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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 000-52603

MANAGED FUTURES PREMIER WARRINGTON L.P.

 

(Exact name of registrant as specified in its charter)

 

New York   20-3845577
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue – 14th Floor

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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

Yes X  No -

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of 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. (Check one):

 

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

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

Yes -  No X

As of July 31, 2014, 118,894.2989 Limited Partnership Class A Redeemable Units were outstanding, 5,082.5303 Limited Partnership Class D Redeemable Units were outstanding.


Table of Contents

MANAGED FUTURES PREMIER WARRINGTON FUND L.P.

FORM 10-Q

INDEX

 

          Page
  Number  

PART I — Financial Information:

  
   Item 1.    Financial Statements:
      Statements of Financial Condition at
June 30, 2014 (unaudited) and December 31, 2013
   3
      Condensed Schedules of Investments at
June 30, 2014 (unaudited) and December 31, 2013
   4 – 5
      Statements of Income and Expenses for the three and six months ended June 30, 2014 and 2013 (unaudited)    6
      Statements of Changes in Partners’ Capital for the six months ended
June 30, 2014 and 2013 (unaudited)
   7
      Notes to Financial Statements (unaudited)    9 – 17
   Item 2.    Management’s Discussion and Analysis
of Financial Condition and Results of
Operations
   18 – 19
   Item 3.    Quantitative and Qualitative Disclosures about Market Risk    20 – 21
   Item 4.    Controls and Procedures    22

PART II — Other Information

  
   Item 1.    Legal Proceedings    23-29
   Item 1A.    Risk Factors    30
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    31
   Item 5.    Other Information    31
   Item 6.    Exhibits    32 – 33

 

2


Table of Contents

PART I

Item 1. Financial Statements

Managed Futures Premier Warrington L.P.

Statements of Financial Condition

 

     (Unaudited)
June 30,

2014
     December 31,
2013
 

Assets:

     

Equity in trading account:

     

Cash

   $ 136,466,651       $ 148,487,365   

Cash margin

     20,816,106         23,597,971   

Options purchased, at fair value (cost $848,000 and $80,000 at June 30, 2014 and December 31, 2013, respectively)

     888,375         55,000   
  

 

 

    

 

 

 

Total trading equity

     158,171,132         172,140,336   

Interest receivable

     2,181         1,515   
  

 

 

    

 

 

 

Total assets

   $ 158,173,313       $ 172,141,851   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Options premium received, at fair value (premium $1,060,936 and $1,225,640 at June 30, 2014 and December 31, 2013, respectively)

   $ 1,073,750       $ 644,188   

Accrued expenses:

     

Ongoing selling agent fees

     318,924         521,423   

Management fees

     261,181         284,804   

Administrative fees

     65,295         71,201   

Clearing fees due to MS&Co.

     14,537         14,812   

Other

     57,319         79,029   

Redemptions payable

     5,371,156         2,322,338   
  

 

 

    

 

 

 

Total liabilities

     7,162,162         3,937,795   
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, Class A, (0.0000 unit equivalents outstanding at June 30, 2014 and December 31, 2013)

     —           —     

General Partner, Class D, (1,442.1637 unit equivalents outstanding at June 30, 2014 and December 31, 2013)

     1,762,674         1,736,553   

Limited Partners, Class A, (120,573.9259 and 136,148.6869 Redeemable Units outstanding at June 30, 2014 and December 31, 2013, respectively)

     143,036,394         160,520,962   

Limited Partners, Class D, (5,082.5303 and 4,938.4603 Redeemable Units outstanding at June 30, 2014 and December 31, 2013, respectively)

     6,212,083         5,946,541   
  

 

 

    

 

 

 

Total partners’ capital

     151,011,151         168,204,056   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

   $ 158,173,313       $ 172,141,851   
  

 

 

    

 

 

 

Net asset value per unit:

     

Class A

   $ 1,186.30       $ 1,179.01   
  

 

 

    

 

 

 

Class D

   $ 1,222.24       $ 1,204.13   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

3


Table of Contents

Managed Futures Premier Warrington L.P.

Condensed Schedule of Investments

June 30, 2014

(Unaudited)

 

     Number of
Contracts
     Fair
Value
    % of Partners’
Capital
 

Options Purchased

       

Indices

       

Calls

     1,150       $ 14,375        0.01

Puts

     380         874,000        0.58   
     

 

 

   

 

 

 

Total options purchased

        888,375        0.59   
     

 

 

   

 

 

 

Options Premium Received

       

Indices

       

Calls

     1,150         (76,250     (0.05

Puts

     1,900         (997,500     (0.66
     

 

 

   

 

 

 

Total options premium received

        (1,073,750     (0.71
     

 

 

   

 

 

 

Net fair value

      $ (185,375     (0.12 )% 
     

 

 

   

 

 

 

See accompanying notes to financial statements.

 

4


Table of Contents

Managed Futures Premier Warrington L.P.

Condensed Schedule of Investments

December 31, 2013

 

     Number of
Contracts
     Fair Value     % of Partners’
Capital
 

Options Purchased

       

Indices

       

Calls

     3,200       $ 55,000        0.03   
     

 

 

   

 

 

 

Total options purchased

        55,000        0.03   
     

 

 

   

 

 

 

Options Premium Received

       

Indices

       

Calls

     3,200         (320,000     (0.19

Puts

     1,615         (324,188     (0.19
     

 

 

   

 

 

 

Total options premium received

        (644,188     (0.38
     

 

 

   

 

 

 

Net fair value

      $ (589,188     (0.35 )% 
     

 

 

   

 

 

 

See accompanying notes to financial statements.

