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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

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 0-53211

EMERGING CTA PORTFOLIO L.P.

 

(Exact name of registrant as specified in its charter)

 

New York    04-3768983

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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

Yes X  No -

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

Yes X  No -

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

 

Large accelerated filer -

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

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

Yes -  No X

As of July 31, 2016, 58,745.1392 Limited Partnership Class A Redeemable Units were outstanding.


Table of Contents

EMERGING CTA PORTFOLIO L.P.

FORM 10-Q

INDEX

 

         

Page
Number

 

PART I-Financial Information:

  

  Item 1.

 

Financial Statements:

  
 

Statements of Financial Condition at June 30, 2016 and December 31, 2015 (unaudited)

     3   
 

Condensed Schedules of Investments at June 30, 2016 (unaudited) and December 31, 2015

     4–5   
 

Statements of Income and Expenses and Changes in Partners’ Capital for the three and six months ended June 30, 2016 and 2015 (unaudited)

     6   
 

Notes to Financial Statements (unaudited)

     7–22   

  Item 2.

 

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

     23–25   

  Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     26–30   

  Item 4.

 

Controls and Procedures

     31   

PART II-Other Information:

  

  Item 1.

 

Legal Proceedings

     32-39   

  Item 1A.

 

Risk Factors

     40   

  Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     40   

  Item 3.

 

Defaults Upon Senior Securities

     40   

  Item 4.

 

Mine Safety Disclosures

     40   

  Item 5.

 

Other Information

     40   

  Item 6.

 

Exhibits

     41–43   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Emerging CTA Portfolio L.P.

Statements of Financial Condition

(Unaudited)

 

     June 30,
2016
     December 31,
2015
 

Assets:

     

Investment in the Funds(1), at fair value

     $         54,018,036           $       62,285,375     
  

 

 

    

 

 

 

Equity in trading account:

     

Investment in U.S. Treasury bills, at fair value (amortized cost $0 and $11,248,961 at June 30, 2016 and December 31, 2015, respectively)

     -               11,248,588     

Cash at MS&Co.

     25,820,991           15,654,546     

Cash margin

     2,839,555           8,133,817     

Net unrealized appreciation on open futures contracts

     281,970           146,134     

Net unrealized appreciation on open forward contracts

     173,251           -         
  

 

 

    

 

 

 

Total equity in trading account

     29,115,767           35,183,085     
  

 

 

    

 

 

 

Cash at bank

     607           -         

Interest receivable

     4,736           2,130     
  

 

 

    

 

 

 

Total assets

     $ 83,139,146           $ 97,470,590     
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Net unrealized depreciation on open forward contracts

     $ -               $ 678,352     

Accrued expenses:

     

Ongoing selling agent fees

     138,565           161,320     

Management fees

     104,105           127,306     

General Partner fees

     69,181           80,498     

Professional fees

     122,021           194,123     

Redemptions payable to General Partner

     211,129           -         

Redemptions payable to Limited Partners

     3,933,167           1,900,350     
  

 

 

    

 

 

 

Total liabilities

     4,578,168           3,141,949     
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, Class A, 652.4816 and 814.5646 Redeemable Units outstanding at June 30, 2016 and December 31, 2015, respectively

     849,924           1,081,872     

Limited Partners, Class A, 59,658.3342 and 70,207.4852 Redeemable Units outstanding at June 30, 2016 and December 31, 2015, respectively

     77,711,054           93,246,769     
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     78,560,978           94,328,641     
  

 

 

    

 

 

 

Total liabilities and partners’ capital

     $ 83,139,146           $ 97,470,590     
  

 

 

    

 

 

 

Net asset value per Redeemable Unit, Class A

     $ 1,302.60           $ 1,328.16     
  

 

 

    

 

 

 

 

  (1)

Defined in Note 1.

 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

3


Table of Contents

Emerging CTA Portfolio L.P.

Condensed Schedule of Investments

June 30, 2016

(Unaudited)

 

     Notional ($) /
Number of
Contracts
     Fair Value      % of Partners’
Capital
 

Futures Contracts Purchased

        

Currencies

     8           $ 1,085           0.00   *% 

Energy

     3           2,640           0.00  

Grains

     5           856           0.00  

Indices

     121           39,798           0.05     

Interest Rates U.S.

     165           343,160           0.44     

Interest Rates Non-U.S.

     811           780,000           0.99     

Livestock

     1           265           0.00  

Metals

     4           26,830           0.04     

Softs

     1           (616)          (0.00) 
     

 

 

    

 

 

 

Total futures contracts purchased

        1,194,018           1.52     
     

 

 

    

 

 

 

Futures Contracts Sold

        

Grains

     22           21,000           0.03     

Indices

     165           (27,638)          (0.04)    

Interest Rates U.S.

     301           (799,852)          (1.02)    

Interest Rates Non-U.S.

     482           (63,576)          (0.08)    

Metals

     24           (42,050)                      (0.05)    

Softs

     1           68           0.00  
     

 

 

    

 

 

 

Total futures contracts sold

        (912,048)          (1.16)    
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        $ 281,970           0.36  
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

     $ 14,248,923           $ 456,058           0.58  
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        456,058           0.58     
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

     $     14,217,545           (282,807)          (0.36)    
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (282,807)          (0.36)    
     

 

 

    

 

 

 

Net unrealized appreciation on open forward contracts

        $ 173,251           0.22  
     

 

 

    

 

 

 

Investment in the Funds

        

SECOR Master Fund L.P.

        $ 19,792,662           25.20  

Cambridge Master Fund L.P.

        24,551,623           31.25     

CMF Willowbridge Master Fund L.P.

        9,673,751           12.31     
     

 

 

    

 

 

 

Total Investment in the Funds

        $         54,018,036           68.76  
     

 

 

    

 

 

 

* Due to rounding.

 

See accompanying notes to financial statements.

 

4


Table of Contents

Emerging CTA Portfolio L.P.

Condensed Schedule of Investments

December 31, 2015

 

     Notional ($) /
Number of
Contracts
     Fair Value      % of Partners’
Capital
 

Futures Contracts Purchased

        

Indices

     296           $ 336,594           0.36  

Interest Rates U.S.

     466           (157,655)          (0.17)    

Interest Rates Non-U.S.

     2,635           (450,352)          (0.48)    
           

 

 

    

 

 

 

Total futures contracts purchased

        (271,413)          (0.29)    
           

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     86           3,720           0.00  

Grains

     53           29,813           0.03     

Indices

     446           (89,279)          (0.09)    

Interest Rates U.S.

     732           339,849           0.36     

Interest Rates Non-U.S.

     1,796           204,572           0.22     

Metals

     101           (71,128)          (0.08)    
           

 

 

    

 

 

 

Total futures contracts sold

        417,547           0.44     
           

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        $ 146,134           0.15  
           

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

     $ 8,038,416           $ 422,969           0.45  
           

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        422,969           0.45     
           

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

     $     43,159,674           (1,101,321)          (1.17)    
           

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (1,101,321)          (1.17)    
           

 

 

    

 

 

 

Net unrealized depreciation on open forward contracts

        $ (678,352)          (0.72) 
           

 

 

    

 

 

 

U.S. Government Securities

        

Face Amount

   Maturity Date         

Description

     Fair Value      % of Partners’
Capital
 

$4,250,000

   1/21/2016   

U.S. Treasury bills, 0.19%
(Amortized cost of $4,249,372)

   

     $ 4,249,721           4.51  

$7,000,000

   3/3/2016   

U.S. Treasury bills, 0.015%
(Amortized cost of $6,999,589)

   

     6,998,867           7.42     
           

 

 

    

 

 

 

Total U.S. Government Securities

           $ 11,248,588           11.93  
           

 

 

    

 

 

 

Investment in the Funds

           

SECOR Master Fund L.P.

           $ 22,981,374           24.36  

Cambridge Master Fund L.P.

           24,376,553           25.84     

CMF Willowbridge Master Fund L.P.

           14,927,448           15.82     
           

 

 

    

 

 

 

Total Investment in the Funds

           $         62,285,375                       66.02  
           

 

 

    

 

 

 

* Due to rounding.

See accompanying notes to financial statements.

