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EXCEL - IDEA: XBRL DOCUMENT - World Monitor Trust III - Series JFinancial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - World Monitor Trust III - Series Jex31-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - World Monitor Trust III - Series Jex31-2.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - World Monitor Trust III - Series Jex32-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - World Monitor Trust III - Series Jex32-1.htm

 

 UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarter ended:   March 31, 2015

 

or

 

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

 

For the transition period from __________________________ to _________________________________________

 

Commission File Number: 000-51651

 

WORLD MONITOR TRUST III – SERIES J


(Exact name of the Registrant as specified in its charter)

 

Delaware

  20-2446281
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
1211 Avenue of the Americas, Suite 2701, New York       10036
(Address of principal executive offices) (Zip Code)

 

(212) 596-3480


(The Registrant’s telephone number, including area code)

 


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

 

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  ☒      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  ☒      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 definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   Accelerated filer ☐
         
Non-accelerated filer   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  ☒

 

 

   

WORLD MONITOR TRUST III – SERIES J

INDEX TO QUARTERLY REPORT ON FORM 10-Q

MARCH 31, 2015

  

    Page
     
PART I - FINANCIAL INFORMATION 3
     
Item 1. Condensed Financial Statements 3
  World Monitor Trust III  Series J  
     
  Condensed Statements of Financial Condition as of March 31, 2015 (Unaudited) and December 31, 2014 5
     
  Condensed Schedules of Investments as of March 31, 2015 (Unaudited) and December 31, 2014 6
   
  Condensed Statements of Operations (Unaudited) for the Three Months Ended March 31, 2015 and 2014 7
   
  Condensed Statements of Changes in Unitholders Capital (Unaudited) for the Three Months Ended March 31, 2015 and 2014 8
     
  Notes to Condensed Financial Statements (Unaudited) 9-23
     
Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 39
     
PART II - OTHER INFORMATION 40
     
Item 1. Legal Proceedings 40
     
Item 1.A. Risk Factors 40
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
     
Item 3. Defaults Upon Senior Securities 41
     
Item 5. Other Information 41
     
Item 6. Exhibits 41

 

2
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Condensed Financial Statements

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;

CONDENSED FINANCIAL STATEMENTS TO FOLLOW]

  

3
 

 

WORLD MONITOR TRUST III – SERIES J

 

CONDENSED FINANCIAL STATEMENTS

 

March 31, 2015 (Unaudited)

 

4
 

 

WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF FINANCIAL CONDITION

March 31, 2015 (Unaudited) and December 31, 2014

 


 

    March 31, 2015   December 31, 2014
ASSETS        
Cash and cash equivalents (see Note 2)   $ 780,005     $ 987,552  
Due from Affiliated Investment Funds     0       759,845  
Investment in securities, at fair value (cost $8,895,190 and $10,296,827 at March 31, 2015 and December 31, 2014, respectively)     8,845,572       10,187,034  
Investment in Affiliated Investment Funds, at fair value (cost $6,547,999 and $3,965,279 at March 31, 2015 and December 31, 2014, respectively)
(see Note 7)
    6,526,983       4,083,278  
Total assets   $ 16,152,560     $ 16,017,709  
                 
LIABILITIES                
Accrued expenses payable   $ 133,602     $ 115,573  
Interest payable to Managing Owner     3,045       0  
Service fees payable (see Note 5)     43,423       25,659  
Redemptions payable     147,771       231,883  
Total liabilities     327,841       373,115  
                 
UNITHOLDERS’ CAPITAL (Net Asset Value)                
Class I Units:                
Unitholders’ Units – 159,579.188 and 164,636.168 Units outstanding at March 31, 2015 and December 31, 2014, respectively     14,918,608       14,707,477  
Class II Units:                
Unitholders’ Units – 8,371.835 and 9,103.868 Units outstanding at March 31, 2015 and December 31, 2014, respectively     906,111       937,117  
Total Unitholders’ capital (Net Asset Value)     15,824,719       15,644,594  
Total liabilities and Unitholders’ capital   $ 16,152,560     $ 16,017,709  
                 
NET ASSET VALUE PER UNIT                
Class I   $ 93.49     $ 89.33  
Class II   $ 108.23     $ 102.94  

  

See accompanying notes.

 

5
 

 

WORLD MONITOR TRUST III – SERIES J

CONDENSED SCHEDULES OF INVESTMENTS

March 31, 2015 (Unaudited) and December 31, 2014

 


  

    March 31, 2015   December 31, 2014
   

Fair Value as
a % of
Unitholders’ Capital

  Fair Value   Fair Value as
a % of
Unitholders’ Capital
  Fair Value
                 
Investment in securities:                
Publicly-traded mutual funds:                
JP Morgan Short Duration Bond – Select (shares 270,001.183 and 312,875.606 at March 31, 2015 and December 31, 2014, respectively)     18.62 %   $ 2,945,713       21.72 %   $ 3,397,829  
Fidelity Instl Shrt-Interm Govt (shares 292,493.184 and 339,400.918 at March 31, 2015 and December 31, 2014, respectively)     18.65 %     2,951,256       21.74 %     3,400,797  
T. Rowe Price Short-Term Fund (shares 618,155.722 and 713,349.067 at March 31, 2015 and December 31, 2014, respectively)     18.63 %     2,948,603       21.66 %     3,388,408  
Total investment in securities (cost $8,895,190 and $10,296,827 at March 31, 2015 and December 31, 2014, respectively)     55.90 %   $ 8,845,572       65.12 %   $ 10,187,034  
                                 
Investment in Affiliated Investment Funds:                                
CTA Choice EGLG     7.48 %   $ 1,183,312       4.83 %   $ 755,254  
CTA Choice ELL     21.42 %     3,389,807       10.49 %     1,641,628  
CTA Choice RDOK     7.52 %     1,190,738       6.31 %     986,764  
Other investment in Affiliated Investment Funds     4.82 %     763,126       4.47 %     699,632  
Total investment in Affiliated Investment Funds (cost $6,547,999 and $3,965,279 at March 31, 2015 and December 31, 2014, respectively)     41.24 %   $ 6,526,983       26.10 %   $ 4,083,278  

  

 

See accompanying notes.

 

6
 

 

WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 


 

   Three months ended March 31,
   2015  2014
INVESTMENT INCOME      
Interest income  $1   $593 
Dividend income   22,041    64,889 
Total investment income   22,042    65,482 
           
EXPENSES          
Management fees to Managing Owner   19,767    51,585 
Managing Owner interest earned on Certain Investment Funds (see Note 4)   9,601    40,235 
Service fees - Class I Units (see Note 5)   71,827    180,820 
Sales commission   39,742    104,363 
Offering costs   0    47,045 
Operating expenses   80,115    106,512 
Total expenses   221,052    530,560 
Net investment loss   (199,010)   (465,078)
           
REALIZED AND UNREALIZED GAIN OR (LOSS) ON INVESTMENTS          
Net realized loss on investment in securities   (11,611)   (99,142)
Net change in unrealized appreciation on investment in securities   60,175    154,153 
Net gain from investment in securities   48,564    55,011 
Net realized gain (loss) on investment in Affiliated Investment Funds   1,025,417    (2,069,242)
Net change in unrealized depreciation on investment in Affiliated Investment Funds   (139,015)   (1,966,395)
Net gain (loss) from investment in Affiliated Investment Funds   886,402    (4,035,637)
NET INCOME (LOSS)  $735,956   $(4,445,704)
           
NET INCOME (LOSS) PER WEIGHTED AVERAGE UNITHOLDER          
Net income (loss) per weighted average Unitholder          
Class I  $4.26   $(10.74)
Class II  $5.38   $(11.76)
Weighted average number of Units outstanding - Class I   161,806.209    380,299.137 
Weighted average number of units outstanding - Class II   8,756.343    30,558.887 

 

See accompanying notes.

 

7
 

  

WORLD MONITOR TRUST III – SERIES J

CONDENSED STATEMENTS OF CHANGES IN UNITHOLDERS’ CAPITAL

For the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 


 

      Class I        Class II                    
      Unitholders       Unitholders       Total  
      Units       Amount       Units       Amount       Units       Amount  
                                                 
Three months ended
March 31, 2015
                                               
Unitholders' capital at December 31, 2014     164,636.168     $ 14,707,477       9,103.868     $ 937,117       173,740.036     $ 15,644,594  
Redemptions     (5,056.980 )     (477,717 )     (732.033 )     (78,114 )     (5,789.013 )     (555,831 )
Net income             688,848               47,108               735,956  
Unitholders' capital at March 31, 2015     159,579.188     $ 14,918,608       8,371.835     $ 906,111       167,951.023     $ 15,824,719  
                                                 
Three months ended
March 31, 2014
                                               
Unitholders' capital at December 31, 2013     489,671.166     $ 45,929,534       43,291.800     $ 4,590,324       532,962.966     $ 50,519,858  
Redemptions     (231,464.845 )     (20,214,734 )     (23,907.193 )     (2,386,302 )     (255,372.038 )     (22,601,036 )
Net loss             (4,086,266 )             (359,438 )             (4,445,704 )
Unitholders' capital at March 31, 2014     258,206.321     $ 21,628,534       19,384.607     $ 1,844,584       277,590.928     $ 23,473,118  

   

See accompanying notes.

 

8
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 


 

Note 1. ORGANIZATION

  

A. General Description of the Trust

  

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

 

    Effective March 17, 2014, the Kenmar Group and the Olympia Group of Companies merged with the GEMS Group. In connection with the merger, certain changes in the corporate structure of the organization have occurred. Kenmar Preferred Investments, L.P. (Kenmar Preferredor the “Managing Owner”) who is the Managing Owner of the Trust, converted from a Delaware limited partnership to a Delaware limited liability company. Accordingly, the name changed to Kenmar Preferred Investments, LLC. Kenmar Preferred or Managing Owner refers to either Kenmar Preferred Investments, L.P. or Kenmar Preferred Investments, LLC, depending on the applicable period discussed. As the Managing Owner of the Trust and of each Series, Kenmar Preferred conducts and manages the business of the Trust and each Series.

 

    Effective March 17, 2014, ClariTy Managed Account & Analytics Platform, L.P. changed its name and form of entity to ClariTy Managed Account & Analytics Platform, LLC (“ClariTy”). ClariTy refers to either ClariTy Managed Account & Analytics Platform, L.P. or ClariTy Managed Account & Analytics Platform, LLC, depending on the applicable period discussed. ClariTy, an affiliate of Kenmar Preferred, serves as the managing member for CTA Choice Fund LLC (“CTA Choice”). CTA Choice is a Delaware limited liability company which consists of multiple segregated series, each established pursuant to a separate Certificate of Designation prepared by ClariTy. Each series maintains separate and distinct records. The assets associated with each series, and the liabilities and obligations incurred with respect to a particular series are enforceable only against the assets of that series.