 

5


Table of Contents

Managed Futures Premier Warrington L.P.

Statements of Income and Expenses

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Investment Income:

        

Interest income

   $ 5,352      $ 8,133      $ 15,855      $ 28,303   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Ongoing selling agent fees

     985,073        1,563,384        2,514,570        3,133,029   

Clearing fees

     350,590        406,981        743,088        722,957   

Management fees

     806,222        852,180        1,642,097        1,708,483   

Administrative fees

     201,556        213,044        410,523        427,120   

Other

     86,664        153,277        105,533        210,280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     2,430,105        3,188,866        5,415,811        6,201,869   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     (2,424,753     (3,180,733     (5,399,956     (6,173,566
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

        

Net gains (losses) on trading of commodity interests:

        

Net realized gains (losses) on closed contracts

     3,220,265        (4,286,488     7,061,687        (1,556,394

Change in net unrealized gains (losses) on open contracts

     (435,249     620,218        (528,891     (1,496,219
  

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

     2,785,016        (3,666,270     6,532,796        (3,052,613
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     360,263        (6,847,003     1,132,840        (9,226,179
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) allocation by class:

        

Class A

   $ 322,261      $ (6,600,167   $ 1,016,741      $ (8,917,736
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

   $ 38,002      $ (246,836   $ 116,099      $ (308,443
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit

        

Class A (120,573.9259 and 137,945.6799 units outstanding at June 30, 2014 and 2013, respectively)

   $ 1,186.30      $ 1,162.67      $ 1,186.30      $ 1,162.67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D (6,524.6940 and 5,964.8000 units outstanding at June 30, 2014 and 2013, respectively)

   $ 1,222.24      $ 1,174.12      $ 1,222.24      $ 1,174.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit*

        

Class A

   $ 1.95      $ (47.78   $ 7.29      $ (64.93
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

   $ 5.82      $ (41.37   $ 18.11      $ (51.66
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding

        

Class A

     128,104.0136        137,479.4913        131,693.9866        136,083.1384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Class D

     6,524.6940        5,971.5400        6,449.2678        5,978.2800   
  

 

 

   

 

 

   

 

 

   

 

 

 

  

 

* Based on change in net asset value per unit.

See accompanying notes to financial statements.

 

6


Table of Contents

Managed Futures Premier Warrington L.P.

Statements of Changes in Partners’ Capital

For the Six Months Ended June 30, 2014 and 2013

(Unaudited)

 

     Class A     Class D     Total  
     Amount     Units     Amount     Units     Amount     Units  

Partners’ Capital at December 31, 2013

   $ 160,520,962        136,148.6869      $ 7,683,094        6,380.6240      $ 168,204,056        142,529.3109   

Net income (loss)

     1,016,741        —          116,099        —          1,132,840        —     

Subscriptions - Limited Partners

     3,681,696        3,104.6890        1,200,000        997.0700        4,881,696        4,101.7590   

Redemptions - Limited Partners

     (22,183,005     (18,679.4500     (1,024,436     (853.0000     (23,207,441     (19,532.4500
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital at June 30, 2014

   $ 143,036,394        120,573.9259      $ 7,974,757        6,524.6940      $ 151,011,151        127,098.6199   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Class A     Class D     Total  
     Amount     Units     Amount     Units     Amount     Units  

Partners’ Capital at December 31, 2012

   $ 160,930,934        131,093.4499      $ 7,336,345        5,985.0200      $ 168,267,279        137,078.4699   

Net income (loss)

     (8,917,736     —          (308,443     —          (9,226,179     —     

Subscriptions - Limited Partners

     26,464,632        21,849.6130        400,000        329.7800        26,864,632        22,179.3930   

Redemptions - Limited Partners

     (18,092,176     (14,997.3830     (424,526     (350.0000     (18,516,702     (15,347.3830
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital at June 30, 2013

   $ 160,385,654        137,945.6799      $ 7,003,376        5,964.8000      $ 167,389,030        143,910.4799   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

1.    General:

Managed Futures Premier Warrington L.P., (formerly known as Warrington Fund L.P.) (the “Partnership”) is a limited partnership organized on November 28, 2005 under the partnership laws of the State of New York to engage in the speculative trading of commodity interests including futures and options contracts. The Partnership does not currently intend to, but may in the future, engage in transactions in spot and forward markets. The Partnership primarily trades futures and options in the stock indices sector. The Partnership may, however, also trade in additional sectors including U.S. Treasury bonds, currencies, gold, silver and energy products. The Partnership commenced trading on February 21, 2006. The commodity interests that are traded by the Partnership are volatile and involve a high degree of market risk. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

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

On June 15, 2011, the Partnership began offering “Class A” Redeemable Units and “Class D” Redeemable Units pursuant to the offering memorandum. All outstanding Redeemable Units on June 15, 2011 were designated Class A Redeemable Units. The rights, powers, duties and obligations associated with the investment in Class A Redeemable Units were not changed. On October 1, 2011, the first Class D Redeemable Units were issued to limited partners of the Partnership (each a “Limited Partner”). Class A Redeemable Units and Class D Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Redeemable Units that a Limited Partner receives will generally depend upon the amount invested in the Partnership, although the General Partner may determine to offer Class A Redeemable Units or Class D Redeemable Units to investors in its sole discretion.