 

5


Table of Contents

Emerging CTA Portfolio L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
 

 

 

   

 

 

   

 

 

 
    2016     2015     2016     2015  

Investment Income:

       

Interest income

    $ 13,803          $ 478          $ 30,852          $ 1,061     

Interest income allocated from the Funds

    23,547          1,530          57,102          3,454     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    37,350          2,008          87,954          4,515     
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

Expenses allocated from the Funds

    105,830          223,785          234,982          439,228     

Clearing fees related to direct investments

    69,230          48,061          141,484          100,408     

Ongoing selling agent fees

    422,835          536,123          896,972          1,119,697     

Management fees

    316,655          403,224          669,327          845,799     

General Partner fees

    211,073          267,769          447,789          559,392     

Incentive fees

    -              14,893          180,449          767,146     

General Partner incentive fees

    -              (33,177)         -              -         

Professional fees

    105,867          98,931          220,633          259,559     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    1,231,490          1,559,609          2,791,636          4,091,229     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

    (1,194,140)         (1,557,601)         (2,703,682)         (4,086,714)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

       

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

       

Net realized gains (losses) on closed contracts

    (266,558)         (576,998)         (830,668)         (1,215,733)    

Net realized gains (losses) on closed contracts allocated from the Funds

    (1,871,387)         (1,591,811)         (1,177,018)         6,704,007     

Net change in unrealized gains (losses) on open contracts

    275,566          112,322          1,005,422          10,174     

Net change in unrealized gains (losses) on open contracts allocated from the Funds

    631,355          (1,183,408)         2,073,232          (4,038,008)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

    (1,231,024)         (3,239,895)         1,070,968          1,460,440     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (2,425,164)         (4,797,496)         (1,632,714)         (2,626,274)    

Subscriptions - Limited Partners

    35,000          1,071,000          35,000          2,591,000     

Redemptions - General Partner

    (211,129)         -              (211,129)         (75,907)    

Redemptions - Limited Partners

    (7,921,517)         (7,211,657)         (13,958,820)         (13,456,166)    
 

 

 

   

 

 

   

 

 

 

Net increase (decrease) in partners’ capital

    (10,522,810)         (10,938,153)         (15,767,663)         (13,567,347)    

Partners’ capital, beginning of period

    89,083,788          111,998,798          94,328,641          114,627,992     
 

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ capital, end of period

    $ 78,560,978          $ 101,060,645          $ 78,560,978          $ 101,060,645     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Class A Redeemable Unit (60,310.8158 and 76,540.6938 Redeemable Units outstanding at June 30, 2016 and 2015, respectively)

    $ 1,302.60          $ 1,320.35          $ 1,302.60          $ 1,320.35     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per Redeemable Unit, Class A*

    $ (36.43)         $ (59.72)         $ (25.56)         $ (33.95)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average Class A Redeemable Units outstanding

        64,693.0298              79,888.0418              67,337.2770              81,983.6275     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Represents the change in net asset value per Redeemable Unit during the period.

See accompanying notes to financial statements.

 

6


Table of Contents

Emerging CTA Portfolio L.P.

Notes to Financial Statements

(Unaudited)

 

1.

Organization:

Emerging CTA Portfolio L.P. (the “Partnership”) is a limited partnership that was organized on July 7, 2003 under the partnership laws of the State of New York. The objective of the Partnership is to achieve capital appreciation through the allocation of assets to early-stage commodity trading advisors or established advisors employing early-stage strategies, which engage, directly and indirectly through investments in the Funds (defined below), in speculative trading of a diversified portfolio of commodity interests, including futures, option on futures, forward, option on forward, spot and swap contracts, cash commodities and any other rights or interests pertaining thereto. The Partnership may also enter into swap and other derivative transactions directly and through its investments in the Funds with the approval of the General Partner (defined below). The sectors traded include currencies, livestock, lumber, energy, grains, metals, indices, softs and U.S. and non-U.S. interest rates. The commodity interests that are traded by the Partnership and the Funds are volatile and involve a high degree of market risk. The General Partner may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates.

Between December 1, 2003 (commencement of the offering period) and August 5, 2004, 20,872 units of partnership interest in the Partnership (“Redeemable Units”) were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until August 6, 2004, at which time they were remitted to the Partnership for trading. The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

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

As of September 1, 2011, the Partnership began offering three classes of limited partnership interests: Class A Redeemable Units, Class D Redeemable Units and Class Z Redeemable Units; each of which will be referred to as a “Class” and collectively referred to as the “Classes.” All Redeemable Units issued prior to September 1, 2011 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in the Class A Redeemable Units were not changed. Class A Redeemable Units and Class D Redeemable Units are available to taxable U.S. individuals and institutions, as well as U.S. tax exempt individuals and institutions. Class Z Redeemable Units are offered to certain employees of Morgan Stanley and its subsidiaries (and their family members). The Class of Redeemable Units that a limited partner of the Partnership (each a “Limited Partner”) receives upon subscription will generally depend upon the amount invested in the Partnership or the status of the Limited Partner, although the General Partner may determine to offer a particular Class of Redeemable Units to investors at its discretion. As of June 30, 2016, there were no Redeemable Units outstanding in Class D or Class Z.

All trading decisions are made for the Partnership by its trading advisors (the “Advisors”) either directly, through individually managed accounts, or indirectly, through investments in other collective investment vehicles. As of June 30, 2016, The Cambridge Strategy (Asset Management) Limited (“Cambridge”), Centurion Investment Management, LLC (“Centurion”), Perella Weinberg Partners Capital Management LP (“Perella”), SECOR Capital Advisors, LP (“SECOR”) and Willowbridge Associates Inc. (“Willowbridge”) served as the Partnership’s major commodity trading advisors. Prior to the termination of its management agreement effective September 30, 2015, Blackwater Capital Management, LLC (“Blackwater”) also served as one of the Partnership’s major commodity trading advisors. In addition, the General Partner may allocate the Partnership’s assets to additional non-major trading advisors (i.e. commodity trading advisors intended to be allocated less than 10% of the Partnership’s assets). Information about advisors allocated less than 10% of the Partnership’s assets may not be disclosed.

 

7


Table of Contents

Emerging CTA Portfolio L.P.

Notes to Financial Statements

(Unaudited)

 

The General Partner may also allocate less than 10% of the Partnership’s assets to a new trading advisor or another trading program of a current Advisor. The Advisors are not affiliated with one another, are not affiliated with the General Partner or Morgan Stanley & Co. LLC (“MS&Co.”), and are not responsible for the organization or operation of the Partnership. References herein to the “Advisors” may also include, as relevant, references to Blackwater.

During the reporting periods ended June 30, 2016 and 2015, the Partnership’s/Funds’ commodity broker was MS&Co., a registered futures commission merchant. The Partnership/Funds also deposit a portion of their cash in non-trading accounts at JPMorgan Chase Bank, N.A.

The assets allocated to Centurion for trading are traded directly pursuant to Centurion’s Short Term Systemic Strategy Program. Since July 1, 2015, the assets allocated to Perella have been traded directly pursuant to a variation of the program traded by PWP Global Macro Master Fund L.P.

Cambridge Master Fund L.P. (“Cambridge Master”), CMF Willowbridge Master Fund L.P. (“Willowbridge Master”) and SECOR Master Fund L.P (“SECOR Master”) (together with Cambridge Master and Willowbridge Master, the “Funds”) have entered into a futures account agreement with MS&Co. and commenced trading through accounts at MS&Co. PGM Master Fund L.P. (“PGM Master”) (prior to its liquidation on June 30, 2015) and Blackwater Master Fund L.P. (“Blackwater Master”) (prior to its liquidation on September 30, 2015) also entered into a futures brokerage account agreement with MS&Co. Cambridge Master has also, and PGM Master had, entered into a foreign exchange prime brokerage agreement with MS&Co. References to “Funds” included in this report may include, as relevant, PGM Master and Blackwater Master. The Partnership has also entered into a futures brokerage account agreement with MS&Co. The Partnership, directly and through its investment in the Funds, pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of all trading fees for the clearing and, where applicable, execution of transactions as well as exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”).

The Partnership has entered into a selling agreement with Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives an ongoing selling agent fee equal to (i) 2.0% per year of adjusted month-end net assets for Class A Redeemable Units and (ii) 0.75% per year of adjusted month-end net assets for Class D Redeemable Units. The ongoing selling agent fee received by Morgan Stanley Wealth Management is shared with the properly registered/exempted financial advisors of Morgan Stanley Wealth Management who sell Redeemable Units in the Partnership. Class Z Redeemable Units are not subject to an ongoing selling agent fee.

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

In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a master services agreement, the Administrator furnishes certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.

 

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Notes to Financial Statements

(Unaudited)

 

2.

Basis of Presentation and Summary of Significant Accounting Policies:

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at June 30, 2016, and the results of its operations and changes in partners’ capital for the three and six months ended June 30, 2016 and 2015. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2015. The December 31, 2015 information has been derived from the audited financial statements as of and for the year ended December 31, 2015.

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

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

Statement of Cash Flows: The Partnership is not required to provide a Statement of Cash Flows.

Partnership’s Investment in the Funds: The Partnership carries its investment in the Funds, other than its investment in Willowbridge Master, based on the Partnership’s (1) net contribution to the Funds and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of the Funds. The Partnership carries its investment in Willowbridge Master based on Willowbridge Master’s net asset value per unit as calculated by Willowbridge Master.

Partnership’s/Funds’ Derivative Investments: All commodity interests of the Partnership/Funds, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described in Note 5, “Fair Value Measurements”) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Partnership’s/Funds’ Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Partnership’s/Funds’ Statements of Income and Expenses and Changes in Partners’ Capital.

Partnership’s Cash: The Partnership’s cash includes cash denominated in foreign currencies of $593,398 (cost of $575,807) and $472,794 (cost of $473,186) as of June 30, 2016 and December 31, 2015, respectively.

Income Taxes: Income taxes have not been listed as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2012 through 2015 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Investment Company Status: Effective January 1, 2014, the Partnership adopted Accounting Standards Update (“ASU”) 2013-08, “Financial Services — Investments Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Notes to Financial Statements

(Unaudited)

 

Net Income (loss) per unit: Net income (loss) per Redeemable Unit is calculated in accordance with ASU 946, “Financial Services – Investment Companies.” See Note 3, “Financial Highlights.”

Fair Value of Financial Instruments: The carrying value of the assets and liabilities presented in the Statements of Financial Condition that qualify as financial instruments under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, “Financial Instruments,” approximates the fair value due to the short term nature of such balances.