 

    Effective March 17, 2014, Kenmar Global Investment Management, L.P changed its name and form of entity to Kenmar Global Investment Management, LLC (the “Asset Allocator”). Asset Allocator refers to either Kenmar Global Investment Management, L.P. or Kenmar Global Investment Management, LLC, depending on the applicable period discussed. The Asset Allocator, an affiliate of the Managing Owner, is the Asset Allocator of CTA Choice. Pursuant to the Asset Allocation Agreements between the Managing Owner, the Asset Allocator, and each interestholder, the Asset Allocator determines the trading level of each interestholder’s assets and reallocates among the separate series of CTA Choice as agreed upon with the Trading Advisors.

 

9
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 1. ORGANIZATION (CONTINUED)

 

  A. General Description of the Trust (Continued)

 

 

While the Asset Allocator receives no fees for such services from Series J, the Asset Allocator is paid management and incentive fees directly from the interestholders pursuant to each interestholder’s Asset Allocation Agreement. Series J pays no management or incentive fees to the Asset Allocator.

 

    Series J allocates a portion of its net assets (“Allocated Assets”) to commodity trading advisors (each, a “Trading Advisor” and collectively, the “Trading Advisors”) through various series of CTA Choice, for which such allocations are rebalanced quarterly. As of March 31, 2015, Series J allocates approximately one-quarter of its Allocated Assets to each Trading Advisor which manages and makes trading decisions with respect to those Allocated Assets (see below table). The Managing Owner may terminate any current Trading Advisor or select new trading advisors from time to time at its sole discretion in order to achieve the goals of Series J. In the future, the Managing Owner may determine to access certain Trading Advisors through separate investee pools.

 

    Each Trading Advisor listed below is referred to herein as an “Affiliated Investment Fund” and collectively referred to herein as the “Affiliated Investment Funds”:

 

Affiliated Investment Fund Trading Advisor Trading Program Start Date Termination Date
CTA Choice EGLG (“EGLG”) Eagle Trading Systems Inc. Eagle Global Program 01/1/12  
CTA Choice SAXN (“SAXN”) Saxon Investment Corporation Saxon Aggressive Diversified Program 01/1/12 12/31/14
CTA Choice GLAGS (“GLAGS”) Global Ag, LLC Diversified Program 12/1/12 12/31/14
CTA Choice RDOK (“RDOK”) Red Oak Commodity Advisors, Inc. Fundamental Trading Program 12/1/12  
CTA Choice ELL (“ELL”) Ellington Management Group, LLC Global Macro Trading Program 12/1/13  
CTA Choice FRT   (“FRT”) Fort, L.P. Global Diversified Program 08/1/14  

 

    Series J meets the definition of an investment company in accordance with guidance under Accounting Standards Codification Topic 946 “Financial Services – Investment Companies”.

 

  B. Regulation

 

    As a registrant with the Securities and Exchange Commission (“SEC”), the Trust and each Series are subject to the regulatory requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.

 

10
 

  

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 1. ORGANIZATION (CONTINUED)

  

   B. Regulation (Continued)

  

  As a commodity pool, the Trust and each Series are subject to the regulations of the Commodity Futures Trading Commission (“CFTC”), an independent agency of the U.S. government which regulates most aspects of the commodity futures industry; rules of the National Futures Association (“NFA”), an industry self-regulatory organization; and the requirements of the various commodity exchanges where the Trust, indirectly through the Affiliated Investment Funds, executes transactions.

 

  C. The Offering

 

Series J offers units (the “Units”) in two classes (each, a “Class”) – Class I and Class II.

 

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

 

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

 

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

 

  Series J completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443.

 

   D. Exchanges, Redemptions and Termination

 

  Redemptions from Series J are permitted on a monthly basis with no redemption charges applicable to either Class I or Class II Units.

 

  In the event that the Net Asset Value of a Series, after adjustments for distributions, contributions and redemptions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate.

 

  Should the Managing Owner make a determination that Series J’s aggregate net assets in relation to its operating expenses make it unreasonable or imprudent to continue the business of Series J, or, in the exercise of its reasonable discretion, if the aggregate Net Asset Value of Series J as of the close of business on any business day declines below $10 million, the Managing Owner may dissolve Series J.

 

11
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

  A. Basis of Accounting

 

The condensed statements of financial condition, including the condensed schedules of investments, as of March 31, 2015, the condensed statements of operations for the three months ended March 31, 2015 (“First Quarter 2015”) and for the three months ended March 31, 2014 (“First Quarter 2014”), and the condensed statements of changes in Unitholders’ capital for the First Quarter 2015 and the First Quarter 2014, are unaudited.

 

In the opinion of the Managing Owner, the condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial position of Series J as of March 31, 2015 and the results of its operations for the First Quarter 2015 and the First Quarter 2014. The operating results for these interim periods may not be indicative of the results expected for a full year.

 

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

 

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in Series J’s annual report on Form 10-K filed with the SEC for the year ended December 31, 2014.

 

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

 

Investment in securities consists of publicly-traded mutual funds, which are valued using the net asset value on the last day of the period. Realized gains and losses from investment in securities and Affiliated Investment Funds are determined using the identified cost method. Any change in net unrealized gain or loss from the preceding period is reported in the condensed statements of operations. Dividends are recorded on the ex-dividend date.

 

Series J has elected not to provide a statement of cash flows since substantially all of Series J’s investments are carried at fair value and classified as Level 1 or Level 2 measurements in the fair value hierarchy table, Series J has little or no debt and a condensed statement of changes in Unitholders’ capital (Net Asset Value) is provided.

 

12
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

  A. Basis of Accounting (Continued)

 

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

 

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

 

  Series J considers its investments in publicly-traded mutual funds to be based on quoted prices in active markets for identical assets (Level 1). In determining the level, Series J considers the length of time until the investment is redeemable, including notice and lock-up periods or any other restriction on the disposition of the investment. Series J also considers the nature of the portfolios of the underlying Affiliated Investment Funds and their ability to liquidate their underlying investments. Series J has the ability to redeem its investments at the reported net asset valuation as of the measurement date (see Note 7) and classified its investment in Affiliated Investment Funds as Level 2 using the fair value hierarchy. The Affiliated Investment Funds are valued at the net asset value as reported by the underlying investment funds’ capital balance using the practical expedient method. The carrying value of the underlying investment in the Affiliated Investment Funds is at fair value.

 

  There are no Level 3 investments as of March 31, 2015 or December 31, 2014, nor any portion of the interim periods.

 

  The following tables summarize the assets measured at fair value using the fair value hierarchy:

 

March 31, 2015   Level 1   Level 2   Level 3   Total
Assets:                
Investment in securities, at fair value   $ 8,845,572     $ 0     $ 0     $ 8,845,572  
Investment in Affiliated Investment Funds, at fair value   $ 0     $ 6,526,983     $ 0     $ 6,526,983  
                                 
December 31, 2014     Level 1       Level 2       Level 3       Total
                                 
Assets:                                
Investment in securities, at fair value   $ 10,187,034     $ 0     $ 0     $ 10,187,034  
Investment in Affiliated Investment Funds, at fair value   $ 0     $ 4,083,278     $ 0     $ 4,083,278  


   

13
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

   B. Cash and Cash Equivalents

 

  Cash and cash equivalents include cash and investments in overnight deposits. Interest income, if any, includes interest on cash and overnight deposits. In the event of a financial institution’s insolvency, recovery of cash on deposit may be limited to account insurance or other protections afforded such deposits. Series J has established procedures to actively monitor market risk and minimize credit risk, although there can be no assurance that it will, in fact, succeed in doing so. The Unitholders bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions or redemptions received.

 

  C. Income Taxes

 

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

 

  Series J appropriately recognizes and discloses uncertain tax provisions in their financial statements. Recognition is permitted for each position if, based on its technical merits, it is “more likely than not” that the position will be upheld under audit by tax authorities. The Managing Owner has reviewed Series J’s tax positions for all open years and concluded that no provision for income taxes or expense is required in these condensed financial statements. Series J has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest or other expense.

 

  There have been no differences between the tax basis and book basis of assets, liabilities or Unitholders’ capital since inception of Series J.

 

  D. Profit and Loss Allocations and Distributions

 

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

 

  E. Offering Costs

 

  In accordance with the Trust’s Agreement and Prospectus, the Managing Owner is responsible for the payment of all offering expenses of Series J incurred after the Initial Offering Period (“ongoing offering costs”), provided that the amount of such ongoing offering costs paid by the Managing Owner are subject to reimbursement by the Trust, without interest, in up to 36 monthly payments during each of the first 36 months following the month in which such expenses were paid by the Managing Owner. Through March 31, 2015, the Managing Owner has paid $2,936,640 in ongoing offering costs, of which $2,879,478 has been allocated to Series J.

  

14
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

  E. Offering Costs (Continued)

 

  Ongoing offering costs incurred through November 30, 2006 in the amount of $599,062 will not be reimbursed to the Managing Owner. For the period December 1, 2006 through March 31, 2015, the Managing Owner incurred and Series J was allocated ongoing offering costs in the amount of $2,300,021 and $2,280,415, respectively. Of the $2,280,415 allocated to Series J, $635,144 will not be reimbursable to the Managing Owner.

 

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

 

  During the First Quarter 2015 and the First Quarter 2014, Series J’s allocable portion of ongoing offering costs did not exceed 0.50% per annum of the Net Asset Value of Series J.

 

   F. Interest and Dividends

 

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

 

  G. Investment in Affiliated Investment Funds

 

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

 

Note 3. RELATED PARTIES

 

  Series J reimburses Kenmar Preferred and its affiliates for services it performs for Series J, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, and other administrative services.

15
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 3. RELATED PARTIES (CONTINUED)

 

  The expenses incurred by Series J for services performed by Kenmar Preferred and its affiliates for Series J were as follows:

 

    Three months ended  
March 31,
    2015   2014
Management fees to Managing Owner   $ 19,767     $ 51,585  
Managing Owner interest earned on Certain Investment Funds     9,601       40,235  
Operating expenses     27,196       36,910  
Total   $ 56,564     $ 128,730  

 

  Expenses payable to the Managing Owner and its affiliates, which are included in accrued expenses payable on the condensed statements of financial condition as of March 31, 2015 and December 31, 2014, were $32,445 and $33,110, respectively.

 

Note 4. MANAGING OWNER AND AFFILIATES

 

  The Managing Owner is paid a monthly management fee of 1/12th of 0.5% (0.5% per annum) of Series J’s Net Asset Value at the beginning of each month (See Note 5).