As of June 30, 2014, all trading decisions for the Partnership are made by Warrington Asset Management, LLC (the “Advisor”) using the Core Trading Program, a proprietary, systematic program. In addition, the Advisor is a special limited partner (in its capacity as special limited partner, the “Special Limited Partner”) of the Partnership.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended June 30, 2014.

During the three and six months ended June 30, 2014, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During prior periods included in this report, Citigroup Global Markets Inc. (“CGM”) also served as a commodity broker.

Effective August 15, 2013, the Partnership entered into a futures brokerage account agreement with MS&Co. and began transferring the brokerage account of the Partnership from CGM to MS&Co. The Partnership pays MS&Co. trading fees for the clearing and, where applicable, execution of transactions.

Effective October 1, 2013, the Partnership ceased paying a brokerage fee to CGM. Also effective October 1, 2013, the Partnership entered into a selling agreement with Morgan Stanley Smith Barney LLC (d/b/a Morgan Stanley Wealth Management). Pursuant to the selling agreement, Morgan Stanley Wealth Management received a monthly ongoing selling agent fee equal to (i) 5/16 of 1% (3.75% per year) of month-end Net Assets for Class A Redeemable Units and (ii) 1/12 of 1.50% (1.50% per year) of month-end Net Assets for Class D Redeemable Units. The selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisers of Morgan Stanley Wealth Management who sold redeemable units in the Partnership.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced (i) from an annual rate of 3.75% to an annual rate of 2.50% of month-end Net Assets for Class A Redeemable Units and (ii) from an annual rate of 1.50% to an annual rate of 1.25% of month-end Net Assets for Class D Redeemable Units.

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

The General Partner and each Limited Partner share in the profits and losses of the Partnership, after the allocation to the Special Limited Partner, in proportion to the amount of Partnership interest owned by each, except that no Limited Partner is liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions and losses, if any.

        The Partnership’s trading of futures and options contracts, if applicable, on commodities is done primarily on United States of America and foreign commodity exchanges. During the three and six months ended June 30, 2014, the Partnership engaged in such trading through a commodity brokerage account maintained with MS&Co. During prior periods covered by this report, the Partnership engaged in such trading through a commodity brokerage account maintained with CGM.

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Partnership’s financial condition at June 30, 2014, and December 31, 2013, and the results of its operations and changes in partners’ capital 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 disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2013.

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

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

 

8


Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

2.    Financial Highlights:

Changes in net asset value per unit for each Class for the three and six months ended June 30, 2014 and 2013 were as follows:

 

     Three Months
Ended
June 30, 2014
    Three Months
Ended
June 30, 2013
    Six Months
Ended
June 30, 2014
    Six Months
Ended
June 30, 2013
 
     Class A     Class D     Class A     Class D     Class A     Class D     Class A     Class D  

Net realized and unrealized gains (losses)*

   $ 10.03      $ 14.13      $ (39.34   $ (32.88   $ 22.78      $ 34.03      $ (48.62   $ (35.29

Interest income

     0.04        0.04        0.06        0.06        0.12        0.12        0.21        0.22   

Expenses**

     (8.12     (8.35     (8.50     (8.55     (15.61     (16.04     (16.52     (16.59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     1.95        5.82        (47.78     (41.37     7.29        18.11        (64.93     (51.66

Net asset value per unit, beginning of period

     1,184.35        1,216.42        1,210.45        1,215.49        1,179.01        1,204.13        1,227.60        1,225.78   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

   $ 1,186.30      $ 1,222.24      $ 1,162.67      $ 1,174.12      $ 1,186.30      $ 1,222.24      $ 1,162.67      $ 1,174.12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

* Includes ongoing selling agent fees and clearing fees. Net realized and unrealized gains (losses) excluding ongoing selling agent fees and clearing fees for Class A Redeemable Units for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $20.13, $(25.33), $46.74 and $(20.91), respectively.

 

   Net realized and unrealized gains (losses) excluding ongoing selling agent fees and clearing fees for Class D Redeemable Units for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $20.66, $(25.53), $47.94 and $(21.11), respectively.
** Excludes ongoing selling agent fees and clearing fees and includes allocation to Special Limited Partner in the three and six months ended June 30, 2014 and 2013, if any. Total expenses including ongoing selling agent fees and clearing fees for Class A Redeemable Units for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $(18.22), $(22.51), $(39.57) and $(44.23), respectively.

 

   Total expenses including ongoing selling agent fees and clearing fees for Class D Redeemable Units for the three months ended June 30, 2014 and 2013 and for the six months ended June 30, 2014 and 2013 were $(14.88), $(15.90), $(29.95), and $(30.77), respectively.