Recent Accounting Pronouncement: In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments for all entities that hold financial assets or owe financial liabilities. One of the amendments in this update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet or a description of changes in the methods and significant assumptions. Additionally, the update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. Investment companies are specifically exempted from ASU 2016-01’s equity investment accounting provisions and will continue to follow the industry specific guidance for investment accounting under Topic 946. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, and interim periods therein. For other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The General Partner is currently evaluating the impact this guidance will have on the Partnership’s financial statements and related disclosures.

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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Notes to Financial Statements

(Unaudited)

 

3.

Financial Highlights:

Financial highlights for the Limited Partner class as a whole for the three and six months ended June 30, 2016 and 2015 were as follows:

Class A

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2016        2015     2016        2015  

Per Redeemable Unit Performance (for a unit outstanding throughout the period):*

              

Net realized and unrealized gains (losses)

     $ (17.97)            $ (40.26)         $ 14.59              $ 15.58      

Net investment loss

     (18.46)            (19.46)         (40.15)            (49.53)    
  

 

 

      

 

 

   

 

 

      

 

 

 

Increase (decrease) for the period

     (36.43)            (59.72)         (25.56)            (33.95)    

Net asset value per Redeemable Unit, beginning of period

     1,339.03            1,380.07         1,328.16            1,354.30    
  

 

 

      

 

 

   

 

 

      

 

 

 

Net asset value per Redeemable Unit, end of period

     $      1,302.60            $     1,320.35         $     1,302.60            $     1,320.35    
  

 

 

      

 

 

   

 

 

      

 

 

 

Ratios to Average Limited Partners’ Capital:**

              

Net investment loss ***

     (5.8)%            (6.0)%         (6.0)%            (6.8)%    
  

 

 

      

 

 

   

 

 

      

 

 

 

Operating expenses

     5.9 %            6.0 %         6.0 %            6.1 %    

Incentive fees

     -                 0.0 %   ****      0.2 %            0.7 %    
  

 

 

      

 

 

   

 

 

      

 

 

 

Total expenses

     5.9 %            6.0 %         6.2 %            6.8 %    
  

 

 

      

 

 

   

 

 

      

 

 

 

Total return:

              

Total return before incentive fees

     2.7 %            (4.3)%         (1.7)%            (1.8)%    

Incentive fees

     -                 0.0 %   ****      (0.2)%            (0.7)%    
  

 

 

      

 

 

   

 

 

      

 

 

 

Total return after incentive fees

     2.7 %            (4.3)%         (1.9)%            (2.5)%    
  

 

 

      

 

 

   

 

 

      

 

 

 

 

*

Net investment loss per Redeemable Unit is calculated by dividing the expenses net of interest income by the average number of Redeemable Units outstanding during the period. The net realized and unrealized gains (losses) per Redeemable Unit is a balancing amount necessary to reconcile the change in net asset value per Redeemable Unit with the other per unit information.

 

**

Annualized (except for incentive fees).

 

***

Interest income less total expenses.

 

****

Due to rounding.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average partners’ capital of the Partnership and includes the income and expenses allocated from the Funds, as applicable.

 

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Notes to Financial Statements

(Unaudited)

 

4.

Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The results of the Partnership’s trading activities are shown in the Statements of Income and Expenses and Changes in Partners’ Capital. The Partnership also invests its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Funds’ trading activities is shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The futures brokerage account agreements with MS&Co. give the Partnership and the Funds the legal right to net unrealized gains and losses on open futures, forward and option contracts on the Statements of Financial Condition. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures, forward and option contracts on the Statements of Financial Condition, as the criteria under ASC 210-20, “Balance Sheet,” have been met.

All of the commodity interests owned by the Partnership are held for trading purposes. All of the commodity interests owned by the Funds are held for trading purposes. The monthly average number of futures contracts traded directly by the Partnership during the three months ended June 30, 2016 and 2015 were 3,358 and 169, respectively. The monthly average number of futures contracts traded directly by the Partnership during the six months ended June 30, 2016 and 2015 were 3,159 and 132, respectively. The monthly average number of option contracts traded directly by the Partnership during the three months ended June 30, 2016 and 2015 were 0 and 155, respectively. The monthly average number of option contracts traded directly by the Partnership during the six months ended June 30, 2016 and 2015 were 0 and 201, respectively. The monthly average notional value of currency forward contracts traded directly by the Partnership during the three months ended June 30, 2016 and 2015 were $25,558,438 and $0, respectively. The monthly average notional value of currency forward contracts traded directly by the Partnership during the six months ended June 30, 2016 and 2015 were $24,778,199 and $0, respectively.

Trading and transaction fees are based on the number of trades executed by the Advisors and the Partnership’s percentage ownership of each respective Fund.

All clearing fees paid to MS&Co. are borne directly by the Partnership for its direct trading and also by the Funds, which are then allocated to the Funds’ limited partners, including the Partnership.

The following tables summarize the gross and net amounts recognized relating to assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of June 30, 2016 and December 31, 2015, respectively.

 

                      Gross Amounts Not Offset in the
Statements of Financial Condition
       

June 30, 2016

  Gross Amounts
Recognized
     Gross Amounts Offset 
in the Statements of
Financial Condition
    Net Amounts
Presented in the
Statements of
   Financial Condition   
    Financial
  Instruments  
    Cash Collateral
  Received/Pledged*  
      Net Amount    

Assets

           

Futures

    $ 1,561,230           $ (1,279,260)         $ 281,970          $ -             $ -            $ 281,970     

Forwards

    456,058           (282,807)         173,251          -             -            173,251     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $           2,017,288           $ (1,562,067)         $             455,221          $ -             $ -            $ 455,221     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (1,279,260)         $             1,279,260           $ -              $ -             $ -            $ -         

Forwards

    (282,807)         282,807           -              -             -            -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (1,562,067)         $ 1,562,067           $ -              $ -             $ -            $ -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Fair Value

              $     455,221  
           

 

 

 

 

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Notes to Financial Statements

(Unaudited)

 

                      Gross Amounts Not Offset in the
Statements of Financial Condition
       

December 31, 2015

      Gross Amounts    
Recognized
      Gross Amounts Offset  
in the Statements of
Financial Condition
    Net Amounts
Presented in the
Statements of
     Financial Condition     
    Financial
    Instruments    
    Cash Collateral
    Received/Pledged*    
       Net Amount     

Assets

           

Futures

    $ 1,789,359           $ (1,643,225)         $ 146,134           $ -            $ -              $ 146,134     

Forwards

    422,969           (422,969)         -              -            -              -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $           2,212,328           $ (2,066,194)         $            146,134           $ -            $ -              $ 146,134      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (1,643,225)         $             1,643,225           $ -              $ -            $ -              $ -        

Forwards

    (1,101,321)         422,969           (678,352)         -            -              (678,352)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (2,744,546)         $ 2,066,194           $ (678,352)         $ -            $ -              $ (678,352)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Fair Value

              $     (532,218) 
           

 

 

 

 

  *

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’s off-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. There is no collateral posted by MS&Co. and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee fund may be available in the event of a default.

 

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Notes to Financial Statements

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts held directly by the Partnership as separate assets and liabilities as of June 30, 2016 and December 31, 2015, respectively.

 

Assets          June 30, 2016        

Futures Contracts

  

Currencies

     $ 1,552      

Energy

     2,640      

Grains

     22,200      

Indices

     377,995      

Interest Rates U.S.

     343,160      

Interest Rates Non-U.S.

     786,520      

Livestock

     265      

Metals

     26,830      

Softs

     68      
  

 

 

 

Total unrealized appreciation on open futures contracts

     1,561,230      
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

     (467)    

Grains

     (344)    

Indices

     (365,835)    

Interest Rates U.S.

     (799,852)    

Interest Rates Non-U.S.

     (70,096)    

Metals

     (42,050)    

Softs

     (616)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     (1,279,260)    
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 281,970   
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

     $ 456,058      
  

 

 

 

Total unrealized appreciation on open forward contracts

     456,058      
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (282,807)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     (282,807)    
  

 

 

 

Net unrealized appreciation on open forward contracts

     $ 173,251    ** 
  

 

 

 

 

  * This amount is included in “Net unrealized appreciation on open futures contracts” in the Statements of Financial Condition.

 

  ** This amount is included in “Net unrealized appreciation on open forward contracts” in the Statements of Financial Condition.

 

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Notes to Financial Statements

(Unaudited)

 

Assets        December 31, 2015      

Futures Contracts

  

Energy

     $ 3,720      

Grains

     29,813      

Indices

     793,699      

Interest Rates U.S.

     339,849      

Interest Rates Non-U.S.

     607,581      

Metals

     14,697      
  

 

 

 

Total unrealized appreciation on open futures contracts

     1,789,359      
  

 

 

 

Liabilities

  

Futures Contracts

  

Indices

     (546,384)    

Interest Rates U.S.

     (157,655)    

Interest Rates Non-U.S.

     (853,361)    

Metals

     (85,825)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     (1,643,225)    
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 146,134   
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

     $ 422,969      
  

 

 

 

Total unrealized appreciation on open forward contracts

     422,969      
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (1,101,321)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     (1,101,321)    
  

 

 

 

Net unrealized depreciation on open forward contracts

     $ (678,352)  ** 
  

 

 

 

*  This amount is included in “Net unrealized appreciation on open futures contracts” in the Statements of Financial Condition.

**This amount is included in “Net unrealized depreciation on open forward contracts” in the Statements of Financial Condition.