 

  Series J invests a portion of the excess cash balances not required for margin through certain investment funds which invest in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rules and regulations (collectively, “Certain Investment Funds”). The objective is to obtain a rate of return for Series J that balances risk and return relative to the historically low yields on short term cash deposits with banks and/or brokerage firms. There is no guarantee that the Managing Owner will be successful in investing the excess cash successfully to obtain a greater yield than available on short term cash deposits with banks and/or brokerage firms. The Managing Owner is paid monthly 1/12th of 50% of the first 1% of the positive returns earned on Series J’s investments in Certain Investment Funds. The calculation is based on Series J’s average annualized Net Asset Value, and any losses related to returns on Certain Investment Funds must first be recovered through subsequent positive returns prior to the Managing Owner receiving a payment. After the calculation of the amount payable to the Managing Owner, Series J will be credited with all additional positive returns (or 100% of any losses) on Series J’s investments in Certain Investment Funds. If at the end of any calendar year, a loss has been incurred on the returns for Certain Investment Funds, then the loss carry forward will reset to zero for the next calendar year with regards to the calculation of the Managing Owner’s portion of Certain Investment Fund’s income. As of March 31, 2015, the loss carry forward amounted to $0. For the First Quarter 2015 and the First Quarter 2014, the Managing Owner’s portion of interest earned on Certain Investment Funds amounted to $9,601 and $40,235, respectively.

 

 

16
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 4. MANAGING OWNER AND AFFILIATES (CONTINUED)

 

  Series J pays a monthly administrative services fee to ClariTy for risk management and related services with respect to monitoring the Trading Advisors, indirectly through its investment in Affiliated Investment Funds based on their respective beginning of month Allocated Assets. For the First Quarter 2015 and the First Quarter 2014, the administrative services fee earned indirectly totaled $9,955 and $26,102, respectively.

 

Note 5. SERVICE FEES AND SALES COMMISSIONS

 

  Series J pays a service fee with respect to Class I Units, monthly in arrears, equal to 1/12th of 2% (2% per annum) of the Net Asset Value per Unit of the outstanding Class I Units as of the beginning of the month. Series J also pays an initial commission equal to 2% of the initial Net Asset Value per Unit of each Class I Unit sold by the Correspondent Selling Agents (“CSA”), payable on the date such Class I Units are purchased. Commencing with the 13th month after the purchase of a Class I Unit, the CSAs received an ongoing monthly commission equal to 1/12th of 2% (2% per annum) of the Net Asset Value per Class I Unit as of the beginning of each month of the Class I Units sold by them.

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

 

  For the First Quarter 2015 and the First Quarter 2014, the Service Fee – Class I Units is composed of the following:

 

    First Quarter 2015   First Quarter 2014
Monthly 1/12th of 2% service fee calculated on all Class I Units   $ 74,776     $ 191,080  
Series J’s recapture on 1/12th of 2% service fee on select Units and  recapture of the service fee on Units held with no CSA     (2,949 )     (10,260 )
Total   $ 71,827     $ 180,820  

 

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

 

 

17
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 6. ADMINISTRATOR

 

 

SS&C GlobeOp Financial Services LLC (“SS&C GlobeOp” or the “Administrator”), a Delaware limited liability company, serves as the Administrator of Series J. The Administrator performs or supervises the performance of services necessary for the operation and administration of Series J (other than making investment decisions), including administrative and accounting services. The Administrator also calculates Series J’s Net Asset Value. In addition, the Administrator maintains certain books and records of Series J, including certain books and records required by CFTC Rule 4.23(a). SS&C GlobeOp also serves as the administrator of the Affiliated Investment Funds.

 

  Series J indirectly pays its pro-rata share of administrator fees through its investment in Affiliated Investment Funds. For the First Quarter 2015 and the First Quarter 2014, Series J indirectly paid administrator fees totaling $10,890 and $24,013, respectively.

 

  Series J also pays administrator fees directly to SS&C GlobeOp. For the First Quarter 2015 and the First Quarter 2014, Series J directly paid SS&C GlobeOp administrator fees of $6,250 and $6,250, respectively.

 

Note 7. INVESTMENT IN AFFILIATED INVESTMENT FUNDS

 

  Series J invests a portion of its assets in Affiliated Investment Funds. Series J’s investment in Affiliated Investment Funds represents 41.24% and 26.10% of the Net Asset Value of Series J at March 31, 2015 and December 31, 2014, respectively. The investment in Affiliated Investment Funds is reported in Series J’s condensed statements of financial condition at fair value. Series J records its proportionate share of income or loss in the condensed statements of operations. The investments are subject to the terms of the organizational and offering documents of the Affiliated Investment Funds.

 

  The following tables summarize the change in net asset value (fair value) of Series J’s investment in Affiliated Investment Funds for the First Quarter 2015 and the First Quarter 2014:

 

    Net asset value
December 31, 2014
  Purchases   Gain   Redemptions   Net asset value March 31, 2015
Investment in Affiliated Investment Funds   $ 4,083,278     $ 1,780,598     $ 886,402     $ (223,295 )   $ 6,526,983  
                                         
      Net asset value
December 31, 2013
    Purchases       Loss       Redemptions     Net asset value March 31, 2014
Investment in Affiliated Investment Funds   $ 12,249,728     $ 3,389,774     $ (4,035,637 )   $ (6,113,686 )   $ 5,490,179      

 


   
  The Affiliated Investment Funds are redeemable monthly and require a redemption notice of 1-5 days. Series J may make additional contributions to or redemptions from the Affiliated Investment Funds on a standard allocation date. The Affiliated Investment Funds engage in trading commodity futures including agricultural, currency, energy, interest rates and stock indices among other types, foreign currency forward contracts and options on futures contracts.

 

18
 

  

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 7. INVESTMENT IN AFFILIATED INVESTMENT FUNDS (CONTINUED)

 

  Series J records its proportionate share of income or loss in the condensed statements of operations.

 

  Series J’s investment in Affiliated Investment Funds is not fully funded, but is subject to additional capital calls up to the full amount of the capital commitment. The following table sets out the total capital commitment split between net asset value (amount funded) and the remaining capital commitment. The remaining capital commitment is the maximum amount that can be requested from Series J if requested by the Affiliated Investment Funds to meet margin calls in accordance with the governing documents. Series J’s capital commitment to the Affiliated Investment Funds is disclosed below:

 

   Total capital commitment March 31, 2015 

Net asset value

March 31, 2015

  Remaining capital commitment 
March 31, 2015
CTA Choice EGLG  $4,055,831   $1,183,312   $2,872,519 
CTA Choice ELL   3,939,418    3,389,807    549,611 
CTA Choice FRT   3,850,322    763,126    3,087,196 
CTA Choice RDOK   4,165,350    1,190,738    2,974,612 
Total  $16,010,921   $6,526,983   $9,483,938 

 

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

 

Note 8. TRUSTEE

 

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

 

Note 9. COSTS, FEES AND EXPENSES

 

   A. Operating Expenses

 

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

 

19
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 9. COSTS, FEES AND EXPENSES (CONTINUED)

 

  B. Trading Advisor Management and Incentive Fees

 

  Series J pays indirectly through its investment in Affiliated Investment Funds, the following Trading Advisors’ management fees (based on Series J’s Allocated Assets as of each standard allocation date) and incentive fees for achieving “New High Net Trading Profits,” in Series J’s capital accounts within the Affiliated Investment Funds as defined in their respective advisory agreements:

 

Affiliated Investment Fund  Management Fee  Incentive Fee
CTA Choice EGLG   2.00%   25.00%
CTA Choice ELL   0.00%   30.00%
CTA Choice FRT   2.00%   20.00%
CTA Choice GLAGS*   2.00%   20.00%
CTA Choice RDOK   2.00%   20.00%
CTA Choice SAXN*   0.00%   25.00%

 

  * Series J fully redeemed from CTA Choice GLAGS and CTA Choice SAXN as of December 31, 2014.

 

  For the First Quarter 2015 and the First Quarter 2014, the Trading Advisor management fees paid indirectly within each Affiliated Investment Fund based on Series J’s Allocated Assets as of each standard allocation date, totaled $60,904 and $119,862, respectively.

 

  For the First Quarter 2015 and the First Quarter 2014, the Trading Advisor incentive fees paid indirectly within Series J’s investment in Affiliated Investment Funds totaled $188,291 and $0, respectively.

 

  C. Commissions

 

  Series J, indirectly through the commodity trading activity of the Affiliated Investment Funds, is obligated to pay all floor brokerage expenses, give-up charges and NFA clearing and exchange fees. These activities are reflected within the respective net asset value of each of the Affiliated Investment Funds.

 

Note 10. DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS

 

  No derivative instruments were directly held by Series J as of March 31, 2015 and December 31, 2014. Derivative trading activity is conducted within the Affiliated Investment Funds.

 

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

  

20
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


 

Note 10. DERIVATIVE INSTRUMENTS AND ASSOCIATED RISKS (CONTINUED)

 

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

 

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

 

  Market Risk

 

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

 

Credit Risk

 

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

 

21
 

 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

 


  

Note 11. FINANCIAL HIGHLIGHTS

 

  The following information presents per Unit operating performance data and other supplemental data for the First Quarter 2015 and the First Quarter 2014. This information has been derived from information presented in the condensed financial statements:

 

    Class I   Class II
    Three months ended 
March 31,
  Three months ended 
March 31,
    2015   2014   2015   2014
Per Unit Performance                
(for a Unit outstanding throughout the entire period)                
Net Asset Value per Unit at beginning of period   $ 89.33     $ 93.80     $ 102.94     $ 106.03  
Gain (Loss) from operations:                                
Net realized and change in unrealized gain (loss) (1)     5.34       (8.88 )     6.15       (10.10 )
Interest income (1)     0.00       0.00       0.00       0.00  
Dividend income (1)     0.13       0.16       0.15       0.18  
Expenses     (1.31 )     (1.32 )     (1.01 )     (0.95 )
Total gain (loss) from operations     4.16       (10.04 )     5.29       (10.87 )
Net Asset Value per Unit at end of period   $ 93.49     $ 83.76     $ 108.23     $ 95.16  
                                 
Total Return (4)     4.66 %     (10.70 )%     5.14 %     (10.26 )%
                                 
Supplemental data                                
Ratios to average Net Asset Value:                                
Net investment loss (2), (3)     (5.13 )%     (5.19 )%     (3.23 )%     (3.02 )%
Interest income (3)     0.00 %     0.01 %     0.00 %     0.01 %
Dividend income (3)     0.56 %     0.70 %     0.56 %     0.71 %
Other expenses (3)     5.69 %     5.90 %     3.79 %     3.74 %
Total expenses     5.69 %     5.90 %     3.79 %     3.74 %

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

 

   (1) Dividend and Interest income per Unit, expenses per Unit are calculated by dividing dividend income, interest income and other expenses applicable to each Class by the weighted average number of Units of each Class outstanding during the period. Net realized and change in unrealized gain (loss) is a balancing amount necessary to reconcile the change in Net Asset Value per Unit of each Class with the other per Unit information.

  (2) Represents dividend and interest income less total expenses. This excludes Series J’s proportionate share of income and expenses from investment in Affiliated Investment Funds.

  (3) Annualized.

  (4) Not annualized.