 

     Three Months
Ended
June 30, 2014
    Three Months
Ended
June 30, 2013
    Six Months
Ended
June 30, 2014
    Six Months
Ended
June  30, 2013
 
     Class A     Class D     Class A     Class D     Class A     Class D     Class A     Class D  

Ratios to average net assets:***

                

Net investment income (loss)

     (6.2 )%      (4.9 )%      (7.7 )%      (5.4 )%      (6.8 )%      (5.1 )%      (7.5 )%      (5.2 )% 

Allocation to Special Limited Partner

     —       —       —       —       —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss) before allocation to Special Limited Partner ****

     (6.2 )%      (4.9 )%      (7.7 )%      (5.4 )%      (6.8 )%      (5.1 )%      (7.5 )%      (5.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

     6.2     4.9     7.7     5.4     6.9     5.1     7.6     5.2

Allocation to Special Limited Partner

     —       —       —       —       —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6.2     4.9     7.7     5.4     6.9     5.1     7.6     5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

                

Total return before allocation to Special Limited Partner

     0.2     0.5     (3.9 )%      (3.4 )%      0.6     1.5     (5.3 )%      (4.2 )% 

Allocation to Special Limited Partner

     —       —       —       —       —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after allocation to Special Limited Partner

     0.2     0.5     (3.9 )%      (3.4 )%      0.6     1.5     (5.3 )%      (4.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

*** Annualized (except allocation to Special Limited Partner, if applicable).
**** Interest income less total expenses (exclusive of allocation to Special Limited Partner, if applicable).

The above ratios may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner Classes using each Limited Partner’s share of income, expenses and average net assets.

 

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Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

3.    Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses.

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

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

Trading and transaction fees are based on the number of trades executed by the Advisor for the Partnership.

All trading, exchange, clearing, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “clearing fees”) are borne by the Partnership.

All of the commodity interests owned by the Partnership are held for trading purposes. The monthly average number of option contracts traded during the three months ended June 30, 2014 and 2013 were 8,257 and 12,443, respectively. The monthly average number of option contracts traded during the six months ended June 30, 2014 and 2013 were 9,284 and 12,791, respectively.

On January 1, 2013, the Partnership adopted Accounting Standards Update (“ASU”) 2011-11, “Disclosure about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 created a new disclosure requirement about the nature of an entity’s rights to setoff and the related arrangements associated with its financial instruments and derivative instruments, while ASU 2013-01 clarified the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards. The new guidance did not have a significant impact on the Partnership’s financial statements.

 

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Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The following tables summarize the valuation of the Partnership’s investments at June 30, 2014 and December 31, 2013, respectively.

 

      Gross Amounts not
Offset in the Statement
of Financial Condition
        

June 30, 2014

   Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statement of
Financial
Condition
     Net Amounts
Presented in the
Statement of
Financial
Condition
    Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Assets

              

Options purchased

   $ 888,375      $         —       $ 888,375      $ (888,375   $         —       $   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

     888,375                888,375        (888,375               
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

              

Options premium received

   $ (1,073,750   $       $ (1,073,750   $ 888,375      $       $ (185,375
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

     (1,073,750             (1,073,750     888,375                (185,375
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

               $ (185,375
              

 

 

 
      Gross Amounts not
Offset in the Statement

of Financial Condition
        

December 31, 2013

   Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statement of
Financial
Condition
     Amounts
Presented in the
Statement of
Financial
Condition
    Financial
Instruments
    Cash
Collateral
Received
     Net Amount  

Assets

              

Options purchased

   $ 55,000      $         —       $ 55,000      $ (55,000   $         —       $   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

     55,000                55,000        (55,000               
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

              

Options premium received

   $ (644,188   $       $ (644,188   $ 55,000      $       $ (589,188
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

     (644,188             (644,188     55,000                (589,188
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

               $ (589,188
              

 

 

 

 

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Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures and option contracts as separate assets and liabilities as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014  

Assets

  

Options Purchased

  

Indices

   $ 888,375   
  

 

 

 

Total options purchased

   $ 888,375
  

 

 

 

Liabilities

  

Options Premium Received

  

Indices

   $ (1,073,750
  

 

 

 

Total options premium received

   $ (1,073,750 )** 
  

 

 

 

 

* This amount is in “Options purchased, at fair value” on the Statements of Financial Condition.
** This amount is in “Options premium received, at fair value” on the Statements of Financial Condition.

 

     December 31, 2013  

Assets

  

Options Purchased

  

Indices

   $ 55,000   
  

 

 

 

Total options purchased

   $ 55,000
  

 

 

 

Liabilities

  

Options Premium Received

  

Indices

   $ (644,188
  

 

 

 

Total options premium received

   $ (644,188 )** 
  

 

 

 

 

* This amount is in “Options purchased, at fair value” on the Statements of Financial Condition.
** This amount is in “Options premium received, at fair value” on the Statements of Financial Condition.

 

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Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and six months ended June 30, 2014 and 2013.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Sector

   2014     2013     2014     2013  

Indices

   $ 2,785,016      $ (3,666,270   $ 6,532,796      $ (3,052,613
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,785,016 ***    $ (3,666,270 )***    $ 6,532,796 ***    $ (3,052,613 )*** 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*** This amount is in “Total trading results” on the Statements of Income and Expenses.

4.    Fair Value Measurements:

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

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

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The General Partner has concluded that based on available information in the marketplace, the Partnership’s Level 1 assets and liabilities are actively traded.