The following table indicates the trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the three and six months ended June 30, 2016 and 2015, respectively.

 

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

Sector

   2016     2015     2016     2015  

Currencies

     $ (73,625)         $ 73,075           $ 503,355           $ (34,083)    

Energy

     (146,462)         (400,693)         56,563           (1,078,629)    

Grains

     (48,739)         45,282           (45,619)         18,347      

Indices

     (244,059)         (367,668)         82,097           (270,015)    

Interest Rates U.S.

     (642,244)         26,583           (1,312,257)         48,530      

Interest Rates Non-U.S.

     1,240,488           141,151           1,372,865           189,197      

Livestock

     2,658           (33,281)         415           (17,970)    

Metals

     (71,068)         49,122           (477,678)         (46,545)    

Softs

     (7,941)         1,753           (4,987)         (14,391)    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 9,008      ***      $ (464,676)    ***      $ 174,754      ***      $     (1,205,559)    *** 
  

 

 

   

 

 

   

 

 

   

 

 

 

*** This amount is included in “Total trading results” in the Partnership’s Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Notes to Financial Statements

(Unaudited)

 

5.

Fair Value Measurements:

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

The fair value of exchange-traded futures, option and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

The Partnership and the Funds consider prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of the U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker quotes or pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of June 30, 2016 and December 31, 2015 and for the periods ended June 30, 2016 and 2015, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the reporting periods, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

June 30, 2016

           Total                  Level 1                  Level 2                      Level 3          

Assets

           

Futures

     $ 1,561,230           $ 1,561,230           $ -               $ -        

Forwards

     456,058           -               456,058           -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 2,017,288           $ 1,561,230           $ 456,058           $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 1,279,260           $ 1,279,260           $ -               $ -        

Forwards

     282,807           -               282,807           -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 1,562,067           $     1,279,260           $ 282,807           $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

   Total      Level 1      Level 2      Level 3  

Assets

           

U.S. Treasury bills

     $     11,248,588           $ -               $ 11,248,588           $ -        

Futures

     1,789,359           1,789,359           -               -        

Forwards

     422,969           -               422,969           -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 13,460,916           $ 1,789,359           $ 11,671,557           $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 1,643,225           $ 1,643,225           $ -               $ -        

Forwards

     1,101,321           -               1,101,321           -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 2,744,546           $ 1,643,225           $ 1,101,321           $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Notes to Financial Statements

(Unaudited)

 

6.

Investment in the Funds:

On November 1, 2010, the assets allocated to Blackwater for trading were invested in Blackwater Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in Blackwater Master with cash equal to $15,674,694. Effective September 30, 2015, the Partnership fully redeemed its investment in Blackwater Master for cash equal to $2,233,594.

On September 1, 2012, the assets allocated to Cambridge for trading were invested in Cambridge Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in Cambridge Master with cash equal to $3,000,000. Cambridge Master permits accounts managed by Cambridge using the Asian Markets Alpha Programme and the Emerging Markets Alpha Programme, each a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Cambridge Master. Individual and pooled accounts currently managed by Cambridge, including the Partnership, are permitted to be limited partners of Cambridge Master. The General Partner and Cambridge believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. The General Partner and Cambridge agreed that Cambridge will trade the Partnership’s assets allocated to Cambridge at a level that is up to 1.5 times the amount of assets allocated. The amount of leverage may be increased or decreased in the future. However, in no event will the amount of leverage be greater than 2 times the amount of assets allocated.

Effective January 1, 2013, the assets traded directly by Willowbridge using its wPraxis Futures Trading Approach were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 14,103.3175 units of Willowbridge Master with cash equal to $29,484,306. Willowbridge Master permits accounts managed by Willowbridge using the wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. The General Partner and Willowbridge agreed that Willowbridge will trade the Partnership’s assets allocated to Willowbridge at a level that is up to 3 times the amount of assets allocated.

On August 1, 2013, the assets allocated to SECOR for trading were invested in SECOR Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in SECOR Master with cash equal to $10,000,000. SECOR Master permits accounts managed by SECOR using a variation of the program traded by SECOR Alpha Master Fund L.P., a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of SECOR Master. Individual and pooled accounts currently managed by SECOR are permitted to be limited partners of SECOR Master. The General Partner and SECOR believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. The General Partner and SECOR agreed that SECOR will trade the Partnership’s assets allocated to SECOR at a level that is up to 1.5 times the amount of assets allocated.

On September 1, 2014, the assets allocated to Perella for trading were invested in PGM Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in PGM Master with cash equal to $10,500,000. Effective June 30, 2015, the Partnership fully redeemed its investment in PGM Master for cash equal to $21,222,368 and open commodity futures and forward contracts with a fair value of $(608,710). The Partnership also assumed PGM Master’s liabilities totaling $82,054 in the same transaction. Since July 1, 2015, Perella has traded the assets allocated to it directly in a managed account in the Partnership’s name.

The General Partner is not aware of any material changes to any of the trading programs discussed above during the fiscal quarter ended June 30, 2016.

 

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Notes to Financial Statements

(Unaudited)

 

The Funds’ and the Partnership’s trading of futures, forward and option contracts, as applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. The Funds and the Partnership engage in such trading through commodity brokerage accounts maintained with MS&Co.

Generally, a limited partner in the Funds withdraws all or part of its capital contribution and undistributed profits, if any, from the Funds as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner elects to redeem and informs the Funds. However, a limited partner may request a withdrawal as of the end of any day if such request is received by the General Partner at least three days in advance of the proposed withdrawal day.

Management, General Partner, ongoing selling agent and incentive fees are charged at the Partnership level. All clearing fees are borne by the Partnership directly or by the Funds and allocated to the Funds’ limited partners, including the Partnership. Professional fees are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level.

At June 30, 2016, the Partnership owned approximately 2.5% of Willowbridge Master, 41.3% of SECOR Master and 31.8% of Cambridge Master. At December 31, 2015, the Partnership owned approximately 4.3% of Willowbridge Master, 45.5% of SECOR Master and 40.8% of Cambridge Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of investment in the Funds are approximately the same as they would be if the Partnership traded directly and the redemption rights are not affected.

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

 

     June 30, 2016                             
         Total Assets                      Total Liabilities                     Total Partners’   
Capital
   

SECOR Master

     $ 47,946,513              $ 27,138              $ 47,919,375        

Cambridge Master

     97,750,214              20,560,073              77,190,141        

Willowbridge Master

         390,739,775              1,675,338                389,064,437        
    

 

December 31, 2015

   
         Total Assets                   Total Liabilities                  Total Partners’   
Capital
   

SECOR Master

     $ 50,962,450              $ 464,928              $ 50,497,522        

Cambridge Master

     73,013,433              13,303,511              59,709,922        

Willowbridge Master

     366,002,932              17,302,983              348,699,949        

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

 

     For the three months ended June 30, 2016              
          Net Investment     
     Income (Loss)     
                    Total Trading     
     Results     
                      Net Income       
     (Loss)      
    
                 

SECOR Master

     $ (67,063)             $ (820,318)             $ (887,381)       

Cambridge Master

     (2,337)             (2,101,071)             (2,103,408)       

Willowbridge Master

     (74,889)             (8,464,297)             (8,539,186)       

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

(Unaudited)

 

     For the six months ended June 30, 2016  
          Net Investment     
     Income (Loss)     
           Total Trading      
     Results      
             Net Income        
     (Loss)      
 

SECOR Master

     $ (145,724)          $ 393,562           $ 247,838     

Cambridge Master

     7,573           2,578,583           2,586,156     

Willowbridge Master

     (184,455)          (10,557,807)          (10,742,262)    
     For the three months ended June 30, 2015  
          Net Investment     
     Income (Loss)     
          Total Trading     
     Results     
          Net Income     
     (Loss)     
 

Blackwater Master

     $ (12,900)          $ (455,735)          $ (468,635)    

SECOR Master

     (100,822)          (143,575)          (244,397)    

Cambridge Master

     (36,769)          688,062           651,293     

Willowbridge Master

     (213,266)          (24,855,443)          (25,068,709)    

PGM Master

     (75,668)          (2,446,062)          (2,521,730)    
     For the six months ended June 30, 2015  
          Net Investment     
     Income (Loss)     
          Total Trading     
     Results     
          Net Income     
     (Loss)     
 

Blackwater Master

     $ (23,133)          $ (209,927)          $ (233,060)    

SECOR Master

     (221,230)          2,557,803           2,336,573     

Cambridge Master

     (54,375)          3,200,205           3,145,830     

Willowbridge Master

     (490,804)          (13,622,175)          (14,112,979)    

PGM Master

     (136,430)          (923,314)          (1,059,744)    

Summarized information reflecting the Partnership’s investments in, and the Partnership’s pro-rata share of the results of operations of, the Funds is shown in the following tables.