  

22
 


 

WORLD MONITOR TRUST III – SERIES J
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

 


 

Note 12. SUBSEQUENT EVENTS

 

  ClariTy has amended CTA Choice’s Private Placement Memorandum which is effective May 1, 2015. In accordance with the amendment, the full amount of Series J’s capital contribution to an Affiliated Investment Fund will be traded by each Trading Advisor pursuant to its trading strategy at the Affiliated Investment Fund’s Investment Level Factor. An Affiliated Investment Fund’s Investment Level Factor multiplied by the capital contribution of Series J to an Affiliated Investment Fund shall equal Series J’s Investment Level. An Affiliated Investment Fund’s Investment Level Factor is the trading leverage factor of an Affiliated Investment Fund, as designated by ClariTy from time to time for such Affiliated Investment Fund, and reflects the level at which a Trading Advisor is instructed to trade the Affiliated Investment Fund’s assets. ClariTy may increase or decrease the Affiliated Investment Fund’s Investment Level Factor in its sole discretion.
   
  Effective May 1, 2015, Series J allocates approximately one-sixth of its net assets to each of the following:

 

  CTA Choice ELL
  CTA Choice FRT
  CTA Choice RDOK
  CTA Choice QNTM - managed by Quantmetrics Capital Management LLP, pursuant to its QM Multi Strategy Program.
  CTA Choice SCT- managed by SCT Capital Management INC, pursuant to its AQTIX Trading Program.
  CTA Choice WTN - managed by Winton Capital Management Limited, pursuant to its Diversified Program.
   
  The following table sets out the total capital contribution and investment level split between net asset value effective May 1, 2015:

 

   Total capital
contribution
May 1, 2015
  Total investment level
May 1, 2015
CTA Choice ELL  $2,515,936   $3,019,123 
CTA Choice FRT   1,509,561    3,019,123 
CTA Choice RDOK   1,509,561    3,019,123 
CTA Choice QNTM   1,509,561    3,019,123 
CTA Choice SCT   1,509,561    3,019,123 
CTA Choice WTN   2,515,936    3,019,123 
Total  $11,070,117   $18,114,737 

 

  From April 1, 2015 through May 14, 2015, there were redemptions of approximately $26,000.

 

23
 

 

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

 

This report on Form 10-Q (the “Report”) for the quarter ending March 31, 2015 (“First Quarter 2015”) includes forward-looking statements that reflect the current expectations of Kenmar Preferred Investments, LLC, the Managing Owner of World Monitor Trust III – Series J (the “Registrant”), about the future results, performance, prospects and opportunities of the Registrant. The Managing Owner has tried to identify these forward-looking statements by using words such as “may”, “will”, “expect”, “anticipate”, “believe”, “intend”, “should” and “estimate”, or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in this Report, and unknown, that could cause the Registrant’s actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

 

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

 

Introduction

 

General

 

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

 

The Trust’s Units were initially offered in four (4) separate and distinct Series: Series G, Series H, Series I and Series J (the Registrant”). The Trust may issue additional Series of Units in the future. Each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the Fifth Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”). Each Series offers Units in two classes (each, a “Class”) – Class I and Class II. Class I Units pay a service fee. Class II Units may only be offered to investors who are represented by approved correspondent selling agents who are directly compensated by the investor for services rendered in connection with an investment in the Trust (such arrangements commonly referred to as “wrap-accounts”) (see Note 5 of the condensed financial statements).

 

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

 

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

 

Managing Owner and its Affiliates

 

Effective March 17, 2014, Kenmar Preferred Investments, L.P. changed its name and form of entity to Kenmar Preferred Investments, LLC (“Kenmar Preferred” or the “Managing Owner”). Kenmar Preferred or Managing Owner refers to either Kenmar Preferred Investments, L.P. or Kenmar Preferred Investments, LLC depending on the applicable period discussed. Kenmar Preferred is the Managing Owner of the Registrant.

 

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

 

The Registrant reimburses the Managing Owner for services it performs for the Registrant, which include, but are not limited to: management, legal, accounting, registrar, transfer and assignment functions, investor communications, printing, postage and related services with respect to monitoring the Trust and other administrative services. The Registrant pays a monthly fee to ClariTy Managed Account & Analytics Platform, L.P., who effective March 17, 2014 changed its name and form of entity to Clarity Managed Account & Analytics Platform, LLC (“ClariTy”), an affiliate of the Managing Owner, for risk management and related services with respect to monitoring the Trading Advisors. ClariTy refers to either ClariTy Managed Account & Analytics Platform, L.P. or ClariTy Managed Account & Analytics Platform, LLC, depending on the applicable period discussed.  

 

24
 

 

The Offering

 

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

 

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

 

Initially, the Units for each Series were offered for a period ending November 30, 2005 (“Initial Offering Period”) at $100 per Unit. The subscription minimum of $30,000,000 for the Registrant was reached during the Initial Offering Period permitting all of Series G, H, I and J to commence trading operations. The Registrant completed its initial offering on December 1, 2005 with gross proceeds of $31,024,443, which was fully allocated to the trading vehicles. Series H and Series I Units were fully redeemed as of April 30, 2007 and Series G’s Units as of December 31, 2007. Up to $281,250,000 Series J, Class I and $93,750,000 Series J, Class II Units are being offered (totaling $375,000,000) (“Subscription Maximum”).

 

The Trading Advisors and the Trading Vehicles

 

The Registrant allocates a portion of its net assets (“Allocated Assets”) to commodity trading advisors (each, a “Trading Advisor” and collectively, the “Trading Advisors”). Each Trading Advisor manages a portion of the Allocated Assets of the Registrant and makes the trading decisions with respect to those Allocated Assets. The Managing Owner may terminate any current Trading Advisor or select new trading advisors from time to time in its sole discretion. In the future, the Managing Owner may determine to access certain Trading Advisors through separate investee pools.

 

In general, the Registrant expects to access the Trading Advisors through various series of CTA Choice Fund LLC (“CTA Choice”). CTA Choice is an “umbrella fund” having multiple segregated series, each of which is referred to herein as a “CTA Fund” or an “Affiliated Investment Fund”. Each CTA Fund has its own clearly-defined investment objective and strategies that are implemented by a Trading Advisor. ClariTy, an affiliate of the Managing Owner, is the managing member of CTA Choice. From December 1, 2013 to July 31, 2014, the Registrant allocated approximately one-fifth of its Allocated Assets to each of the following CTA Funds:

 

CTA Choice EGLG, managed by Eagle Trading Systems Inc. (“Eagle”), pursuant to its Global Program, which is a systematic, technical long term diversified program;

 

CTA Choice ELL, managed by Ellington Management Group, LLC (“Ellington”), pursuant to its Global Macro Trading Program, which is a discretionary, fundamental, event driven program.

 

CTA Choice GLAGS, managed by Global Ag, LLC (“Global”), pursuant to its Discretionary Trading Program, which is a discretionary, fundamental trading program that focuses on agricultural markets;

 

CTA Choice RDOK, managed by Red Oak Commodity Advisors, Inc. (“Red Oak”), pursuant to its Fundamental Trading Program, which is a Diversified, Discretionary trading program; and

 

CTA Choice SAXN, managed by Saxon Investment Corporation (“Saxon”), pursuant to its Saxon Aggressive Diversified Program, which is a systematic, technically based, broadly diversified program.

 

As of August 1, 2014, the Registrant allocated approximately one-sixth of its Allocated Assets to each EGLG, ELL, GLAGS, RDOK, SAXN and CTA Choice FRT, which is managed by Fort, L.P. (“Fort”), pursuant to its Global Diversified Program.

 

As of January 1, 2015, the Registrant allocated approximately one-quarter of its Allocated Assets to each EGLG, ELL, FRT and RDOK after fully redeeming from GLAGS and SAXN.

 

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Eagle’s Global Program is a technical, trend-following system developed, based on Eagle’s extensive experience in observing and trading the global markets, to capture a well-structured trading philosophy. The trading philosophy incorporates trend following elements, money management principles, predetermined risk parameters and volatility adjustment features. The system is designed to trade in a wide range of global futures markets—currencies, fixed income, energies, commodities and stock indices—that exhibit orderly intermediate and long-term trends, and adjust to changes in market environment with no predetermined allocation to any one sector. Eagle analyzes typical behavior and volatility patterns of various markets. The system seeks markets with potentially good risk/reward profiles while attempting to avoid markets characterized by excessive volatility and sharp price corrections. An attempt is made to participate in markets which exhibit favorable “signal to noise” characteristics. Money management and risk control disciplines serve to attempt to limit downside risk.

 

Ellington’s Global Macro Trading Program primarily invests by taking both long and short positions in global currency, fixed income, commodity and equity markets through a wide range of derivative instruments and direct investments. Ellington will, from time to time, make extensive use of derivative instruments, including, without limitation, futures and forwards contracts and options on global currencies, commodities, fixed income and equity securities and security indices; interest rate derivatives (such as swaps, caps and floors); credit default swaps; options on any of the foregoing; and other over-the-counter and exchange-traded derivatives.

 

Fort’s Global Diversified Trading Program consists of three separate strategy components: (i) trend anticipating; (ii) trend following; and (iii) short term mean reversion. Fort’s investment objective is to achieve attractive absolute returns and reduced volatility of returns primarily through trading a broad spectrum of futures contracts, including short term interest rates, bonds, currencies, stock indices, energy and metals. Fort has designed its Trading Program in an attempt to produce high quality risk adjusted returns with a low correlation to broad based equity markets such as the S&P 500 or the MSCI world index. In an attempt to reduce volatility, the trading program is not constructed based primarily on one sided exposure to a particular market factor, such as long exposure to equity investments.

 

Global’s Discretionary Trading Program primarily, but not exclusively, trades futures on agricultural markets, primarily grains and oilseeds and the associated options on these markets. Global is aware of the “randomness” of markets. However, it is Global’s belief that fundamentals determine the eventual movement of a particular market towards a price, either higher or lower than currently observed. It is for this reason that Global relies heavily on analyzing each market “fundamentally” and developing a trading strategy to complement the analysis. As price discovery takes place, Global monitors a host of market inputs that it deems very important. Some of these include energy and currency values, domestic and international freight values, underlying cash values associated with futures markets, as well as political events in both importing and exporting countries that can have a substantive effect on global trade flows.

 

Red Oak’s Fundamental Trading Program is driven by fundamentals: specifically, its strategy is grounded in Red Oak’s principals’ experience in and knowledge of the different commodity and commodity-related markets and the various fundamental factors which affect each of such markets. Thus, unlike many trading strategies now being employed by managed futures professionals, Red Oak’s approach is neither technically-based nor trend-following. Fundamental analysis, in general, is based on a study of factors external to the markets in predicting future prices. Such factors might include, among other things, supply and demand factors for a particular commodity, the economy of a particular country, government policies, domestic and foreign political and economic events and changing trade prospects. Fundamental analysis is premised on the concept that market prices frequently may not reflect (on a real time basis) the actual value of a commodity, although such value will eventually determine price levels.

 

Saxon’s Aggressive Diversified Program is primarily “trend following;” to this end, Saxon combines multiple rigorously researched systems to trade a diversified portfolio of futures worldwide. Saxon currently trades over 50 commodity interests on 13 exchanges in 6 countries; commodities traded included currencies, financials, softs, metals, grains, the meat complex and energy products. Through the use of proprietary money management techniques, Saxon seeks to further optimize returns. In addition, Saxon believes that the development of a trading system is an ongoing process; consequently, Saxon commits substantial resources to researching, developing and implementing improved trading techniques, money management principles and statistical analysis.