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

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

 

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Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

The Partnership considers prices for exchange-traded commodity futures and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of forwards and certain option contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended June 30, 2014 and December 31, 2013, the Partnership did not hold any derivative instruments for which market quotations were not readily available and which were priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). During the six months ended June 30, 2014 and the twelve months ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

     June 30, 2014     Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
    Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets

         

Options purchased

   $ 888,375      $ 888,375      $       $   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

     888,375        888,375                  
  

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

         

Options premium received

   $ 1,073,750      $ 1,073,750      $       $   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

     1,073,750        1,073,750                  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

   $ (185,375   $ (185,375   $       $   
  

 

 

   

 

 

   

 

 

    

 

 

 
     December 31, 2013     Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
    Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets

         

Options purchased

   $ 55,000      $ 55,000      $         —       $         —   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total assets

     55,000        55,000                  
  

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities

         

Options premium received

   $ 644,188      $ 644,188      $       $   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

     644,188        644,188                  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net fair value

   $ (589,188   $ (589,188   $       $   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

5.    Financial Instrument Risks:

In the normal course of business, the Partnership is party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include futures and options, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, to purchase or sell other financial instruments on specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward and option contracts. OTC contracts are negotiated between contracting parties and include certain forward and option contracts. Specific market movements of commodities or future contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer, or seller, of an option has unlimited risk. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. None of the Partnership’s current contracts are traded OTC, although contracts may be traded OTC in the future.

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

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

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

The Partnership’s trading will be concentrated in exchange-traded futures and options on the S&P 500 Index and the Dow Jones Industrials Average. Concentration in a limited number of commodity interests may subject the Partnership’s account to greater volatility than if a more diversified portfolio of contracts were traded on behalf of the Partnership.

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

 

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Table of Contents

Managed Futures Premier Warrington L.P.

Notes to Financial Statements

June 30, 2014

(Unaudited)

 

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

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

6.    Critical Accounting Policies

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

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

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

GAAP also requires the use of judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The General Partner has concluded that based on available information in the marketplace, the Partnership’s Level 1 assets and liabilities are actively traded.

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

The Partnership considers prices for exchange-traded commodity futures and options contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of certain options contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended June 30, 2014 and December 31, 2013, the Partnership did not hold any derivative instruments that were priced by broker-dealers that derive fair values for those assets from observable inputs (Level 2) or that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). During the six months ended June 30, 2014 and the twelve months ended December 31, 2013, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

16


Table of Contents

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

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

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

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

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

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

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

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

 

17


Table of Contents

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

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its equity in its trading account, consisting of cash and cash margin, options purchased at fair value and interest receivable. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the second quarter of 2014.

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

For the six months ended June 30, 2014, the Partnership’s capital decreased 10.2% from $168,204,056 to $151,011,151. This decrease was attributable to redemptions of 18,679.4500 Class A Redeemable Units totaling $22,183,005 and redemptions of 853.0000 Class D Redeemable Units totaling $1,024,436. This decrease was partially offset by a net gain of $1,132,840, coupled with subscriptions of 3,104.6890 Class A Redeemable Units totaling $3,681,696 and subscriptions of 997.0700 Class D Redeemable Units totaling $1,200,000. Future redemptions can impact the amount of funds available for investment in commodity contract positions in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The General Partner believes that the estimates utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 6 of the Financial Statements.

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

Results of Operations

During the Partnership’s second quarter of 2014, the net asset value per Class A unit increased 0.2% from $1,184.35 to $1,186.30, as compared to a decrease of 3.9% in the second quarter of 2013. During the Partnership’s second quarter of 2014, the net asset value per Class D unit increased 0.5% from $1,216.42 to $1,222.24, as compared to a decrease of 3.4% in the second quarter of 2013. The Partnership experienced a net trading gain before fees and expenses in the second quarter of 2014 of $2,785,016. Gains were primarily attributable to the trading of commodity futures in the S&P 500 Index Calls and the S&P 500 Index Puts. The Partnership experienced a net trading loss before fees and expenses in the second quarter of 2013 of $3,666,270. Losses were primarily attributable to the trading of commodity futures in the S&P 500 Index Calls and the S&P 500 Index Puts, and were partially offset by gains in the S&P 500 Index futures.

During the second quarter, the Partnership recorded trading gains in S&P 500 Index options. The most significant gains were achieved during May as choppy trading behavior in the S&P 500 Index during the middle of the month allowed the Partnership to record gains on its ratio put spread positions. Gains were also recorded during April as geopolitical turmoil between Ukraine and Russia caused moderate volatility in the S&P 500 Index market. The Partnership was able to record profits by overlaying call spread positions on its core put spread positions to capitalize on this volatility during April. A portion of the Partnership’s gains during the second quarter was partially offset by losses incurred during June from the debt cost of the ratio put spread’s in the Fund’s portfolio.

During the Partnership’s six months ended June 30, 2014, the net asset value per Class A unit increased 0.6% from $1,179.01 to $1,186.30, as compared to a decrease of 5.3% in the six months ended June 30, 2013. During the Partnership’s six months ended June 30, 2014, the net asset value per Class D unit increased 1.5% from $1,204.13 to $1,222.24, as compared to a decrease of 4.2% in the second quarter of 2013. The Partnership experienced a net trading gain before fees and expenses in the six months ended June 30, 2014 of $6,532,796. Gains were primarily attributable to the trading of commodity futures in the S&P 500 Index Calls and the S&P 500 Index Puts. The Partnership experienced a net trading loss before fees and expenses in the six months ended June 30, 2013 of $3,052,613. Losses were primarily attributable to the trading of commodity futures in the S&P 500 Index Calls and the S&P 500 Index Puts.

