Partners should assume that System Events and their ensuing risks and impact are an inherent part of investing with a process-driven, systematic Advisor such as the Advisor. Accordingly, the Advisor does not expect to disclose discovered System Events to the Partnership or to Limited Partners.

The Partnership will bear the risks associated with the reliance on Models and Data including that the Partnership will bear all losses related to System Events unless otherwise determined by the Advisor in accordance with its internal policies or as may be required by applicable law.

Trade Error Risk. The complex trading programs operated by the Advisor and the speed and volume of transactions invariably result in occasional trades being executed which, with the benefit of hindsight, were not required by the trading program. To the extent an error is caused by a counterparty, such as a broker, the Advisor generally attempts to recover any loss associated with such error from such counterparty. To the extent an error is caused by the Advisor, a formalized process is in place for the resolution of such errors. Given the volume, diversity and complexity of transactions executed by the Advisor on behalf of the Partnership, investors should assume that trading errors (and similar errors) will occur. If such errors result in gains to the Partnership, such gains will be retained by the Partnership. However, if such errors result in losses, they will be borne by the Advisor in accordance with its internal policies unless otherwise determined by the General Partner.

 

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Markets Are Volatile and Difficult to Predict. Trading in futures is a speculative activity. Futures prices may be highly volatile. Market prices are difficult to predict and are influenced by many factors, including: changes in interest rates; governmental, agricultural, trade, fiscal, monetary and exchange control programs and policies; weather and climate conditions; changing supply and demand relationships; national and international political and economic events; and the changing philosophies and emotions of market participants. In addition, governments intervene in particular markets from time to time, both directly and by regulation, often with the intent to influence prices. The effects of government intervention may be particularly significant in the financial instrument and currency markets, and may cause such markets to move rapidly.

Trading Is Highly Leveraged. The low margin deposits normally required in futures trading permit an extremely high degree of leverage. A relatively small movement in the price of a futures contract may result in immediate and substantial loss or gain to a trader holding a position in such contract. For example, if at the time of purchase 10% of the price of a futures contract is deposited as margin, a 10% decrease in the price of the futures contract would, if the contract were then closed out, result in a total loss of the margin deposit before any deduction for brokerage commissions. Consequently, like other leveraged investments, a futures trade may result in losses in excess of the amount invested. Forward contracts involve similar leverage and also may require deposits of margin as collateral. Swaps and over-the-counter (“OTC”) derivative instruments are also highly leveraged transactions.

Markets May Be Illiquid. At times, it may not be possible for the Advisor to obtain execution of a buy or sell order at the desired price or to liquidate an open position, either due to market conditions on exchanges or due to the operation of “daily price fluctuation limits” or “circuit breakers.” For example, most U.S. commodity exchanges limit fluctuations in most futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” During a single trading day, no trades may be executed at prices beyond the daily limit. Futures contract prices occasionally have moved to the daily limit for several consecutive days with little or no trading.

Even when futures prices have not moved to the daily limit, the Advisor might not be able to obtain execution of trades at favorable prices if little trading in the contracts which the Advisor wishes to trade is taking place. Also, an exchange or governmental authority may suspend or restrict trading on an exchange (or in particular futures traded on an exchange) or order the immediate settlement of a particular instrument.

Options trading may be restricted in the event that trading in the underlying instrument becomes restricted. Options trading also may be illiquid at times regardless of the condition of the market in the underlying instrument. In either event, it will be difficult for the Advisor to realize gain or limit losses on option positions by offsetting them or to change positions in the market.

Trading in OTC derivative instruments is conducted with individual counterparties rather than on organized exchanges. There have been periods during which forward contract dealers have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the bid and asked price.

Speculative Position Limits May Restrict Futures Trading. Speculative position limits prescribe the maximum net long or short futures contract and options positions which any person or group may hold or control in particular futures contracts. All futures contracts and options on futures contracts traded on commodity exchanges located in the United States, with the exception of contracts on certain major non-U.S. currencies, are subject to speculative position limits established either by the Commodity Futures Trading Commission (the “CFTC”) or the relevant exchange.