 

    June 30, 2016     For the three months ended June 30, 2016    

  Investment  

Objective

    Redemptions  
Permitted
 

Funds

  % of
Partnership’s
  Partners’ Capital  
    Fair Value     Income
(Loss)
    Expenses     Net
Income
(Loss)
     
        Clearing
Fees
      Professional  
Fees
       

SECOR Master

    25.20%         $ 19,792,662          $ (336,196)         $ 78,264          $ 8,330          $ (422,790)      

Commodity Portfolio

    Monthly   

Cambridge Master

    31.25%            24,551,623          (661,887)         5,972          6,557          (674,416)      

Commodity Portfolio

    Monthly   

Willowbridge Master

    12.31%         9,673,751          (218,402)         6,173          534          (225,109)      

Commodity Portfolio

    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

      $ 54,018,036          $     (1,216,485)         $     90,409          $ 15,421          $     (1,322,315)        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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Table of Contents
    June 30, 2016     For the six months ended June 30, 2016              
    % of                 Expenses     Net              

Funds

  Partnership’s
 Partners’ Capital 
    Fair Value      Income
(Loss) 
    Clearing
Fees
     Professional 
Fees
    Income
(Loss)
      Investment  
Objective
      Redemptions  
Permitted
 

SECOR Master

    25.20%       $ 19,792,662        $ 242,239         $ 174,428        $ 17,053        $ 50,758         
 
Commodity
Portfolio
  
  
    Monthly   

Cambridge Master

    31.25%        24,551,623         959,917          12,681         13,636         933,600         
 
Commodity
Portfolio
  
  
    Monthly   

Willowbridge Master

    12.31%        9,673,751         (248,840)         15,974         1,210         (266,024)        
 
Commodity
Portfolio
  
  
    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $     54,018,036        $ 953,316         $  203,083        $ 31,899        $ 718,334         
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    December 31, 2015     For the three months ended June 30, 2015              
    % of                 Expenses    

Net

             

Funds

  Partnership’s
Partners’ Capital
    Fair Value     Income
(Loss)
    Clearing
Fees
    Professional
Fees
    Income
(Loss)
    Investment
Objective
    Redemptions
Permitted
 

Blackwater Master

    -             $ -            $ (54,031)        $ 1,167        $ 3,163        $ (58,361)        
 
Commodity
Portfolio
  
  
    Monthly   

SECOR Master

    24.36%        22,981,374         (154,584)         91,476         10,152         (256,212)        
 
Commodity
Portfolio
  
  
    Monthly   

Cambridge Master

    25.84%        24,376,553         453,753          20,316         17,125         416,312         
 
Commodity
Portfolio
  
  
    Monthly   

Willowbridge Master

    15.82%        14,927,448         (573,133)         3,886         464         (577,483)        
 
Commodity
Portfolio
  
  
    Monthly   

PGM Master(a)

    -              -             (2,445,694)         41,893         34,143         (2,521,730)        
 
Commodity
Portfolio
  
  
    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 62,285,375        $   (2,773,689)        $   158,738        $ 65,047        $ (2,997,474)        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    December 31, 2015     For the six months ended June 30, 2015              
    % of                 Expenses     Net              

Funds

  Partnership’s
Partners’ Capital
    Fair Value     Income
(Loss)
    Clearing
Fees
      Professional  
Fees
    Income
(Loss)
    Investment
Objective
    Redemptions
Permitted
 

Blackwater Master

    -             $ -            $ 3,687         $ 2,455        $ 5,950        $ (4,718)        
 
Commodity
Portfolio
  
  
    Monthly   

SECOR Master

    24.36%        22,981,374         1,648,919          192,697         30,146         1,426,076         
 
Commodity
Portfolio
  
  
    Monthly   

Cambridge Master

    25.84%        24,376,553         2,081,417          22,468         33,341         2,025,608         
 
Commodity
Portfolio
  
  
    Monthly   

Willowbridge Master

    15.82%        14,927,448         (142,084)         13,241         1,672         (156,997)        
 
Commodity
Portfolio
  
  
    Monthly   

PGM Master(a)

    -              -             (922,486)         75,206         62,052            (1,059,744)        
 
Commodity
Portfolio
  
  
    Monthly   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 62,285,375        $ 2,669,453         $ 306,067        $  133,161        $ 2,230,225         
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

(a)  From January 1, 2015 through June 30, 2015, the date the Partnership fully redeemed its interest in PGM Master.

 

20


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Emerging CTA Portfolio L.P.

Notes to Financial Statements

(Unaudited)

 

7.

Financial Instrument Risks:

In the normal course of business, the Partnership and the Funds are party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include futures, forwards, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, swap and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk.

Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 52.1% to 68.2% of the Partnership’s/Funds’ contracts are traded OTC.

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

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

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

 

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Notes to Financial Statements

(Unaudited)

 

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

The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Partnership’s/Funds’ Statements of Income and Expenses and Changes in Partners’ Capital.

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

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Funds’ risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Funds to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Funds have credit risk and concentration risk, as MS&Co. or an MS&Co. affiliate is the sole counterparty or broker with respect to the Partnership’s/Funds’ assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s/Funds’ counterparty is an exchange or clearing organization.

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

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

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

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

 

8.

Subsequent Events:

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

Effective the close of business on July 31, 2016, the General Partner terminated the management agreement among the General Partner, Perella and the Partnership pursuant to which Perella ceased all trading on behalf of the Partnership.

On August 1, 2016, the Partnership allocated a portion of its assets to Harbour Square Capital Management LLC (“Harbour Square”), which is managed and traded by Harbour Square pursuant to Harbour Square’s Discretionary Energy Program.

 

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

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its assets are its (i) investment in the Funds, (ii) equity in trading account, consisting of cash at MS&Co. and cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts, options purchased at fair value and investment in U.S. Treasury bills at fair value, if applicable, (iii) cash at bank and (iv) interest receivable. The Funds’ only assets are their cash at bank, expense reimbursement and equity in trading account, consisting of cash and cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts, options purchased at fair value and U.S. Treasury bills at fair value, if applicable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its direct investments and investment in the Funds. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the second quarter of 2016.

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

For the six months ended June 30, 2016, Partnership capital decreased 16.7% from $94,328,641 to $78,560,978. This decrease was attributable to redemptions of 10,575.9890 Class A Redeemable Units totaling $13,958,820 and redemptions of 162.0830 Class A General Partner Redeemable Units totaling $211,129, coupled with a net loss of $1,632,714, which was partially offset by subscriptions for 26.8380 Class A Redeemable Units totaling $35,000. Future redemptions can impact the amount of funds available for investment in funds in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The General Partner believes that the estimates utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 2 of the Financial Statements.

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

Results of Operations

During the Partnership’s second quarter of 2016, the net asset value per Class A Redeemable Unit decreased 2.7% from $1,339.03 to $1,302.60, as compared to a decrease of 4.3% in the second quarter of 2015. The Partnership experienced a net trading loss before fees and expenses in the second quarter of 2016 of $1,231,024. Losses were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, energy, U.S. interest rates, metals and indices, and were partially offset by gains in grains, non-U.S. interest rates, livestock and softs. The Partnership experienced a net trading loss before fees and expenses in the second quarter of 2015 of $3,239,895. Losses were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in energy, indices, non-U.S. interest rates, livestock and softs, and were partially offset by gains in grains, U.S. interest rates and metals.

The most significant losses were incurred within the currency sector primarily during May from long positions in the Thai baht and South African rand versus the U.S. dollar as the relative value of the dollar rallied amid increased speculation of a June interest rate hike by the U.S. Federal Reserve. Within the global stock index sector, losses were incurred during the second quarter from long and short global equity index futures positions as prices whipsawed throughout the quarter amid speculation on government stimulus, corporate earnings, and implications of the U.K. leaving the European Union. Losses within the metals sector were experienced during April from short silver futures positions as prices rose as a decrease in the value of U.S. dollar spurred investor demand for precious metals. Additional losses were experienced in this sector during June from short industrial metals futures positions as prices increased after weak Chinese manufacturing data fueled optimism that more stimulus was on the way to bolster growth from the world’s biggest consumer of industrial metals. In the energy complex, losses were experienced during April from short positions in crude oil and its related products as prices rose due to a weak U.S. dollar and a decline in U.S. production. The Partnership’s losses for the quarter were partially offset by gains achieved within the global interest rate sector from long Canadian bond futures positions as prices increased due to speculation the Bank of Canada will maintain a dovish monetary policy partly due to a wildfire in Alberta that disrupted oil production. Additional gains were experienced from this sector during June from long positions in European and U.S. fixed income futures as prices advanced as uncertainty surrounding the economic and political fallout following the U.K.’s vote to leave the European Union increased demand for the relative “safety” of government debt. Within the agricultural sector, gains

 

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were recorded during May from long positions in soybean and soybean meal futures as additional prices advanced as flooding and adverse weather in South America threatened to curtail grain exports. During June, gains were achieved in this sector from long sugar futures positions as poor growing conditions in Thailand, possible weather delays in the Brazilian harvest, and an expected supply shortfall next year helped lift prices higher.

During the Partnership’s six months ended June 30, 2016, the net asset value per Class A Redeemable Unit decreased 1.9% from $1,328.16 to $1,302.60, as compared to a decrease of 2.5% in the six months ended June 30, 2015. The Partnership experienced a net trading gain before fees and expenses in the six months ended June 30, 2016 of $1,070,968. Gains were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, grains, non-U.S. interest rates, livestock and softs, and were partially offset by losses in energy, U.S. interest rates, metals and indices. The Partnership experienced a net trading gain before fees and expenses in the six months ended June 30, 2015 of $1,460,440. Gains were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, indices, U.S. interest rates and livestock, and were partially offset by losses in energy, grains, non-U.S. interest rates, metals and softs.