During the first six months of the year the Partnership recorded trading gains in S&P 500 Index options. The most significant gains were achieved during March as the Partnership was able to profitably close out its ratio put spreads after newly appointed Fed Chairwoman Janet Yellen stated that hikes in the Fed Funds rate might occur six months after the end of the current “Quantitative Easing”, much earlier than analysts’ previous forecasts. Gains were also recorded during February as the value of the S&P sharply declining early in the month benefitted the Partnership’s ratio put spread positions. Smaller trading gains were recorded during May from the Partnership’s ratio put spread positions. A portion of the Partnership’s gains during the first six months of the year were offset by losses incurred during January as a sharp sell-off of the S&P 500 Index following the Federal Reserve’s announced commitment to end its bond buying program adversely affected the Partnership’s ratio put spread positions. Additional losses were incurred during June as limited volatility in the S&P 500 Index provided the Partnership with limited trading opportunities for its mean-reversion trading methods.

 

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

Interest income on 80% of the Partnership’s daily average equity maintained in cash in its account during each month was earned at a 30-day U.S. Treasury bill rate determined weekly by CGM based on the average non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days or at the monthly average of the 4-week U.S. Treasury bill discount rate, as applicable. Interest income for the three and six months ended June 30, 2014 decreased by $2,781 and $12,448, respectively, as compared to the corresponding periods in 2013. The decrease in interest income is due to lower U.S. Treasury bill rates during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership during the reporting period depended on the average daily equity in the Partnership’s account, and upon interest rates over which the Partnership and MS&Co. have no control.

Ongoing selling agent/brokerage fees are calculated on the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset value. Ongoing selling agent/brokerage fees for the three and six months ended June 30, 2014 decreased by $578,311 and $618,459, respectively, as compared to the corresponding periods in 2013. This decrease is due to lower average net assets during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013, as well as reductions in ongoing selling agent fees (i) from an annual rate of 3.75% to an annual rate of 2.50% for Class A Redeemable Units and (ii) from an annual rate of 1.50% to an annual rate of 1.25% for Class D Redeemable Units effective April 1, 2014, as disclosed in Note 1 of the Financial Statements.

Certain clearing fees are based on the number of trades executed by the Advisor for the Partnership. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees for the three months ended June 30, 2014 decreased by $56,391, as compared to the corresponding period in 2013. The decrease in clearing fees is primarily due to a decrease in the number of trades executed during the three months ended June 30, 2014, as compared to the corresponding period in 2013. Clearing fees for the six months ended June 30, 2014 increased by $20,131, as compared to the corresponding period in 2013. The increase in clearing fees is primarily due to an increase in the number of trades executed during the six months ended June 30, 2014, as compared to the corresponding period in 2013. All clearing fees are borne by the Partnership.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to fluctuations in the monthly net asset values. Management fees for the three and six months ended June 30, 2014 decreased by $45,958 and $66,386, respectively, as compared to the corresponding periods in 2013. The decrease in management fees is due to lower average net assets during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013.

Administrative fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to fluctuations in the monthly net asset values. Administrative fees for the three and six months ended June 30, 2014 decreased by $11,488 and $16,597, respectively, as compared to the corresponding periods in 2013. The decrease in administrative fees is due to lower average net assets during the three and six months ended June 30, 2014, as compared to the corresponding periods in 2013.

Special Limited Partner profit share allocations (incentive fees) are based on the new trading profits earned by the Advisor on behalf of the Partnership, at the end of the quarter, as defined in the management agreement among the Partnership, the General Partner and the Advisor. There were no profit share allocations made for the three and six months ended June 30, 2014 and 2013. The Special Limited Partner will not receive a profit share allocation until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership.

In allocating the assets of the Partnership to the Advisor, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

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

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

Market movements result in frequent changes in the fair value of the Partnership’s open positions and, consequently, in its earnings and cash balances. 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 contracts and the liquidity of the markets in which it trades.

The Partnership rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the 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 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.

Exchange margin requirements have been used by the Partnership as the measure of its Value at Risk. Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

 

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Value at Risk tables represent a probabilistic assessment of the risk of loss in market sensitive instruments. The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of June 30, 2014 and December 31, 2013, and the highest, lowest and average values during the three months ended June 30, 2014, and twelve months ended December 31, 2013. All open contracts trading risk exposures of the Partnership have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013. As of June 30, 2014, the Partnership’s total capital was $151,011,151.

June 30, 2014

 

                  Three months ended June 30, 2014  

Market Sector

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

Indices

   $ 20,816,106         13.78   $ 60,906,507       $ 20,816,106       $ 27,007,845   
  

 

 

    

 

 

         

Total

   $ 20,816,106         13.78        
  

 

 

    

 

 

         

 

* Average of month-end Values at Risk.

As of December 31, 2013, the Partnership’s total capitalization was $168,204,056.

December 31, 2013

 

                  Twelve months ended December 31, 2013  

Market Sector

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

Indices

   $ 23,597,971         14.03   $ 104,873,505       $ 47,880       $ 30,091,707   
  

 

 

    

 

 

         

Total

   $ 23,597,971         14.03        
  

 

 

    

 

 

         

 

* Annual average of month-end Values at Risk.

 

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Item 4.    Controls and Procedures

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

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2014, and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

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

 

   

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

 

   

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

 

   

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

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended June 30, 2014, that 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.