 

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The Administrator

 

SS&C GlobeOp Financial Services LLC (“SS&C GlobeOp” or the “Administrator”), a Delaware limited liability company located at One South Road, Harrison, NY 10528, has been retained by the Registrant to serve as the Registrant’s administrator and provide certain administration and accounting services. 

 

The Administrator performs or supervises the performance of services necessary for the operation and administration of the Registrant (other than making investment decisions), including administrative and accounting services. The Administrator also calculates the Registrant’s Net Asset Value. In addition, the Administrator maintains certain books and records of the Registrant, including certain books and records required by CFTC Rule 4.23(a).

 

Fees and Expenses

 

Management Fee

 

The Registrant pays the Managing Owner in advance a monthly management fee equal to 1/12th of 0.5% (0.5% per annum) of the Registrant’s Net Asset Value (defined below) at the beginning of each month. See Note 4 of the Registrant’s financial statements included in its annual report for the year ended December 31, 2014 (the “Registrant’s 2014 Annual Report”), which is filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2014.

 

Net Asset Value” is the total assets of the Registrant less total liabilities of the Registrant, each determined on the basis of accounting principles generally accepted in the United States of America.

 

The Registrant, indirectly through its investment in Affiliated Investment Funds, pays a monthly administrative services fee in the amount of 1/12th of 0.25% (0.25% per annum) of the respective CTA Fund’s beginning of month Allocated Assets to ClariTy for risk management and related services with respect to monitoring the Trading Advisors.

 

Trading Advisors’ Fees

 

The Registrant, indirectly through its investment in the Affiliated Investment Funds, pays each Trading Advisor a monthly management fee and an incentive fee accrued monthly and paid quarterly.

 

   Management  Incentive
Trading Advisor  Fee  Fee
       
Eagle   2.00%   25.00%
Ellington   0.00%   30.00%
Fort*   2.00%   20.00%
Global**   2.00%   20.00%
Red Oak   2.00%   20.00%
Saxon**   0.00%   25.00%

 

* The Registrant subscribed to CTA Choice FRT as of August 1, 2014.

** The Registrant fully redeemed from CTA Choice GLAGS and CTA Choice SAXN as of December 31, 2014.

 

New High Net Trading Profits” (for purposes of calculating a Trading Advisor’s incentive fees) will be computed as of the close of business of the last day of each calendar quarter (the “Incentive Measurement Date”) and will include such profits (as outlined below) since the immediately preceding Incentive Measurement Date (or, with respect to the first Incentive Measurement Date, since commencement of operations of the Registrant or the date the Trading Advisor commenced trading activities for the Registrant), each an Incentive Measurement Period. New High Net Trading Profits for any Incentive Measurement Period will be the net profits, if any, from the Trading Advisor’s trading during such period (including (i) realized trading profit (loss) plus or minus (ii) the change in unrealized trading profit (loss) on open positions), and will be calculated after the determination of certain transaction costs attributable to the Trading Advisor’s trading activities, operating expenses, and the Trading Advisor’s management fee, but before deduction of any incentive fees payable during the Incentive Measurement Period. New High Net Trading Profits will not include interest earned or credited on the assets allocated to the Trading Advisor.

 

New High Net Trading Profits will be generated only to the extent that the cumulative New High Net Trading Profits achieved by the Trading Advisor exceed the highest level of cumulative New High Net Trading Profits achieved by such Trading Advisor as of a previous Incentive Measurement Date. Except as set forth below, net losses from prior months must be recouped before New High Net Trading Profits can again be generated.

 

If a withdrawal or distribution occurs or if a Trading Advisor’s advisory agreement with the relevant CTA Fund is terminated at any date that is not an Incentive Measurement Date, the date of the withdrawal or distribution or termination will be treated as if it were an Incentive Measurement Date. New High Net Trading Profits for an Incentive Measurement Period shall exclude capital contributions allocated to the Trading Advisor in an Incentive Measurement Period, distributions or redemptions paid or payable from the Trading Advisor’s account during an Incentive Measurement Period and any loss carry-forward attributable to the Trading Advisor will be reduced in the same proportion that the value of the assets allocated away from the Trading Advisor comprises of the value of the assets allocated to the Trading Advisor prior to such allocation away from the Trading Advisor. In calculating New High Net Trading Profits, incentive fees paid for a previous Incentive Measurement Period will not reduce cumulative New High Net Trading Profits in subsequent periods.

 

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Brokerage Commissions and Fees

 

The Registrant indirectly pays to the clearing brokers all brokerage commissions, including applicable exchange fees, National Futures Association (“NFA”) fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with the Registrant’s trading activities. These activities are charged indirectly through the Registrant’s Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds. On average, total charges paid to the clearing brokers are expected to be less than $10.00 per round-turn trade, although the clearing broker’s brokerage commissions and trading fees will be determined on a contract-by-contract basis. The exact amount of such brokerage commissions and trading fees to be incurred is impossible to estimate and will vary based upon a number of factors including the trading frequency of each Trading Advisor, the types of instruments traded, transaction sizes, degree of leverage employed and transaction rates in effect from time to time.

 

Routine Operational, Administrative and Other Ordinary Expenses

 

The Registrant pays directly or indirectly all of its routine operational, administrative and other ordinary expenses, including, but not limited to, (i) legal, bookkeeping, accounting, custodial, administration (including, without limitation, the costs and expenses of the Administrator), auditing, tax preparation charges and related charges of the Registrant (including reimbursement of the Managing Owner on a reasonable time-spent basis, for certain legal, accounting, administrative and registrar and transfer agent work performed by certain of the Managing Owner’s personnel for and on behalf of the Registrant), as well as printing and other related expenses, (ii) investment related expenses, including, but not limited to brokerage commissions, “bid-ask” spreads, mark-ups, margin interest and other transactional charges and clearing fees, as well as banking, sales and purchase commissions and charges and exchange fees, fees and charges of other custodians and clearing agencies, interest and commitment fees on loans and debit balances, income taxes, withholding taxes, transfer taxes and other governmental charges and duties, and other transactional charges and clearing fees incurred by the Trading Advisor on behalf of the Registrant, the Registrant’s pro rata share of the expenses of any Affiliated Investment Fund into which it invests, and any due diligence expenses incurred in selecting and monitoring the Trading Advisor and any Affiliated Investment Fund, (iii) operational and overhead expenses of the Registrant, including but not limited to, photocopying, postage, and telephone expenses, (iv) preparation of monthly, quarterly, annual and other reports required by applicable Federal and state regulatory authorities, (v) the Registrant’s meetings and preparing, printing and mailing of proxy statements and reports to Unitholders, (vi) client relations and services, and (vii) computer equipment, system maintenance and other technology-related expenses.

 

Extraordinary Fees and Expenses

 

The Registrant pays all its extraordinary fees and expenses, if any, and its allocable portion of all extraordinary fees and expenses of the Registrant generally, if any, as determined by the Managing Owner. Extraordinary fees and expenses are fees and expenses that are non-recurring and unusual in nature, such as legal claims and liabilities and litigation costs and any permitted indemnification payments related thereto. Extraordinary fees and expenses shall also include material expenses that are not currently anticipated obligations of the Registrant or of managed futures funds in general, such as the payment of partnership taxes or governmental fees associated with payment of such taxes. Routine operational, administrative and other ordinary expenses will not be deemed extraordinary expenses. Any fees and expenses imposed on the Registrant due to the status of an individual shall be paid by such individual or the Registrant, not the Managing Owner.

 

Competition

 

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

 

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

 

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Employees

 

The Registrant has no employees. Management and administrative services for the Registrant are performed by the Managing Owner or third parties pursuant to the Trust Agreement, as further discussed in Notes 3, 4, 5, 6 and 8 of the Registrant’s 2014 Annual Report, which is filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2014.

 

Financial Information about Segments

 

The Registrant’s business constitutes only one segment for financial reporting purposes. The Registrant does not engage in the production or sale of any goods or services. The objective of the Registrant’s business is appreciation of its assets through speculative trading in commodity interests. Financial information about the Registrant’s business, as of March 31, 2015, is set forth under Items 2 and 3 herein.

 

Financial Information about Geographic Areas

 

Although the Registrant has indirect exposure to the global futures, forward and option markets, it does not have operations outside of the United States.

 

Available Information

 

The Registrant files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission (the “SEC”). You may read and copy any document filed by the Registrant at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The Registrant does not maintain an internet website; however, the Registrant’s SEC filings are available to the public from the EDGAR database on the SEC’s website at http://www.sec.gov. The Registrant’s CIK number is 0001345991.

 

Critical Accounting Policies

 

General

 

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

 

The Managing Owner has evaluated the Registrant’s condensed financial statements and related disclosures and has determined that the policies discussed below are critical accounting policies because they involve estimates, judgments and assumptions that are particularly complex, subjective or uncertain. For further discussion of the Registrant’s significant accounting policies, see Note 2 of the Registrant’s 2014 Annual Report, which is filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2014.

 

The Registrant records all investments at fair value in its condensed financial statements, with changes in fair value reported in the condensed statements of operations. Generally, fair values are based on quoted market prices; however, in certain circumstances, significant judgments and estimates are involved in determining fair value in the absence of an active market closing price. The Registrant considers its investments in publicly-traded mutual funds to be based on quoted prices in active markets for identical assets (Level 1). Level 3 inputs reflect the Registrant’s assumptions that it believes market participants would use in pricing the asset or liability. The Registrant develops Level 3 inputs based on the best information available in the circumstances, which may include indirect correlation to a market value, combinations of market values or the Registrant’s proprietary data. Level 3 inputs generally include information derived through extrapolation or interpolation of observable market data. The Registrant does not currently have any investments valued using Level 3 inputs.

 

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The investment in Affiliated Investment Funds is reported in the Registrant’s condensed statements of financial condition and is considered a Level 2 investment. In determining the level, the Registrant considers the length of time until the investment is redeemable, including notice and lock-up periods or any other restriction on the disposition of the investment. The Registrant also considers the nature of the portfolios of the underlying Affiliated Investment Funds and their ability to liquidate their underlying investments. The Registrant has the ability to redeem its investments at the reported net asset valuation as of the measurement date (see Note 7 of the Registrant’s 2014 Annual Report, which is filed as an exhibit to the Registrant’s Form 10-K for the fiscal year ended December 31, 2014) and classified its investment in Affiliated Investment Funds as Level 2 using the fair value hierarchy. Fair value ordinarily is the value determined for the Affiliated Investment Funds in accordance with the fund’s valuation policies and reported at the time of the Registrant’s valuation by the management of the fund. Generally, the fair value of the Registrant’s investment in the Affiliated Investment Funds represents the amount that the Registrant could reasonably expect to receive from the Affiliated Investment Funds if the Registrant’s investment was redeemed at the time of the valuation, based on information reasonably available at the time the valuation is made and that the Registrant believes to be reliable.