 

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All trading accounts owned or managed by the Advisor and its principals will be combined for the purposes of speculative position limits. Such limits could adversely affect the profitability of the Trading Company and, consequently, of the Partnership. For example, the Advisor could be required to liquidate futures positions at an unfavorable time in order to comply with such limits. However, the Advisor does not believe that existing speculative position limits will materially adversely affect its ability to manage the Trading Company’s account.

Cash Flow. Futures contract gains and losses are marked-to-market daily for purposes of determining margin requirements. Option positions generally are not, although short option positions will require additional margin if the market moves against the position. Due to these differences in margin treatment between futures and options, there may be periods in which positions on both sides must be closed down prematurely due to short term cash flow needs. If this were to occur during an adverse move in a spread or straddle relationship, a substantial loss could occur.

Decisions Based on Trends and Technical Analysis. The trading decisions of the Advisor will be based in part on trading strategies which utilize mathematical analyses of technical factors relating to past market performance. The buy and sell signals generated by a technical, trend-following trading strategy are based upon a study of actual daily, weekly and monthly price fluctuations, volume variations and changes in open interest in the markets. The profitability of any technical, trend-following trading strategy depends upon the occurrence in the future of significant, sustained price moves in some of the markets traded. The Trading Company and, consequently, the Partnership may incur substantial trading losses:

 

   

during periods when markets are dominated by fundamental factors that are not reflected in the technical data analyzed by the program;

 

   

during prolonged periods without sustained moves in one or more of the markets traded; or

 

   

during “whip-saw” markets, in which potential price trends start to develop but reverse before actual trends are realized.

In the past there have been prolonged periods without sustained price moves in various markets. Presumably, such periods will recur. A series of volatile reverses in price trends may generate repeated entry and exit signals in trend-following systems, resulting in unprofitable transactions and increased brokerage commission expenses. Technical, trend-following trading systems are used by many other traders. At times, the use of such systems may:

 

   

result in traders attempting to initiate or liquidate substantial positions in a market at or about the same time;

 

   

alter historical trading patterns;

 

   

obscure developing price trends; or

 

   

affect the execution of trades.

Trading in OTC Markets Will Expose the Partnership to Risks Not Applicable to Trading on Organized Exchanges. The Partnership, through the Trading Company, may engage in OTC derivative transactions, such as: currency forward contracts traded in the interbank market; options on currency forward contracts; and swap transactions.

In general, there is much less governmental regulation and supervision of transactions in the OTC markets than of transactions entered into on organized exchanges. Most of the protections afforded to participants on U.S. and certain non-U.S. exchanges, such as daily price fluctuation limits and the performance guarantee of an exchange clearinghouse, will not be available in connection with OTC transactions. Consequently, the Partnership will be exposed to greater risk of loss through default than if it confined its trading to organized exchanges.

A portion of the Partnership’s assets may be traded in forward contracts. Such forward contracts are generally not traded on exchanges and are executed directly through forward contract dealers. However, certain forward currency exchange contracts are regulated as swaps by the CFTC and have begun being voluntarily traded on swap execution facilities. Some of these contracts may be required to be centrally

 

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cleared by a regulated U.S. clearinghouse, and may be required to be traded on a regulated exchange in the future. There is no limitation on the daily price moves of forward contracts, and a dealer is not required to continue to make markets in such contracts. There have been periods during which forward contract dealers have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the bid and asked price. Arrangements to trade forward contracts may therefore experience liquidity problems. The Partnership therefore will be subject to the risk of credit failure or the inability of or refusal of a forward contract dealer to perform with respect to its forward contracts.