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

The following information supplements and amends the discussion set forth under Part I, Item 3 “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated by the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

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

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

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

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

On May 7, 2009, MS&Co. was named as a defendant in a purported class action lawsuit brought under Sections 11, 12 and 15 of the Securities Act of 1933, as amended, which is now styled In re Morgan Stanley Mortgage Pass-Through Certificates Litigation and is pending in the United States District Court for the Southern District of New York (“SDNY”). The third amended complaint, filed on September 30, 2011, alleges, among other things, that the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 contained false and misleading information concerning the pools of residential loans that backed these securitizations. The plaintiffs seek, among other relief, class certification, unspecified compensatory and rescissionary damages, costs, interest and fees. On July 22, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

 

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On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied MS&Co.’s individual motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $55 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against MS&Co. and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s claims brought under the Securities Act of 1933, as amended, were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. A bellwether trial is currently scheduled to begin in January 2015. MS&Co. is not a defendant in connection with the securitizations at issue in that trial. On May 23, 2014, plaintiff and the defendants in the bellwether trial filed motions for summary adjudication. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $301 million, and the certificates had incurred actual losses of approximately $6 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $301 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

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On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. MS&Co. filed its answer on December 21, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle, were named as defendants in a purported class action related to securities issued by the special purpose vehicle in Singapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and is pending in the SDNY. An amended complaint was filed on October 22, 2012. The court denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted class certification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal the court’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amended complaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraud investors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. In addition, the second amended complaint alleges that the securities’ offering materials contained material misstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interest between the defendants and the investors. The second amended complaint asserts common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement in principle to settle the litigation. The settlement is subject to court approval.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the

 

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case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which was granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. On July 16, 2014, plaintiff voluntarily dismissed its claims against MS&Co. with respect to one of the securitizations at issue. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $67 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $67 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

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

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. MS&Co. filed its answer on August 17, 2012. Trial is currently scheduled to begin in July 2015. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $113 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently

 

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available information, MS&Co. believes it could incur a loss in this action up to the difference between the $113 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus post-judgment interest, fees and costs. MS&Co. may be entitled to an offset for interest received by the plaintiff prior to a judgment.

On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B., filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation, as Receiver for Franklin Bank S.S.B. v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to the plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. The complaints each raised claims under both federal securities law and the Texas Securities Act and each seeks, among other things, compensatory damages associated with plaintiff’s purchase of such certificates. On March 20, 2012, MS&Co. filed answers to the complaints in both cases. On June 7, 2012, the two cases were consolidated. On January 10, 2013, MS&Co. filed a motion for summary judgment and special exceptions with respect to plaintiff’s claims. On February 6, 2013, the FDIC filed an amended consolidated complaint. On February 25, 2013, MS&Co. filed a motion for summary judgment and special exceptions, which motion was denied in substantial part on April 26, 2013. On May 3, 2013, the FDIC filed a second amended consolidated complaint. Trial is currently scheduled to begin in November 2014. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $46 million, and the certificates had incurred actual losses of approximately $5 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $46 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. is approximately $1 billion. The complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud and tortious interference with contract and seeks, among other things, compensatory damages, punitive damages, rescission and rescissionary damages associated with plaintiffs’ purchases of such certificates. On October 16, 2012, plaintiffs filed an amended complaint which, among other things, increases the total amount of the certificates at issue by approximately $80 million, adds causes of action for fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On April 26, 2013, the defendants

 

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filed an answer to the amended complaint. On June 5, 2014, the defendants filed a renewed motion to dismiss the amended complaint. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $623 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $623 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On April 22, 2014, the defendants’ motion to dismiss was denied in substantial part. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $75 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $75 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $694 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court denied defendants’ motion to dismiss. On July 10, 2014, MS&Co. filed a renewed motion to dismiss with respect to two certificates at issue in the case. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $284 million, and the certificates had incurred actual losses of approximately $52 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $284 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

On September 23, 2013, plaintiffs in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY.

 

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The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to plaintiffs of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs was approximately $417 million. The complaint alleges causes of action against MS&Co. for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things, rescissory and compensatory damages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014, the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended, and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On April 28, 2014, the court granted in part and denied in part plaintiff’s motion to strike certain of the defendants’ affirmative defenses. On July 11, 2014, the defendants filed a motion for reconsideration of the court’s order on the motion to dismiss the complaint or, in the alternative, for certification of interlocutory appeal and a stay of all proceedings. At June 25, 2014, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $215 million, and the certificates had incurred actual losses of approximately $26 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $215 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime residential mortgage-backed security transactions sponsored and underwritten by those entities in 2007. Pursuant to the settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

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

 

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Item 1A.    Risk Factors

There have been no material changes to the risk factors set forth under Part 1, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

 

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

For the three months ended June 30, 2014, there were subscriptions of 1,653.9590 Class A Redeemable Units totaling $1,976,728 and 164.4170 Class D Redeemable Units totaling $200,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

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

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

 

Period  

Class A

(a) Total Number

of Shares

(or Redeemable

Units) Purchased*

 

Class A

(b) Average

Price Paid per

Share (or

Redeemable Unit)**

 

(c) Total Number

of Shares (or

Redeemable Units)

Purchased as Part
of Publicly Announced

Plans or Programs

  (d) Maximum  Number
(or Approximate
Dollar Value) of Shares
(or Redeemable Units)
that May Yet Be Purchased
Under the
Plans or Programs
April 1, 2014 - April 30, 2014   3,794.6830   $1,195.29   N/A   N/A
May 1, 2014 - May 31, 2014   3,788.3600   $1,198.75   N/A   N/A

June 1, 2014 - June 30, 2014

  4,527.6540   $1,186.30   N/A   N/A
    12,110.6970   $1,193.01        

 

* Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners.
** Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

Item 3.    Defaults Upon Senior Securities – None

Item 4.    Mine Safety Disclosures – Not Applicable

Item 5.    Other Information

Effective October 1, 2014, the monthly ongoing selling agent fee will be (i) reduced from an annual rate of 2.50% to an annual rate of 2.00% for Class A Redeemable Units and (ii) reduced from an annual rate of 1.25% to an annual rate of 0.75% for Class D Redeemable Units. As of the same date, the administrative fee will be increased from an annual rate of 0.50% to an annual rate of 1.00%. The October 1, 2014 fee changes will offset each other and, accordingly, there will be no change to the aggregate fees incurred by the Partnership.