The most significant losses were recorded within the metals complex during February and March from short base metals futures positions as prices rose on optimism that demand would improve in China after the government signaled increased support for the economy through higher spending and measures to boost lending. During April, additional losses in this sector were experienced from short silver futures positions as prices rose as a decrease in the value of U.S. dollar spurred investor demand for precious metals. Further losses were experienced in this sector during June from short industrial metals futures positions. Losses were experienced within the stock indices during January from long positions in U.S. and European equity index futures as prices declined sharply amid a slowdown in China, drop in oil prices, and weak corporate earnings. Additional losses were incurred in this sector during February from long positions in Asian equity index futures as prices moved lower amid ongoing concerns over the Chinese economy and a bearish crude oil outlook, which weighed on investor sentiment. Losses in this sector were also incurred during the second quarter from long and short global equity index futures positions as prices whipsawed. In the energy complex, losses were experienced during March from short crude oil futures positions as prices rose following a decline in U.S. production and speculation the Organization of the Petroleum Exporting Countries (“OPEC”) would cap output levels. The Partnership’s losses for the first six months of the year were offset by gains achieved within the global interest rates sector during January and May from long Canadian bond futures positions as prices increased amid speculation that a decrease in oil revenue in Canada would delay future government interest rate increases. During June, additional gains were achieved within the this sector from long positions in European and U.S. fixed income futures as prices advanced as uncertainty surrounding the economic and political fallout following the U.K.’s vote to leave the European Union increased demand for the relative “safety” of government debt. Within the currency sector, gains were recorded during January from short positions in the Mexican peso versus the U.S. dollar as the relative value of the peso fell as investors sold-off emerging market currencies and moved to assets that appeared more stable. Additional gains were experienced during February from long positions in the Philippine peso, Brazilian real, Turkish lira, and Swedish krona versus the U.S. dollar as the relative value of the U.S. dollar weakened following dovish comments from U.S. Federal Reserve Chair Janet Yellen, which pushed out expectations for the U.S. central bank’s next interest rate hike. Additional gains were achieved in this sector during June from short positions in the British pound versus the U.S. dollar as the relative value of the pound decreased significantly due to recession fears and speculation that the Bank of England will maintain a loose monetary policy following the U.K. “Brexit” vote to leave the E.U. Within the agricultural sector, gains were recorded during May from long positions in soybean and soybean meal futures as prices advanced as flooding and adverse weather in South America threatened to curtail grain exports. During June, gains were achieved in this sector from long sugar futures positions as poor growing conditions in Thailand, possible weather delays in the Brazilian harvest, and an expected supply shortfall next year helped lift prices higher.

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

Interest income on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s) brokerage account during each month is earned at the monthly average of the 4-week U.S. Treasury bill discount rate. Any interest earned on the Partnership’s and/or each Fund’s account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest income earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership and/or the Funds, as applicable. Interest income for the three and six months ended June 30, 2016 increased by $35,342 and $83,439, respectively, as compared to the corresponding periods in 2015. The increase in interest income is primarily due to higher 4-week U.S. Treasury bill discount rates along with additional interest income earned on U.S. Treasury bills during the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership and the Funds depends on (1) the average daily equity in the Partnership’s and the Funds’ accounts, (2) the amount of Treasury bills and/or money market mutual funds purchased by the Partnership and the Funds and (3) interest rates over which the Partnership/Funds and MS&Co. have no control.

 

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Certain clearing fees are based on the number of trades executed by the Advisors for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees related to direct investments for the three and six months ended June 30, 2016 increased by $21,169 and $41,076, respectively, as compared to the corresponding periods in 2015. The increase in these clearing fees is primarily due to an increase in the number of direct trades made by the Partnership during the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. Ongoing selling agent fees for the three and six months ended June 30, 2016 decreased by $113,288 and $222,725, respectively, as compared to the corresponding periods in 2015. The decrease in ongoing selling agent fees is due to lower average net assets during the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. Management fees for the three and six months ended June 30, 2016 decreased by $86,569 and $176,472, respectively, as compared to the corresponding periods in 2015. The decrease in management fees is due to lower average net assets during the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015, as well as reductions in monthly management fees paid to Centurion and SECOR effective January 1, 2016.

General Partner fees (formerly, administrative fees) are paid to the General Partner for administering the business and affairs of the Partnership including, among other things (i) selecting, appointing and terminating the Partnership’s commodity trading advisors, (ii) allocating and reallocating the Partnership’s assets among the commodity trading advisors and (iii) monitoring the activities of the commodity trading advisors. These fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. General Partner fees for the three and six months ended June 30, 2016 decreased by $56,696 and $111,603, respectively, as compared to the corresponding periods in 2015. The decrease in General Partner fees is due to lower average net assets during the three and six months ended June 30, 2016, as compared to the corresponding periods in 2015.

Incentive fees paid by the Partnership to the Advisors are based on the new trading profits generated by each Advisor at the end of the quarter, as defined in the respective management agreements among the Partnership, the General Partner and each Advisor. Trading performance for the three and six months ended June 30, 2016 resulted in incentive fees in the amounts of $0 and $180,449, respectively, and compares with $14,893 and $767,146 for the corresponding periods in 2015. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

The General Partner is also paid an incentive fee payable annually equal to 5% of the Partnership’s overall New Trading Profits, as defined in the Partnership’s limited partnership agreement, earned in each calendar year. Trading performance for the three and six months ended June 30, 2016 did not result in any General Partner incentive fees, as compared to a reversal of $33,177 and $0 for the three and six months ended June 30, 2015.

In allocating the assets of the Partnership among the Advisors, the General Partner conducts proprietary research and considers, among other things, the background of the Advisors’ principals, as well as the Advisors’ trading styles, strategies and markets traded, expected volatility, trading results (to the extent available) and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time.

As of June 30, 2016 and March 31, 2016, the Partnership’s assets were allocated among the Advisors in the following approximate percentages:

 

Advisor

   June 30, 2016          March 31, 2016  

Cambridge

     $         23,949,509             30%            $         25,934,432             29%    

Centurion

     9,059,947         12%            10,725,115         12%    

Perella

     18,280,401         23%            19,586,482         22%    

SECOR

     18,133,957         23%            21,619,732         24%    

Willowbridge

     9,137,164         12%            11,218,027         13%    

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

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

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

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. With the exception of certain Advisors, the Advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the master fund over which they have been granted limited authority to make trading decisions. The first two trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly and through its investments in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly (i.e., in the managed accounts in the Partnership’s name traded by certain Advisors), and indirectly by each Fund separately. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of June 30, 2016 and December 31, 2015, as applicable. As of June 30, 2016, the Partnership’s total capitalization was $78,560,978.

 

June 30, 2016  

Market Sector

     Value at Risk        % of
 Total Capitalization 
 

Currencies

    $ 14,328,319          18.24%    

Energy

    280,984          0.36     

Grains

    214,796          0.27     

Indices

    3,753,199          4.78     

Interest Rates U.S.

    680,696          0.87     

Interest Rates Non-U.S.

    1,036,677          1.32     

Livestock

    75,781          0.09     

Metals

    1,130,825          1.44     

Softs

    261,115          0.33     
 

 

 

   

 

 

 

Total

    $ 21,762,392          27.70%    
 

 

 

   

 

 

 

As of December 31, 2015, the Partnership’s total capitalization was $94,328,641.

 

December 31, 2015  

Market Sector

     Value at Risk        % of
  Total Capitalization  
 

Currencies

    $ 19,821,484          21.02%    

Energy

    575,631          0.61     

Grains

    208,769          0.22     

Indices

    3,980,882          4.22     

Interest Rates U.S.

    1,350,575          1.43     

Interest Rates Non-U.S.

    1,709,108          1.81     

Livestock

    96,059          0.10     

Metals

    1,104,566          1.17     

Softs

    144,869          0.16     
 

 

 

   

 

 

 

Total

    $       28,991,943          30.74%    
 

 

 

   

 

 

 

The following tables indicate the trading Value at Risk associated with the Partnership’s direct investments and indirect investments in the Funds by market category as of June 30, 2016 and December 31, 2015, and the highest, lowest and average values during the three months ended June 30, 2016 and the twelve months ended December 31, 2015. All open contracts trading risk exposures have been included in calculating the figures set forth below.

As of June 30, 2016, the Partnership’s Value at Risk for the portion of its assets that are traded directly was as follows:

 

    June 30, 2016                    
                 Three Months Ended June 30, 2016  

 Market Sector            

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

 Currencies

    $ 429,746           0.55%         $ 1,645,208          $ 278,068          $      1,156,502     

 Energy

    6,732           0.01          279,994          6,732          75,834     

 Grains

    37,180           0.05          111,210          24,750          53,717     

 Indices

    1,475,013           1.88          3,170,859          1,391,309          2,018,172     

 Interest Rates U.S.

    365,552           0.47          804,067          245,154          573,948     

 Interest Rates Non-U.S.

    447,154           0.57          1,313,118          446,771          901,248     

 Livestock

    1,980           0.00   **      19,800          -              2,420     

 Metals

    72,782           0.09          182,710          62,024          103,888     

 Softs

    3,417           0.00   **      13,160          -              1,139     
 

 

 

    

 

 

       

 Total

    $             2,839,556                       3.62%          
 

 

 

    

 

 

       

*    Average of month-end Values at Risk.

**  Due to rounding.

 

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     December 31, 2015                                    
                           Twelve Months Ended December 31, 2015  

 Market Sector            

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

 Currencies

     $ 3,559,859             3.77%           $     4,487,543          $             4,857          $     1,438,489     

 Energy

     378,400             0.40            1,289,713          2,200          381,046     

 Grains

     58,300             0.06            268,691          1,650          33,309     

 Indices

     1,751,429             1.86            4,672,882          6,433          1,431,077     

 Interest Rates U.S.