When trading currency forward contracts, the Trading Company may hedge the foreign currencies in order to limit the Trading Company’s exposure to fluctuations in exchange rates. However, there is no guarantee that such hedging will be successful.

Enhanced Regulation of the OTC Derivatives Markets. The European Market Infrastructure Regulation (“EMIR”) seeks comprehensively to regulate the OTC derivatives market in Europe for the first time including, in particular, imposing mandatory central clearing, trade reporting and, for non-centrally cleared trades, risk management obligations on counterparties. Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”), enacted in July 2010, includes provisions that substantially increase the regulation of the OTC derivatives markets for the first time. The Reform Act will require that a substantial portion of OTC derivatives must be executed in regulated markets and submitted for clearing to regulated clearinghouses. For example, certain interest rate swaps, including certain foreign exchange forwards defined as swaps by the CFTC, and credit default index swaps are required by the CFTC to be submitted for clearing if traded by US persons. These OTC trades submitted for clearing will be subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible CFTC-mandated margin requirements. OTC derivative dealers also will be required to post margin to the clearinghouses through which they clear their customers’ trades instead of using such margin in their operations, as they are allowed to do for uncleared OTC trades. This will further increase the dealers’ costs, which costs may be passed through to other market participants in the form of higher fees and less favorable dealer marks. Although the Reform Act includes limited exemptions from the clearing and margin requirements for so-called “end-users”, the Partnership may not be able to rely on such exemptions. In addition, the OTC derivative dealers with which the Partnership executes the majority of its OTC derivatives will not be able to rely on the end-user exemptions under the Reform Act and therefore such dealers will be subject to clearing and margin requirements notwithstanding whether the Partnership is subject to such requirements. Taken together, these regulatory developments will increase the OTC derivative dealers’ costs, and these increased costs are expected to be passed through to other market participants in the form of higher upfront and mark-to-market margin, less favorable trade pricing, and possible new or increased fees.

The SEC or the CFTC may also require a substantial portion of derivatives transactions that are currently executed on a bilateral basis in the OTC markets to be executed through a regulated securities, futures, or swap exchange or execution facility. Certain CFTC-regulated derivatives trades are currently subject to these rules, although it is not yet clear when the parallel SEC requirements will go into effect. If the Trading Company decides to become a direct member of one or more of these exchanges or execution facilities, the Trading Company would be subject to all of the rules of the exchange or execution facility, which would bring additional risks and liabilities, and potential additional regulatory requirements. Similarly, under EMIR, European regulators may require a substantial proportion of such derivatives transactions to be brought on exchange and/or centrally cleared. Such requirements may make it more difficult and costly for investment funds, including the Partnership and/or the Trading Company, to enter into highly tailored or customized transactions. They may also render certain strategies in which the Partnership might otherwise engage impossible or so costly that they will no longer be economical to implement. They may also increase the overall costs for OTC derivative dealers, which are likely to be passed along, at least partially, to market participants in the form of higher fees or less advantageous dealer marks. The overall impact of EMIR and the Reform Act on the Partnership is highly uncertain and it is unclear how the OTC derivatives markets will adapt to these new regulatory regimes.

 

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The “Volcker Rule” component of the Reform Act materially restricts proprietary speculative trading by banks, “bank holding companies” and other regulated entities. As a result, there has been a significant influx of new portfolio managers into private investment funds who had previously traded institutional proprietary accounts. Such influx can only increase the competition for the Partnership from other talented portfolio managers trading in the Partnership’s investment sector.