 

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Item 6.    Exhibits

 

3.1

   (a)   Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York on November 21, 2005 (filed as Exhibit 3.1 to general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference).
   (b)   Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(b) to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
   (c)   Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 25, 2009 (filed as Exhibit 99.1 to the current report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
   (d)   Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 30, 2010 (filed as Exhibit 3.1(d) to the current report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).
   (e)   Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the current report on Form 8-K on September 7, 2011 and incorporated herein by reference).
   (f)   Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated November 27, 2012 (filed as Exhibit 3.1 to the current report on Form 8-K filed on January 3, 2013 and incorporated herein by referenced).
   (g)  

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated August 7, 2013 (filed as Exhibit 3.1(g) to the quarterly report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

3.2

   (a)   Fifth Amended and Restated Limited Partnership Agreement, effective January 30, 2012 (filed as Exhibit 3.2 to the current report on Form 8-K filed on May 17, 2012 and incorporated herein by reference).
   (b)   Amendment No. 1 to the Fifth Amended and Restated Limited Partnership Agreement, dated November 30, 2012 (filed as Exhibit 3.2 to the current report on Form 8-K filed on January 3, 2013 and incorporated herein by reference).

10.1

   (a)   Management Agreement among the Partnership, the General Partner and Warrington Asset Management, LLC, effective July 24, 2011 (filed as Exhibit 10.1 to the current report on Form 8-K filed on July 3, 2012 and incorporated herein by reference).
   (b)   Letter from the General Partner to Warrington Asset Management, LLC extending Management Agreement for 2014 (filed as Exhibit 10.1(b) to the annual report on Form 10-K filed on March 28, 2014 and incorporated herein by reference).

10.2

   (a)   Customer Agreement among the Partnership, the General Partner and CGM, dated February 17, 2005 (filed as Exhibit 10.2 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference).
   (b)   Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August 15, 2013 (filed as Exhibit 10.2(b) to the quarterly report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

10.3

   (a)   Amended and Restated Agency Agreement among the Partnership, the General Partner and CGM, dated April 26, 2007 (filed as Exhibit 10.3 to the general form for registration of securities on Form 10 filed on April 30, 2007 and incorporated herein by reference).
   (b)   Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2013 (filed as Exhibit 10.3(b) to the quarterly report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).
   (c)   Amendment to the Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, effective April 1, 2014 (filed as Exhibit 10.3(c) to the quarterly report on Form 10-Q filed on May 15, 2014 and incorporated herein by reference).
   (d)   Letter amending the Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2014 (filed herewith).

10.4

     Selling Agreement among the Partnership, the General Partner, CGM and Credit Suisse Securities (USA) LLC, dated September 30, 2008 (filed as Exhibit 10.4 to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.5

     Form of Subscription Agreement (filed as Exhibit 10.5 to the quarterly report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

10.6

     Form of Third Party Subscription Agreement (filed as Exhibit 10.6 to the quarterly report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

 

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10.7

     Selling Agreement dated January 6, 2011 by and among the Partnership, the General Partner, CGM and Robert W. Baird & Co. Incorporated (filed as Exhibit 10.11 to the current report on Form 8-K filed on January 7, 2011).

10.8

   (a)   Services Agreement dated January 6, 2011 by and among the Partnership, the General Partner, CGM and Robert W. Baird & Co. Incorporated (filed as Exhibit 10.12 to the current report on Form 8-K filed on January 7, 2011).
   (b)   Amendment to the Services Agreement by and among the Partnership, the General Partner, CGM and Robert W. Baird & Co. Incorporated, effective April 1, 2014 (filed as Exhibit 10.8(b) to the quarterly report on Form 10-Q filed on May 15, 2014 and incorporated herein by reference).

10.9

   (a)   Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.13(a) to the annual report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).
   (b)   Amendment No. 5 to Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.13(b) to the annual report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

31.1

   Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed herewith).

31.2

   Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer) (filed herewith).

32.1

   Section 1350 Certification (Certification of President and Director) (filed herewith).

32.2

   Section 1350 Certification (Certification of Chief Financial Officer) (filed herewith).

101. INS

   XBRL Instance Document.

101. SCH

   XBRL Taxonomy Extension Schema Document.

101. CAL

   XBRL Taxonomy Extension Calculation Linkbase Document.

101. LAB

   XBRL Taxonomy Extension Label Linkbase Document.

101. PRE

   XBRL Taxonomy Extension Presentation Linkbase Document.

101. DEF

   XBRL Taxonomy Extension Definition Linkbase Document.

 

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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.

 

MANAGED FUTURES PREMIER WARRINGTON L.P.
By:   Ceres Managed Futures LLC
  (General Partner)
 
By:   /s/ Alper Daglioglu
  Alper Daglioglu
  President and Director
Date:   August 13, 2014
By:   /s/ Steven Ross
  Steven Ross
  Chief Financial Officer
  (Principal Accounting Officer)
Date:   August 13, 2014

 

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