     920,928             0.98            963,717          990          373,329     

 Interest Rates Non-U.S.

     1,088,316             1.15            1,322,437          1,216          411,728     

 Metals

     376,585             0.40            444,235          4,400          86,274     
  

 

 

      

 

 

          

 Total

     $             8,133,817                         8.62%            
  

 

 

      

 

 

          

* Annual average of month-end Values at Risk.

As of June 30, 2016, Cambridge Master’s total capital was $77,190,141. The Partnership owned approximately 31.8% of Cambridge Master. As of June 30, 2016, Cambridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Cambridge for trading) was as follows:

 

     June 30, 2016                                    
                           Three Months Ended June 30, 2016  

 Market Sector            

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

 Currencies

     $ 36,013,969             46.66         $ 40,764,247          $ 19,579,219          $ 27,023,361     
  

 

 

      

 

 

          

 Total

     $             36,013,969             46.66          
  

 

 

      

 

 

          

* Average of month-end Values at Risk.

As of December 31, 2015, Cambridge Master’s total capitalization was $59,709,922. The Partnership owned approximately 40.8% of Cambridge Master. As of December 31, 2015, Cambridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Cambridge for trading) was as follows:

 

     December 31, 2015                                    
                           Twelve Months Ended December 31, 2015  

 Market Sector            

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

 Currencies

     $ 23,516,491             39.38         $      26,761,534          $       5,371,077          $       15,171,524     
  

 

 

      

 

 

          

 Total

     $             23,516,491                         39.38          
  

 

 

      

 

 

          

* Annual average of month-end Values at Risk.

 

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As of June 30, 2016, Willowbridge Master’s total capitalization was $389,064,437. The Partnership owned approximately 2.5% of Willowbridge Master. As of June 30, 2016, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

     June 30, 2016                               
                      Three Months Ended June 30, 2016  

 Market Sector            

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

 Currencies

     $ 25,140,961             6.46      $     41,085,554          $     19,334,303          $     29,638,317     

 Interest Rates U.S.

     3,289,253             0.85         10,384,050          -              1,933,444     

 Metals

     1,294,700             0.33         4,595,831          -              431,567     
  

 

 

      

 

 

       

 Total

     $             29,724,914                         7.64       
  

 

 

      

 

 

       

*  Average of month-end Values at Risk.

As of December 31, 2015, Willowbridge Master’s total capitalization was $348,699,949. The Partnership owned approximately 4.3% of Willowbridge Master. As of December 31, 2015, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

     December 31, 2015                               
                      Twelve Months Ended December 31, 2015  

 Market Sector            

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

 Currencies

     $ 76,807,828             22.03      $     85,018,080          $         173,995          $     37,637,619     

 Energy

     1,482,863             0.42         9,071,259          667,917          3,089,442     

 Interest Rates U.S.

     4,144,323             1.19         16,624,123          367,325          3,833,031     
  

 

 

      

 

 

       

 Total

     $             82,435,014                         23.64       
  

 

 

      

 

 

       

*  Annual average of month-end Values at Risk.

As of June 30, 2016, SECOR Master’s total capitalization was $47,919,375. The Partnership owned approximately 41.3% of SECOR Master. As of June 30, 2016, SECOR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to SECOR for trading) was as follows:

 

     June 30, 2016                               
                      Three Months Ended June 30, 2016  

 Market Sector            

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

 Currencies

     $ 4,400,985             9.18      $     8,551,518          $     4,400,985          $     6,160,406     

 Energy

     664,048             1.39         701,923          272,638          553,845     

 Grains

     430,062             0.90         615,560          358,413          429,524     

 Indices

     5,516,188             11.51         8,646,311          3,472,804          6,830,577     

 Interest Rates U.S.

     563,954             1.18         1,001,996          213,817          544,334     

 Interest Rates Non-U.S.

     1,427,417             2.98         2,015,495          1,218,276          1,524,948     

 Livestock

     178,695             0.37         236,610          107,168          185,075     

 Metals

     2,483,476             5.18         4,453,106          1,683,412          2,074,688     

 Softs

     623,968             1.30         696,841          135,485          394,672     
  

 

 

      

 

 

       

 Total

     $             16,288,793                         33.99       
  

 

 

      

 

 

       

*    Average of month-end Values at Risk.

 

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As of December 31, 2015, SECOR Master’s total capitalization was $50,497,522. The Partnership owned approximately 45.5% of SECOR Master. As of December 31, 2015, SECOR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to SECOR for trading) was as follows:

 

     December 31, 2015                           
                  Twelve Months Ended December 31, 2015  

 Market Sector            

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

 Currencies

     $ 7,393,758           14.64      $ 8,948,487          $ 616,507          $ 5,392,362     

 Energy

     293,335           0.58         860,575          172,491          453,050     

 Grains

     330,701           0.66         893,530          112,624          491,592     

 Indices

     4,899,897           9.70         8,675,689          3,165,147          6,198,563     

 Interest Rates U.S.

     552,618           1.09         1,883,178          116,257          676,360     

 Interest Rates Non-U.S.

     1,364,379           2.70         1,856,141          509,078          1,073,445     

 Livestock

     211,118           0.42         245,102          14,636          149,830     

 Metals

     1,599,958           3.17         2,164,648          573,024          1,344,765     

 Softs

     318,393           0.63         688,050          157,135          330,342     
  

 

 

    

 

 

       

 Total

     $             16,964,157                       33.59       
  

 

 

    

 

 

       

*  Annual average of month-end Values at Risk.

 

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Item 4.    Controls and Procedures

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

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

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

 

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

 

   

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

 

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

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended June 30, 2016 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

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

MS&Co. is a wholly owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Exchange Act, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2015, 2014, 2013, 2012 and 2011. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at www.morganstanley.com. We refer you to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2015 Audited Financial Statement.

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

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

Regulatory and Governmental Matters. 

MS&Co. has received subpoenas and requests for information from certain federal and state regulatory and governmental entities, including among others various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force, such as the United States Department of Justice, Civil Division and several state Attorney General’s Offices, concerning the origination, financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages and related matters such as residential mortgage backed securities (“RMBS”), collateralized debt obligations (“CDOs”), structured investment vehicles (“SIVs”) and credit default swaps backed by or referencing mortgage pass-through certificates. These matters, some of which are in advanced stages, include, but are not limited to, investigations related to MS&Co.’s due diligence on the loans that it purchased for securitization, MS&Co.’s communications with ratings agencies, MS&Co.’s disclosures to investors, and MS&Co.’s handling of servicing and foreclosure related issues.

On February 25, 2015, MS&Co. reached an agreement in principle with the United States Department of Justice, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against MS&Co. That settlement was finalized on February 10, 2016.

 

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On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. and certain affiliates in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV (defined below), and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On July 20, 2016, MS&Co. filed a demurrer.

In October 2014, the Illinois Attorney General’s Office (“ILAG”) sent a letter to MS&Co. alleging that MS&Co. knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that MS&Co. pay ILAG approximately $88 million. MS&Co. and ILAG reached an agreement to resolve the matter on February 10, 2016.

On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intends to file a lawsuit related to approximately 30 subprime securitizations sponsored by MS&Co. NYAG indicated that the lawsuit would allege that MS&Co. misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. MS&Co. and NYAG reached an agreement to resolve the matter on February 10, 2016.

On June 5, 2012, MS&Co. consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by the Commodity Futures Trading Commission (“CFTC”) to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures transactions unless there is an Exchange for Related Position (“EFRP”). Specifically, the CFTC found that from April 2008 through October 2009, MS&Co. violated Section 4c(a) of the Commodity Exchange Act and CFTC Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (“CME”) and Chicago Board of Trade (“CBOT”) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position. In addition, the CFTC found that MS&Co. violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Commodity Exchange Act and CFTC Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. MS&Co. entered into corresponding and related settlements with the CME and CBOT in which the CME found that MS&Co. violated CME Rules 432.Q and 538 and fined MS&Co. $750,000 and CBOT found that MS&Co. violated CBOT Rules 432.Q and 538 and fined MS&Co. $1,000,000.

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

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on June 28, 2016 without any findings of fraud.

 

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On June 18, 2015, MS&Co. entered into a settlement with the SEC and paid a fine of $500,000 as part of the Municipalities Continuing Disclosure Cooperation Initiative to resolve allegations that MS&Co. failed to form a reasonable basis through adequate due diligence for believing the truthfulness of the assertions by issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule 15c2-12 in connection with offerings in which MS&Co. acted as senior or sole underwriter.