Exchanges for Physicals/Swaps/Risk. While not a regular practice for the Trading Company, it may in rare instances engage in transactions known as exchanges for physicals (“EFP”), exchanges for swaps (“EFS”), or exchanges for risk/over-the-counter derivatives (“EFR”). An EFP/EFS/EFR is a purchase or sale of a spot commodity/swap/derivative, as applicable, in conjunction with an offsetting sale or purchase of a corresponding futures contract involving the same or equivalent underlying commodity or instrument, without making an open and competitive trade for the futures contract on the exchange. EFPs, EFSs and EFRs are a permitted exception to the general requirement of the Commodity Exchange Act, as amended, that all futures contracts must be competitively executed on an exchange. They are permitted pursuant to the rules of the relevant exchanges, which vary from exchange to exchange. If the EFP, EFS or EFR does not comply with specific exchange requirements, particularly regarding possessing documentation evidencing possession of the underlying commodity or instrument, then the CFTC or the exchange may deem the transaction to be an illegal off-exchange futures contract. In addition, every EFP, EFS or EFR involves the transfer of an underlying commodity or entry into a swap or derivative on a bilateral basis, as applicable, with a counterparty in exchange for a related cleared futures contract. There is, therefore, counterparty credit risk if the counterparty or its clearing member on the futures leg fails to perform. Unlike other futures contracts that are deemed cleared by the clearinghouse upon trade matching or at the end of the business day, futures contracts arising out of EFPs, EFSs or EFRs may, under various clearinghouse rules, not be deemed accepted by the clearinghouse until the next business day.

Options on Futures Contracts Are More Volatile Than Futures Contracts. The Advisor may trade options on futures contracts. Options are speculative in nature and are highly leveraged. The purchaser of an option risks losing the entire purchase price of the option. The seller (writer) of an option risks losing the difference between the premium received for the option and the price of the underlying futures contract that the writer must purchase upon exercise of the option. Additionally, the seller and writer of the options lose any commissions and fees associated with such transactions. This could subject the writer to unlimited risk in the event of an increase in the price of the contract to be purchased or delivered. Successful trading of options on futures contracts requires a trader to accurately determine near-term market volatility because it often has an immediate impact on the price of outstanding options. Accurate determination of near-term volatility is more important to successful options trading than it is to long-term futures contract trading strategies because such volatility generally does not have as significant an effect on the prices of futures contracts.

Trading on Non-U.S. Exchanges and Markets Will Expose the Partnership to Risks Not Applicable to Trading on U.S. Exchanges and Markets. The Partnership, through the Trading Company, may engage in trading on non-U.S. exchanges and markets. The Partnership will be subject to the risk of fluctuations in the currency exchange rate between the local currency and the U.S. dollar and to the possibility of exchange controls. Trading on such exchanges and markets generally involves other risks not applicable to trading on U.S. exchanges and markets.

For example, such exchanges and markets:

 

   

may not provide the same assurances of the integrity (financial and otherwise) of the marketplace and its participants as do U.S. exchanges and markets;

 

   

may exercise less regulatory oversight and supervision over transactions and participants in transactions;

 

   

may not afford all participants an equal opportunity to execute trades;

 

   

may be subject to a variety of political influences and the possibility of direct governmental intervention;

 

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may have different clearance and settlement procedures for transactions than U.S. exchanges and markets. There have been times when settlement procedures have been unable to keep pace with the volume of transactions on certain exchanges and markets, making it difficult to conduct trades; and

 

   

may be “principals’ markets” in which performance is the responsibility only of the member with whom the trader has dealt (the counterparty) rather than the responsibility of an exchange or clearing association. Each transaction on such an exchange or market may subject the Partnership to the risk of the counterparty’s credit failure or inability or refusal to perform its obligations.

Institutional Risks. Institutions, such as the brokers, will have custody of the assets of the Partnership. These firms may encounter financial difficulties that impair the operating capabilities or the capital position of the Partnership, the Trading Company or the General Partner. The General Partner and Advisor will attempt to limit its transactions to well-capitalized and established brokers in an effort to mitigate such risks.

Counterparty Risk. The Partnership will be subject to the risk of the inability of counterparties to perform with respect to transactions, whether due to insolvency, bankruptcy or other causes, which could subject the Partnership to substantial losses. In an effort to mitigate such risks, the General Partner and Advisor will attempt to limit transactions to counterparties, which are established, well-capitalized and creditworthy.