 

Of the Registrant’s investments at March 31, 2015, $8,845,572 or 57.54% were classified as Level 1 and $6,526,983 or 42.46% as Level 2. Of the Registrant’s investments at December 31, 2014, $10,187,034 or 71.39% were classified as Level 1 and $4,083,278 or 28.61% as Level 2. There were no Level 3 investments at March 31, 2015 or December 31, 2014, nor any portion of the interim periods.

 

The Registrant invests a portion of the excess cash balances not required for margin through certain investment funds which invest in (i) U.S. government securities (which include any security issued or guaranteed as to principal or interest by the United States), (ii) any certificate of deposit for any of the foregoing, including U.S. treasury bonds, U.S. treasury bills and issues of agencies of the United States government, (iii) corporate bonds or notes, or (iv) other instruments permitted by applicable rules and regulations (collectively, “Certain Investment Funds”). The objective is to obtain a rate of return for the Registrant that balances risk and return relative to the historically low yields on short-term cash deposits with banks and/or brokerage firms. There is no guarantee that the Managing Owner will be successful in investing the excess cash successfully to obtain a greater yield than available on short-term cash deposits with banks and/or brokerage firms. The Managing Owner is paid monthly 1/12th of 50% of the first 1% of the positive returns earned on the Registrant’s investments in Certain Investment Funds. The calculation is based on the Registrant’s average annualized Net Asset Value, and any losses related to returns on the Certain Investment Funds must first be recovered through subsequent positive returns prior to the Managing Owner receiving a payment. After the calculation of the amount payable to the Managing Owner, the Registrant will be credited with all additional positive returns (or 100% of any losses) on the Registrant’s investment in Certain Investment Funds. If, at the end of any calendar year, a loss has been incurred on the returns for the Certain Investment Funds, then the loss carry forward will reset to zero for the next calendar year with regards to the calculation of the Managing Owner’s portion of the Certain Investment Fund’s income.

 

Liquidity and Capital Resources

 

The Registrant commenced operations on December 1, 2005 with gross proceeds of $31,024,443 allocated to commodities trading. Additional contributions raised through the continuous offering of limited units (“Limited Units”) and general units (“General Units” or “Managing Owner Units” and, together with the Limited Units, “Units”) of beneficial ownership in the Registrant for the period from December 1, 2005 (commencement of operations) to March 31, 2015 resulted in additional gross proceeds to the Registrant of $195,857,057.

 

Limited Units in the Registrant may be redeemed on a monthly basis. Subscriptions were no longer accepted effective December 2013.

 

Subscriptions and Redemptions

 

First Quarter 2015

 

Subscriptions of Limited Units for the First Quarter 2015 were $0. Redemptions of Limited Units for the First Quarter 2015 were $555,831.

 

First Quarter 2014

 

Subscriptions of Limited Units for the First Quarter 2014 were $0. Redemptions of Limited Units for the First Quarter 2014 were $22,601,036.

  

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Liquidity

 

A portion of the Registrant’s net assets is held in cash, which is used as margin for its indirect trading in commodities through its investment in Affiliated Investment Funds. 

 

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

 

Since the Registrant’s business is to trade futures, forward and option contracts through its investment in Affiliated Investment Funds, its capital is at risk due to changes in the value of these contracts (market risk) or the inability of counterparties to perform under the terms of the contracts (credit risk). The Registrant’s exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Registrant’s speculative trading as well as the development of drastic market occurrences could result in losses considerably beyond the Registrant’s experience to date and could ultimately lead to a loss of all or substantially all of Unitholders’ capital. The Managing Owner attempts to minimize these risks by requiring the Registrant and the Trading Advisors to abide by various trading limitations and policies, which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note 10 of the Registrant’s 2014 Annual Report for a further discussion on the credit and market risks associated with the Registrant’s futures, forwards and option contracts held indirectly through its investment in Affiliated Investment Funds.

 

There are no known material trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Registrant’s liquidity increasing or decreasing in a material way. 

 

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

 

Market Overview

 

Following is a market overview for the First Quarter 2015 and the First Quarter 2014:

 

First Quarter 2015

 

Currencies took in the spotlight during the 1st quarter of 2015 with the U.S. dollar the primary beneficiary. Despite shifting expectations for the exact timing of the first interest rate hike since 2006, the general consensus remains that the Federal Reserve will move this year and this bullish consensus pushed the U.S. dollar to multi-year highs against many developed and emerging currencies where monetary easing is still very much intact. Particularly hard-hit was the euro as it fell to 12-year lows against the greenback as the ECB began its aggressive monetary stimulus program that is expected to last well into 2016. In fact, during the first quarter, over 20 central banks have cut rates or eased policy to stimulate growth and stave off inflation. This divergence offered substantial opportunity with the quarter’s largest profits accumulated on positions in currencies.

 

Overall trading in global bond markets was also profitable. In the U.S., despite expectations that the Federal Reserve would hike rates in 2015, bond prices rose amid speculation that a global slowdown and very weak inflation readings in the U.S. would allow the Fed to keep rates lower for longer. Further, markets benefited from safe-haven buying on political turmoil in Greece and the search for yield as rates elsewhere fell to record lows. This was notably the case in the German bund where prices trended strongly during the first quarter pushing yields to record lows. Japanese Government bond prices ended the quarter essentially unchanged. Overall, global equity markets recorded gains. While the move in U.S. equity indices was constrained on expectations for higher rates, stock indices in Europe and Japan moved higher supported by continued monetary stimulus.

 

In commodity markets, crude prices consolidated but ultimately ended the month lower on bearish factors including: an unprecedented glut in U.S. inventories; expectations that Iran would increase production following a successful nuclear deal; and a decline in China imports. In metals markets, gold prices vacillated over the period on shifting expectations for U.S. Federal Reserve actions. In the base metals, copper and aluminum ended the month lower on fears of waning China demand. In grains, wheat, corn and bean prices all ended the quarter lower on ample supply. Tropical markets also ended the quarter weaker.

 

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First Quarter 2014

 

The market was volatile in the first quarter and it was a more difficult environment for trading, as compared to 2013. Political unrest and the prospect of higher interest rates gave indications that the market regime may be changing.

 

Market movers over the quarter included the progress of Abenomics, the pace of Federal Reserve tapering, outlook for growth in developed and emerging markets and, late in the quarter, the outbreak of Ukraine-Russian tensions. The situation in the Crimea had a particularly strong impact on global commodities.

 

After a euphoric end to the year, global equity markets began the first quarter on a depressed note as risk aversion swept through the marketplace. China growth concerns combined with emerging market turmoil diminished investor enthusiasm. In February, the United States (“U.S”) rally resumed strongly while European and Pacific Rim markets generally lagged. Thereafter, the major equity markets generally offered little opportunity. Consistent with the equity rout in January, global bond markets rallied in January as investors sought a safe haven. Thereafter, global bond markets settled in to a period of consolidation as investors weighed growth prospects.

 

In currency markets, after a long period of coordinated global central bank activity, the first quarter witnessed the beginnings of actual and anticipated policy decoupling. The Royal Bank of New Zealand was the first central bank to tighten in March and stronger growth in the UK increased expectations they could be next to follow. In the U.S., a mixed message from Federal Reserve Chairman Yellen initially kept the U.S. dollar in a narrow trading range but positive economic reports combined with safe haven buying, as Ukraine-Russian tensions intensified, supported the greenback later. Europe at the other end of the spectrum continued to struggle due to weakness in many Eurozone countries outside of Germany. The euro has nonetheless rallied confounding efforts to use devaluation to support the economies in this zone. In Japan, after a successful weakening of the currency for much of the fourth quarter 2013, investors sought out the safe haven currency putting a temporary halt to its decline.

 

A variety of events impacted the commodity markets including strikes in South Africa, Ukraine-Russian tensions, freezing temperatures in the U.S., and drought in South America. The strongest moves during the quarter were witnessed in the traditional commodity markets: grain, meats and tropicals. In grains, prices of corn and wheat moved sharply higher on concerns of supply disruptions out of Ukraine, aptly named the European Bread Basket, as it is a major exporter in these markets. Prices of soybeans also rallied sharply as weather concerns in Brazil led to worries over near-term supply amid strong demand. Dry weather Brazil also sent coffee prices sharply higher. Finally, in meats, the outbreak of PED propelled hog prices.

 

Sector Performance

 

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

 

(a)    the major sectors to which the Registrant’s assets were allocated indirectly as of the First Quarter 2015 and the First Quarter 2014, measured as a percentage of the “gross speculator margin” (i.e., the minimum amount of cash or marginable securities a speculator must post when buying or selling futures assets); and

 

(b)    a discussion of the Registrant’s trading results for the major sectors in which the Registrant traded indirectly for the First Quarter 2015 and the First Quarter 2014.

 

First Quarter 2015

 

As of March 31, 2015, the allocation of the Registrant’s assets, through its investment in Affiliated Investment Funds, to major sectors was as follows:

 

Sector  Allocation
    
Currencies   16.35%
Energies   27.80%
Grains   5.72%
Indices   26.57%
Interest Rates   16.15%
Meats   0.37%
Metals   3.27%
Tropicals   3.77%
      
TOTAL   100.00%

 

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Trading results for the major sectors in which the Registrant traded indirectly for the First Quarter 2015 were as follows:

 

Currencies: (+) Registrant experienced the majority of its gains in the euro, euro/yen cross, Dollar Index Canadian and Australian Dollars. The majority of losses were incurred in the Swiss franc.

 

Interest Rates: (+) Registrant experienced the majority of its gains in the U.S. 5-years and Australian, Canadian and German 10-year bonds. The majority of losses were incurred in U.S. 2- and 10-years, JGB and Euroswiss markets.

 

Indices: (+) Registrant experienced the majority of its gains in the Nikkei, EuroStoxx 50, S&P 500, Nasdaq and Stockholm indices. The majority of losses were incurred in the Kospi and All Share indices.

 

Energies: (-) Registrant experienced no gains. The majority of losses were in crude oil and natural gas.

 

Metals: (-) Registrant experienced the majority of its gains in aluminum and copper. The majority of losses were incurred in gold and silver.

 

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

 

Tropicals: (+) Registrant realized the majority of its gains in sugar. The majority of losses were incurred in coffee.

 

Meats: (+) Registrant experienced the majority of its gains in live hogs. The majority of losses were incurred in live cattle.

 

First Quarter 2014

 

As of March 31, 2014, the allocation of the Registrant’s assets, through its investment in Affiliated Investment Funds, to major sectors was as follows:

 

Sector  Allocation
    
Currencies   22.09%
Energies   14.80%
Grains   26.80%
Indices   10.89%
Interest Rates   14.65%
Meats   0.24%
Metals   9.18%
Tropicals   1.35%
      
TOTAL   100.00%

 

Trading results for the major sectors in which the Registrant traded indirectly for the First Quarter 2014 were as follows:

 

Currencies: (-) The Registrant experienced a majority of its gains in the Canadian dollar and Brazilian real. The majority of its losses were incurred in the Euro and Japanese yen.