On August 6, 2015, MS&Co. consented to and became the subject of an order by the CFTC to resolve allegations that MS&Co. violated CFTC Regulation 22.9(a) by failing to hold sufficient U.S. Dollars in cleared swap segregated accounts in the U.S. to meet all U.S. Dollar obligations to cleared swaps customers. Specifically, the CFTC found that while MS&Co. at all times held sufficient funds in segregation to cover its obligations to its customers, on certain days during 2013 and 2014, it held currencies, such as euros, instead of U.S. dollars, to meet its U.S. dollar obligations. In addition, the CFTC found that MS&Co. violated CFTC Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, MS&Co. accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

Civil Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied MS&Co.’s individual motion to dismiss the amended complaint. On March 7, 2013, the court granted defendants’ motion to strike plaintiff’s demand for a jury trial. The defendants’ joint motions for partial summary judgment were denied on November 9, 2015. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $44 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $44 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s federal securities law claims were dismissed with prejudice. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $55 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

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On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co. knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. Based on currently available information, MS&Co. believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois, styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011. The corrected amended complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by MS&Co. at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. After that dismissal, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $78 million. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $49 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $49 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 29, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. The defendants’ motions to dismiss the amended complaint were granted in part and denied in part on September 30, 2013. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $53 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $53 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

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On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss the complaint. MS&Co. perfected its appeal from that decision on June 12, 2015. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $258 million, and the certificates had incurred actual losses of approximately $84 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $258 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $132 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 26, 2015, MS&Co. perfected its appeal from the court’s October 29, 2014 decision. At June 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $26 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $26 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

Settled Civil Litigation

On August 25, 2008, MS&Co. and two ratings agencies were named as defendants in a purported class action related to securities issued by a SIV called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case was styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. The complaint alleged, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime RMBS held by the Cheyne SIV. The plaintiffs asserted allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. On April 24, 2013, the parties reached an agreement to settle the case, and on April 26, 2013, the court dismissed the action with prejudice.

 

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On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against MS&Co.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against MS&Co. and/or its affiliates and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints asserted claims on behalf of certain clients of plaintiff’s affiliates and allege that defendants made untrue statements and material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. and/or its affiliates or sold to plaintiff’s affiliates’ clients by MS&Co. and/or its affiliates in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action in the United States District Court for the Southern District of New York (“SDNY”), styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, filed a second amended complaint, which asserted common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement to settle the litigation, which received final court approval on July 2, 2015.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to the plaintiffs by MS&Co. was approximately $104 million. The complaint raised common law claims of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with the plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order MS&Co. appealed on April 11, 2013. On May 3, 2013, MS&Co. filed its answer to the amended complaint. On January 16, 2015, the parties reached an agreement to settle the litigation.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

 

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On September 2, 2011, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including MS&Co. and certain affiliates. A complaint against MS&Co. and certain affiliates and other defendants was filed in the Supreme Court of NY, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass-through certificates with an original unpaid balance of approximately $11 billion. The complaint raised claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On February 7, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten, and/or sold by MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey, styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $1.073 billion. The amended complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

On November 4, 2011, the Federal Deposit Insurance Corporation, as receiver for Franklin Bank S.S.B, filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation as Receiver for Franklin Bank, S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

 

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On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. On July 28, 2015, the parties reached an agreement to settle the litigation, and on August 12, 2015, the plaintiff filed a stipulation of discontinuance with prejudice.

On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleged that MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

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

 

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Item lA.   Risk Factors.

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

 

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

For the three months ended June 30, 2016, there were subscriptions for 26.8380 Class A Redeemable Units totaling $35,000. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

Proceeds from the sale of Redeemable Units are used in the trading of commodity interests including futures contracts, options, forward and swap contracts.

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

 

Period   

Class A (a) 

Total Number 

of Redeemable 

Units Purchased* 

    

Class A (b)

Average

Price Paid per

Redeemable Unit**

    

(c) Total

Number of

Redeemable
Units Purchased

 as Part of Publicly 

Announced

Plans or Programs

       

 

 (d) Maximum

    Number (or Approximate  

 Dollar Value) of

 Redeemable Units

 that May Yet

 Be Purchased

 Under the Plans or

 Programs

April 1, 2016 - April 30, 2016

     2,496.8210       $ 1,304.11       N/A        N/A  

May 1, 2016 - May 31, 2016

     565.9940       $ 1,293.69       N/A        N/A  

June 1, 2016 - June 30, 2016

     3,019.4740       $ 1,302.60       N/A        N/A  
       6,082.2890       $ 1,302.39                 

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

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

 

Item 3. Defaults Upon Senior Securities — None.

 

Item 4. Mine Safety Disclosures — Not Applicable.

 

Item 5. Other Information — None.

 

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Item 6. Exhibits

 

3.1(a)     Certificate of Limited Partnership dated June 30, 2003 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference).
(b)     Certificate of Amendment of the Certificate of Limited Partnership dated September 21, 2005 (filed as Exhibit 3.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference).
(c)     Certificate of Amendment of the Certificate of Limited Partnership dated September 19, 2008 (filed as Exhibit 3.1(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
(d)     Certificate of Amendment of the Certificate of Limited Partnership dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
(e)     Certificate of Amendment of the Certificate of Limited Partnership dated June 29, 2010 (filed as Exhibit 3.1(e) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).
(f)     Certificate of Amendment of the Certificate of Limited Partnership dated September 2, 2011 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).
(g)     Certificate of Amendment of the Certificate of Limited Partnership dated August 7, 2013 (filed as Exhibit 3.1(g) to the Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).
3.2(a)     Fourth Amended and Restated Limited Partnership Agreement effective May 1, 2012 (filed as Exhibit 3.2 to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).
(b)     Amendment No. 1 to the Fourth Amended and Restated Limited Partnership Agreement (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on January 5, 2016 and incorporated herein by reference).
10.1       

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

10.2       

Amended and Restated Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management effective October1, 2013 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 8, 2016 and incorporated herein by reference).

10.3(a)   

Amended and Restated Management Agreement among the Partnership, the General Partner and Blackwater Capital Management, LLC (filed as Exhibit 10.13 to the Current Report on Form 8-K filed on November 4, 2010 and incorporated herein by reference).

(b)   

Amendment No.1 to the Amended and Restated Management Agreement among the Partnership, the General Partner and Blackwater Capital Management, LLC (filed as Exhibit 10.6(b) to the Quarterly Report on Form 10-Q filed on May 14, 2014 and incorporated herein by reference).

(c)    Letter from the General Partner to Blackwater Capital Management, LLC extending the Management Agreement from June 30, 2015 to June 30, 2016 (filed as Exhibit 10.7(c) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

 

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10.4(a)   

Amended and Restated Management Agreement among the Partnership, the General Partner and Willowbridge Associates Inc. (filed as Exhibit 10.9(a) to the Quarterly Report on Form 10-Q filed on November 13, 2014 and incorporated herein by reference).

(b)   

Amendment to the Amended and Restated Management Agreement among the Partnership, the General Partner and Willowbridge Associates Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 7, 2013 and incorporated herein by reference).

(c)   

Letter from the General Partner to Willowbridge Associates Inc. extending the Management Agreement from June 30, 2015 to June 30, 2016 (filed as Exhibit 10.10(c) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

10.5(a)   

Amended and Restated Management Agreement among the Partnership, the General Partner and The Cambridge Strategy (Asset Management) Limited (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 7, 2013 and incorporated herein by reference).

(b)   

Letter from the General Partner to The Cambridge Strategy (Asset Management) Limited extending the Management Agreement from June 30, 2015 to June 30, 2016 (filed as Exhibit 10.12(b) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

10.6(a)   

Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.14(a) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

(b)   

Amendment No. 5 to Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.14(b) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

10.7(a)   

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

(b)   

Amendment to the Management Agreement among the Partnership, the General Partner and SECOR Capital Advisors, LP (filed as Exhibit 10.2 to the Current Report on Form 8-K filed on January 5, 2016 and incorporated herein by reference).

(c)   

Letter from the General Partner to SECOR Capital Advisors, LP. extending the Management Agreement from June 30, 2015 to June 30, 2016 (filed as Exhibit 10.13(c) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

10.8(a)   

Amended and Restated Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August 21, 2013 (filed as Exhibit 10.17 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

(b)   

U.S. Treasury Securities Purchase Authorization Agreement, between the Partnership and MS&Co., effective June 1, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 4, 2015 and incorporated herein by reference

10.9(a)   

Management Agreement among the Partnership, the General Partner and Centurion Investment Management, LLC (filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q filed on November 13, 2014 and incorporated herein by reference).

(b)   

Amendment to the Management Agreement among the Partnership, the General Partner and Centurion Investment Management, LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 5, 2016 and incorporated herein by reference).

(c)   

Letter from the General Partner to Centurion Investment Management, LLC extending the Management Agreement from June 30, 2015 to June 30, 2016 (filed as Exhibit 10.17(c) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

 

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10.10    Amended and Restated Management Agreement among the Partnership, the General Partner and Perella Weinberg Partners Capital Management LP (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on July 6, 2015 and incorporated herein by reference).
10.11   

Amended and Restated Master Services Agreement by and among the Partnership, the General Partner and SS&C Technologies, Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 6, 2015 and incorporated herein by reference).

10.12   

Management Agreement among the Partnership, the General Partner and Harbour Square Capital Management LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 15, 2016 and incorporated herein by reference).

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

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

32.1 — Section 1350 Certification (Certification of President & Director) (filed herewith).

32.2 — Section 1350 Certification (Certification of Chief Financial Officer & Director) (filed herewith).

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB XBRL Taxonomy Extension Label Linkbase Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition Document.

 

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SIGNATURES

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

 

EMERGING CTA PORTFOLIO L.P.

By:

 

Ceres Managed Futures LLC

 

(General Partner)

By:

 

/s/ Patrick T. Egan

 

Patrick T. Egan

 

President & Director

Date: August 11, 2016

By:

 

/s/ Steven Ross

 

Steven Ross

 

Chief Financial Officer & Director

Date: August 11, 2016

 

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