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

(a) Pursuant to the Partnership’s Limited Partnership Agreement, the Partnership may sell Units of Limited Partnership Interests (“Units”) as of the last business day of any calendar month or at such other times as the General Partner may determine. On April 30, 2014, May 31, 2014 and June 30, 2014, the Partnership sold Class A Series 1 Units, exclusive of non-cash transfers, to existing and new Limited Partners in the amount of $0, $76,500 and $0, respectively. On April 30, 2014, May 31, 2014 and June 30, 2014, the Partnership sold Class A Series 2 Units, exclusive of non-cash transfers, to existing and new Limited Partners in the amount of $0, $0 and $0, respectively. On April 30, 2014, May 31, 2014 and June 30, 2014, the Partnership sold Class B Series 1 Units, exclusive of non-cash transfers, to existing and new Limited Partners in the amount of $14,000, $114,200 and $0, respectively. On April 30, 2014, May 31, 2014 and June 30, 2014, the Partnership sold Class B Series 2 Units, exclusive of non-cash transfers, to existing and new Limited Partners in the amount of $0, $0 and $0, respectively. There were no underwriting discounts or commissions in connection with the sales of the Units described above.

(b) Not applicable.

(c) Pursuant to the Partnership’s Limited Partnership Agreement, a Limited Partner may redeem some or all of its Units as of the last business day of each calendar month at the then current month-end Net Asset Value. The redemption of Units has no impact on the value of Units that remain outstanding, and Units are not reissued once redeemed. The following table summarizes the amount of Units redeemed, exclusive of non-cash transfers, during the three months ended June 2014:

 

     Class A Units      Class A-2 Units      Class B Units      Class B-2 Units  

Date of
Redemption:

   Amount
Redeemed:
     Amount
Redeemed:
     Amount
Redeemed:
     Amount
Redeemed:
 

April 30, 2014

   $ 4,791,405       $ 752,423       $ 1,746,440       $ 38,839   

May 31, 2014

   $ 4,257,605       $ 129,969       $ 1,720,306       $ 28,433   

June 30, 2014

   $ 2,953,712       $ 474,572       $ 1,463,240       $ —     

TOTAL

   $ 12,002,722       $ 1,356,964       $ 4,929,986       $ 67,272   

 

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Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are included herewith:

 

Designation

 

Description

10.1   Form of Trading Advisor Agreement between Man-AHL Diversified I L.P., Man Investments (USA) Corp. and AHL Partners LLP
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1   Section 1350 Certification of Chief Executive Officer
32.2   Section 1350 Certification of Principal Financial Officer

The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed on January 28, 2008 with the Partnership’s Registration Statement on Form 10 (Reg. No. 000-53043).

 

  3.1   Certificate of Limited Partnership of Man-AHL Diversified I L.P.
10.3   Form of Selling Agreement between Man Investments (USA) Corp. and Man Investments Inc.

The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed on March 31, 2011, for the year ended December 31, 2010, with the Partnership’s Annual Report on Form 10-K.

 

  4.2   Sixth Amended Limited Partnership Agreement of Man-AHL Diversified I L.P.

 

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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 on August 12, 2014.

 

Man-AHL Diversified I L.P.

(Registrant)

By:   Man Investments (USA) Corp.
General Partner
By:   /s/ Eric Burl
President and Chief Executive Officer
By:   /s/ Shiraz Kajee
As Principal Financial Officer

 

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EXHIBIT INDEX

 

Exhibit Number

  

Description of Document

  10.1    Form of Trading Advisor Agreement between Man-AHL Diversified I L.P., Man Investments (USA) Corp. and AHL Partners LLP
  31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
  31.2    Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
  32.1    Section 1350 Certification of Chief Executive Officer
  32.2    Section 1350 Certification of Principal Financial Officer
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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