 

Energies: (-) The Registrant experienced a majority of its gains in natural gas. The majority of losses were incurred in RBOB gasoline.

 

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

 

Indices: (-) The Registrant experienced no gains. The majority of losses were incurred in European and Pacific Rim indices.

 

Interest Rates: (-) The Registrant experienced a majority of its gains in U.S. rates. The majority of its losses were incurred in European rates.

 

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Meats: (-) The Registrant experienced a majority of its gains in live cattle. The majority of its losses were incurred in live hogs.

 

Metals: (-) The Registrant experienced a majority of its gains in palladium. The majority of its losses were incurred in gold and silver.

 

Tropicals: (+) The Registrant experienced a majority of its gains in coffee. The majority of its losses were incurred in cocoa.

 

Results of Operations

 

First Quarter 2015

 

The Net Asset Value per Unit of Class I as of March 31, 2015 was $93.49, an increase of $4.16 from the December 31, 2014 Net Asset Value of $89.33.

 

The Net Asset Value per Unit of Class II as of March 31, 2015 was $108.23, an increase of $5.29 from the December 31, 2014 Net Asset Value of $102.94.

 

The following table discloses each Trading Advisor’s contribution to the Net Asset Values of Class I and Class II for the First Quarter 2015, as well as the allocation of the Registrant’s assets to each Trading Advisor at March 31, 2015. The table is based on the effect of a Unitholder that held Units for the First Quarter 2015, and is based on the average contribution per Trading Advisor and net expenses for the relevant Class of Units.

 

WMT III Series J - Class I  WMT III Series J - Class II   
Beginning UNAV $89.33   Beginning UNAV $102.94   Allocation of Assets
as of March 31, 2015
CTA Choice EGLG   1.50   CTA Choice EGLG   1.73    24.83%
CTA Choice ELL   0.95   CTA Choice ELL   1.09    24.88%
CTA Choice FRT   0.26   CTA Choice FRT   0.30    24.96%
CTA Choice RDOK  2.33   CTA Choice EGLG   2.68    25.33%
Net Expenses   (0.88)  Net Expenses   (0.51)     
ENDING UNAV $93.49   ENDING UNAV $108.23    100.00%

 

The Registrant’s average net asset level for the First Quarter 2015 was approximately $15,856,000, a decrease of approximately $21,314,000 as compared to the First Quarter 2014, primarily due to the effect of investor redemptions and negative trading performance.

 

The Registrant’s performance for Class I and Class II for the First Quarter 2015 was 4.66% and 5.14%, respectively. Performance includes the percentage change in the Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of investment gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

 

The Registrant’s total gain from its investment in securities for the First Quarter 2015 was approximately $49,000.

 

The Registrant’s total gain from its investment in Affiliated Investment Funds for the First Quarter 2015 was approximately $886,000.

 

Dividend income for the First Quarter 2015 was approximately $22,000, a decrease of approximately $43,000, as compared to the First Quarter 2014.

 

Brokerage commissions and other transaction fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds for the First Quarter 2015 were approximately $33,000, a decrease of approximately $61,000, as compared to the First Quarter 2014.

 

Management fees to the Trading Advisors, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the First Quarter 2015 were approximately $61,000, a decrease of approximately $59,000 as compared to the First Quarter 2014, primarily due to the decrease in the average net asset level discussed above.

 

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Management fees to the Managing Owner for the First Quarter 2015 were approximately $20,000, a decrease of approximately $32,000 as compared to the First Quarter 2014, primarily due to the decrease in the average net asset level discussed above.

 

Trading Advisor incentive fees are based on the New High Net Trading Profits generated by the Trading Advisors, as defined in the Trading Advisory Agreements between the Registrant and the Trading Advisors. Trading Advisor incentive fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the First Quarter 2015 were approximately $188,000.

 

An administrative services fee, which is indirectly paid to ClariTy for risk management and related services with respect to monitoring the Trading Advisors through the Affiliated Investment Funds and reflected within the respective net asset values of each of the Affiliated Investment Funds, for the First Quarter 2015 was approximately $10,000, a decrease of approximately $16,000 as compared to the First Quarter 2014, primarily due to the decrease in the average net asset level discussed above.

 

Service fees for the First Quarter 2015 were approximately $72,000, a decrease of approximately $109,000 as compared to the First Quarter 2014, primarily due to the decrease in the average net asset level discussed above.

 

Sales commissions for the First Quarter 2015 were approximately $40,000, a decrease of approximately $64,000 as compared to the First Quarter 2014, primarily due to the decrease in the average net asset level discussed above.

 

Managing Owner interest earned on Certain Investment Funds for the First Quarter 2015 was approximately $10,000, a decrease of approximately $30,000, as compared to the First Quarter 2014.

 

Operating expenses were approximately $80,000 for the First Quarter 2015. These expenses include accounting, audit, registrar and transfer agent, tax and legal fees, as well as printing and postage costs related to reports sent to Unitholders.

 

Offering costs were $0 for the First Quarter 2015.

 

First Quarter 2014

 

The Net Asset Value per Unit of Class I as of March 31, 2014 was $83.76, a decrease of $10.04 from the December 31, 2013 Net Asset Value of $93.80.

 

The Net Asset Value per Unit of Class II as of March 31, 2014 was $95.16, a decrease of $10.87 from the December 31, 2013 Net Asset Value of $106.03.

 

The following table discloses each Trading Advisor’s contribution to the Net Asset Values of Class I and Class II for the First Quarter 2014, as well as the allocation of the Registrant’s assets to each Trading Advisor at March 31, 2014. The table is based on the effect of a Unitholder that held Units for the First Quarter 2014, and is based on the average contribution per Trading Advisor and net expenses for the relevant Class of Units.

 

WMT III Series J - Class I  WMT III Series J - Class II   
Beginning UNAV  $93.80   Beginning UNAV  $106.03   Allocation of Assets
as of March 31, 2014
CTA Choice EGLG   (3.51)  CTA Choice EGLG   (3.96)   20.34%
CTA Choice ELL   (1.33)  CTA Choice ELL   (1.51)   19.80%
CTA Choice GLAGS   (3.06)  CTA Choice GLAGS   (3.45)   19.87%
CTA Choice RDOK   (1.08)  CTA Choice RDOK   (1.22)   20.20%
CTA Choice SAXN   (0.30)  CTA Choice SAXN   (0.34)   19.79%
Net Expenses   (0.76)  Net Expenses   (0.39)     
ENDING UNAV  $83.76   ENDING UNAV  $95.16    100.00%

 

The Registrant’s average net asset level for the First Quarter 2014 was approximately $37,170,000, a decrease of approximately $55,639,000 as compared to the First Quarter 2013, primarily due to the effect of investor redemptions and negative trading performance.

 

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The Registrant’s performance for Class I and Class II for the First Quarter 2014 was (10.70)% and (10.26)%, respectively. Performance includes the percentage change in the Registrant’s Net Asset Value excluding the effect of any subscriptions and redemptions and includes the percentage impact of investment gains/(losses) less any commissions and related fees and expenses. Past performance is not necessarily indicative of future results.

 

The Registrant’s total gain from its investment in securities for the First Quarter 2014 was approximately $55,000.

 

The Registrant’s total loss from its investment in Affiliated Investment Funds for the First Quarter 2014 was approximately $4,036,000.

 

Dividend income for the First Quarter 2014 was approximately $65,000, a decrease of approximately $102,000, as compared to the First Quarter 2013.

 

Brokerage commissions and other transaction fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds for the First Quarter 2014 were approximately $94,000, a decrease of approximately $81,000, as compared to the First Quarter 2013.

 

Management fees to the Trading Advisors, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective net asset values of each of the Affiliated Investment Funds, for the First Quarter 2014 were approximately $120,000, a decrease of approximately $151,000 as compared to the First Quarter 2013, primarily due to the decrease in the average net asset level discussed above.

 

Management fees to the Managing Owner for the First Quarter 2014 were approximately $52,000, a decrease of approximately $65,000 as compared to the First Quarter 2013, primarily due to the decrease in the average net asset level discussed above.

 

Trading Advisor incentive fees are based on the New High Net Trading Profits generated by the Trading Advisors, as defined in the Trading Advisory Agreements between the Registrant and the Trading Advisors. Trading Advisor incentive fees, which are paid indirectly through the Affiliated Investment Funds and are reflected within the respective Net Asset Values of each of the Affiliated Investment Funds, for the First Quarter 2014 were approximately $0.

 

An administrative services fee, which is indirectly paid to ClariTy for risk management and related services with respect to monitoring the Trading Advisors through the Affiliated Investment Funds and reflected within the respective net asset values of each of the Affiliated Investment Funds, for the First Quarter 2014 was approximately $26,000, a decrease of approximately $33,000 as compared to the First Quarter 2013, primarily due to the decrease in the average net asset level discussed above.

 

Service fees for the First Quarter 2014 were approximately $181,000, a decrease of approximately $232,000 as compared to the First Quarter 2013, primarily due to the decrease in the average net asset level discussed above.

 

Sales commissions for the First Quarter 2014 were approximately $104,000, a decrease of approximately $133,000 as compared to the First Quarter 2013, primarily due to the decrease in the average net asset level discussed above.

 

Managing Owner interest earned on Certain Investment Funds for the First Quarter 2014 was approximately $40,000, a decrease of approximately $23,000, as compared to the First Quarter 2013.

 

Operating expenses were approximately $107,000 for the First Quarter 2014. These expenses include accounting, audit, registrar and transfer agent, tax and legal fees, as well as printing and postage costs related to reports sent to Unitholders.

 

Offering costs were approximately $47,000 for the First Quarter 2014.

 

Inflation

 

Inflation has had no material impact on the operations or on the financial condition of the Registrant from inception through March 31, 2015.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

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

 

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The Registrant’s contractual obligations are with the Managing Owner, the Trading Advisors it accesses through its investment in Affiliated Investment Funds and its commodity broker. Trading Advisor management fees payable by the Registrant to the Trading Advisors through CTA Choice, and management fees payable to the Managing Owner are calculated as a fixed percentage of the Registrant’s Net Asset Value or Allocated Assets. Incentive fees payable by the Registrant to the Trading Advisors through CTA Choice are at a fixed rate, calculated as a percentage of the Registrant’s New High Net Trading Profits (as defined in the Trading Advisory Agreements). As such, the Managing Owner cannot anticipate the amounts to be paid for future periods as Net Asset Values and New High Net Trading Profits are not known until a future date. Commissions payable to the Registrant’s commodity broker are based on a cost per executed trade and, as such, the Managing Owner cannot anticipate the amount that will be required under the brokerage agreement, as the level of executed trades are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party thereto for various reasons. Additionally, since the Registrant does not enter into other long-term debt obligations, capital lease obligations, operating lease obligations or other long-term liabilities that would otherwise be reflected on the Registrant’s condensed statements of financial condition, a table of contractual obligations has not been presented. For a further discussion of the Registrant’s contractual obligations, see Notes 1, 3, 4, 5 and 7 of the Registrant’s 2014 Annual Report, which is filed as an exhibit to the Registrant’s Form 10-K for the year ended December 31, 2014.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Introduction

 

Past Results Not Necessarily Indicative of Future Performance

 

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

 

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

 

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

 

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

 

Standard of Materiality

 

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

 

Quantifying the Registrant’s Trading Value at Risk

 

Quantitative Forward-Looking Statements

 

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

 

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

 

Exchange maintenance margin requirements have been used by the Registrant as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Value at Risk.

 

In the case of market sensitive instruments that are not exchange-traded (almost exclusively currencies in the case of the Registrant), the margin requirements for the approximate estimated equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, estimated dealers’ margins have been used.

 

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

 

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

 

The following table presents the trading value at risk associated with the Registrant’s open positions by market sector through its investment in Affiliated Investment Funds at March 31, 2015 and December 31, 2014. All open position trading risk exposures of the Registrant have been included in calculating the figure set forth below. At March 31, 2015 and December 31, 2014, the Registrant had total capitalizations of approximately $16 million and $16 million, respectively.

 

   March 31, 2015  December 31, 2014
      % of Total     % of Total
Market Sector  Value at Risk  Capitalization  Value at Risk  Capitalization
             
Interest rates  $441,477    2.79%  $391,180    2.50%
Currencies   446,853    2.82%   282,542    1.81%
Commodities   1,118,600    7.07%   756,442    4.84%
Stock indices   726,172    4.59%   262,079    1.68%
                     
Total  $2,733,102    17.27%  $1,692,243    10.83%

 

The following table presents the average trading value at risk of the Registrant’s open positions by market sector for the First Quarter 2015 and the First Quarter 2014 based upon the Registrant’s total average capitalization of approximately $16 million and $37 million, respectively.

 

   First Quarter 2015  First Quarter 2014
      % of Total     % of Total
Market Sector  Value at Risk  Capitalization  Value at Risk  Capitalization
             
Interest rates  $509,854    3.21%  $1,498,152    4.03%
Currencies   461,877    2.91%   844,736    2.27%
Commodities   1,004,530    6.33%   4,027,741    10.84%
Stock indices   657,499    4.14%   1,063,633    2.86%
                     
Total  $2,633,760   16.59%  $7,434,262   20.00%

 

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

 

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

 

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Non-Trading Risk

 

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

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

The following qualitative disclosures regarding the Registrant’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Registrant manages its primary market risk exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

The Registrant’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner and the Trading Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks are one of which could cause the actual results of the Registrant’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Registrant. There can be no assurance that the Registrant’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Unitholders must be prepared to lose all or substantially all of their investment in the Registrant.

 

Based on the trading value at risk at March 31, 2015, the Registrant experienced a net decrease in its value at risk, relative to capitalization levels, as compared with the trading value at risk at December 31, 2014. A net increase in the average trading value at risk, relative to average capitalization levels was experienced during the First Quarter 2015 as compared with the First Quarter 2014.

 

Qualitative Disclosures Regarding Means of Managing Risk Exposure

 

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

 

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

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

The Managing Owner’s management, under the supervision and with the participation of certain officers of the Managing Owner (including the Managing Owner’s President and Chief Operating Officer and Chief Compliance Officer), has evaluated the effectiveness of the Registrant’s disclosure controls and procedures during the First Quarter 2015. Based upon such evaluation, the Managing Owner’s President and Chief Operating Officer and Chief Compliance Officer have concluded that, as of March 31, 2015, the Registrant’s disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Registrant’s internal control over financial reporting (as defined in Rules 13a – 15(f) and 15d – 15(f) under the Exchange Act) during the First Quarter 2015 that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1.A. Risk Factors

  

There have been no changes from risk factors as previously disclosed in the Registrant’s Form 10-K for the fiscal year ended December 31, 2014.

 

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

 

The following table presents sales of unregistered interests (i.e., Managing Owner interests) exempt from registration under Section 4(2) of the Securities Act of 1933 during the period from September 28, 2004 (inception) through March 31, 2015.

  

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

 

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Prior to December 1, 2008 the Registrant was a publicly offered commodity pool and the Managing Owner was required to hold an interest in the Registrant; therefore, sales of the Managing Owner’s interest qualified as unregistered sales of securities. From December 1, 2008 through March 31, 2015, all sales of interest qualify as unregistered sales due to the Registrant offered as a private placement. The aggregate sale of Units in this time period was approximately 0.000 Units amounting to approximately $0.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits:

 

3.1 Fifth Amended and Restated Declaration of Trust Agreement of World Monitor Trust III dated June 30, 2010(incorporated by reference to Exhibit 13.1 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2009)
   
4.2 Subscription Requirements (annexed to the Prospectus as Exhibit B and incorporated by reference to Exhibit 4.2 to the Trust’s Post-Effective Amendment No. 3 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2006)
 
4.3 Subscription instructions, Form of Subscription Agreement and Power of Attorney (annexed to the Prospectus as Exhibit C and incorporated by reference to Exhibit 4.3 to the Trust’s Post-Effective Amendment No. 3 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2006)
 
4.4 Form of Privacy Notices of the Managing Owner dated December 2010 (incorporated by reference to Exhibit 4.4 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2010)
 
10.1 Form of Subscription Escrow Agreement (incorporated by reference to Exhibit 10.1 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)
 
10.2 Form of Advisory Agreement among WMT III Series G/J Trading Vehicle LLC, the Managing Owner and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.2 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)
 
10.3 Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Eagle Trading Systems Inc. (incorporated by reference to Exhibit 10.3 to the Trust’s Post-Effective Amendment No. 6to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
   
10.4 Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Ortus Capital Management (Cayman) Limited (incorporated by reference to Exhibit 10.4 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)
 
10.5 Form of Customer Agreement between the WMT III Series G/J Trading Vehicle LLC and UBS Securities LLC (incorporated by reference to Exhibit 10.5 to the Trust’s Pre-Effective Amendment No. 2 on S-1 Registration Statement, File No. 333-119612, filed with the Commission on March 14, 2005)

 

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10.6 Form of Customer Agreement between the World Monitor Trust III – Series J and UBS Securities LLC(incorporated by reference to Exhibit 10.6 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
   
10.7 Form of FX Prime Brokerage Agreement between UBS AG and WMT III Series G/J Trading Vehicle LLC (incorporated by reference to Exhibit 10.7 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
 
10.8 Form of ISDA Master Agreement between UBS AG and WMT III Series G/J Trading Vehicle LLC, Schedule to ISDA Master Agreement and Credit Support Annex to Schedule (incorporated by reference to Exhibit 10.8 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
 
10.9 Form of FX Prime Brokerage Agreement between UBS AG and World Monitor Trust III – Series J(incorporated by reference to Exhibit 10.9 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)
   
10.10 Form of ISDA Master Agreement between UBS AG and World Monitor Trust III – Series J, Schedule to ISDA Master Agreement and Credit Support Annex to Schedule (incorporated by reference to Exhibit 10.10 to the Trust’s Post-Effective Amendment No. 8 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 25, 2007)
 
10.11 WMT III Series G/J Trading Vehicle LLC Organization Agreement (incorporated by reference to Exhibit 1.1 to the Trust’s Post-Effective Amendment No. 6 to Form S-1 Registration Statement, File No. 333-119612, filed with the Commission on April 10, 2007)
 
10.12 Form of Advisory Agreement among World Monitor Trust III – Series J, the Managing Owner and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.12 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2007)
   
10.13 Form of Services Agreement among World Monitor Trust III – Series J, the Managing Owner and Spectrum Global Fund Administration, L.L.C. (incorporated by reference to Exhibit 10.13 to the Registrant’s annual report on Form 10-K for the year ended December 31, 2007)
   
10.14 Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Tudor Investment Corporation (incorporated by reference to Exhibit 10.9 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on March 26, 2010)
   
10.15 Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Paskewitz Asset Management, LLC (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on March 26, 2010)
   
10.16 Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated November 28, 2008, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Eagle Trading Systems Inc. (incorporated by reference to Exhibit 10.16 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
 
10.17 Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated November 28, 2008, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Graham Capital Management, L.P. (incorporated by reference to Exhibit 10.17 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
 
10.18 Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated July 1, 2009, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Krom River Investment Management (Cayman) Limited and Krom River Trading AG (incorporated by reference to Exhibit 10.18 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on October 1, 2010)
 
10.19 Amendment No. 1 dated September 29, 2010, with an effective date of October 1, 2010, to the Advisory Agreement dated March 24, 2010 by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Paskewitz Asset Management, LLC (incorporated by reference to Exhibit 10.19 to the Registrant’s Form 8-K, File No. 000-5161, filed with the Commission on October 1, 2010)

 

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10.20 Amendment No. 1 dated September 29, 2010, with an effective date of January 1, 2011, to the Advisory Agreement dated May 28, 2009, by and among, World Monitor Trust III – Series J, Kenmar Preferred Investments Corp. and Ortus Capital Management Limited (incorporated by reference to Exhibit 10.20 to the Registrant’s Form 8-K, File No. 000-5161, filed with the Commission on October 1, 2010)
     
10.21 Administrative Services Agreement entered into as of January 27, 2011, by and among GlobeOp Financial Services LLC and World Monitor Trust III – Series J (incorporated by reference to Exhibit 10.21 to the Registrant’s Form 10-Q, filed with the Commission on August 15, 2011)
     
10.22 Middle/Back Office Services Agreement entered into as of January 27, 2011, by and between GlobeOp Financial Services LLC, World Monitor Trust III – Series J and Kenmar  Preferred Investments Corp. (incorporated by reference to Exhibit 10.22 to the Registrant’s Form 10-Q, filed with the Commission on August 15, 2011)
     
14.1 Kenmar Preferred Investments Corp. Code of Ethics (adopted pursuant to Section 406 of Sarbanes Oxley Act of 2002) as of November 29, 2011 (incorporated by reference to Exhibit 14.1 to the Registrant’s annual report to Form 10-K for the year ended December 31, 2011)
     
31.1 Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)  
     
31.2 Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)  
     
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
     
99.1 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on January 4, 2012)
     
99.2 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on August 17, 2012)
     
99.3 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on December 6, 2012)
     
99.4 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on May 6, 2013)
     
99.5 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on September 3, 2013)
   
99.6 Notice to Unitholders regarding certain changes to the ownership and structure of the Registrant’s underlying managers (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K, File No. 000-51651, filed with the Commission on September 3, 2013)
   
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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In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to the Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

[Remainder of page left blank intentionally.]

 

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SIGNATURES

 

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

 

 

WORLD MONITOR TRUST III – SERIES J  
     
By: Kenmar Preferred Investments, LLC,  
  its Managing Owner  

 

  By: /s/ Jim Parrish   Date: May 14, 2015
    Name: Jim Parrish    
    Title: President    
      (Principal Executive Officer)    
         
  By: /s/ David K. Spohr   Date: May 14, 2015
    Name: David K. Spohr    
    Title: Chief Operating Officer and Chief Compliance Officer    
      (Principal Financial/Accounting Officer)    

 

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