Company Quick10K Filing
Quick10K
Ceres Orion
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-01 Enter Agreement, Exhibits
8-K 2019-03-06 Officers
8-K 2019-01-31 Enter Agreement, Leave Agreement, Exhibits
8-K 2018-10-31 Leave Agreement
8-K 2018-09-15 Officers
8-K 2018-04-01 Enter Agreement, Exhibits
8-K 2018-02-28 Amend Bylaw, Exhibits
8-K 2018-01-26 Enter Agreement, Exhibits
8-K 2018-01-19 Enter Agreement, Exhibits
DEO Diageo 97,050
EQH AXA Equitable Holdings 11,090
NAVI Navient 3,020
OI Owens Illinois 2,980
I Intelsat 2,550
ODT Online Disruptive Technologies 640
TNP Tsakos Energy Navigation 297
RIVE Riverview Financial 101
MSBF MSB Financial 96
GLNS Golden Star Resource 0
OFFLP 2018-12-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures. Not Applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accountant Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
EX-10.3B d684190dex103b.htm
EX-31.1 d684190dex311.htm
EX-31.2 d684190dex312.htm
EX-32.1 d684190dex321.htm
EX-32.2 d684190dex322.htm
EX-99.1 d684190dex991.htm
EX-99.2 d684190dex992.htm
EX-99.3 d684190dex993.htm
EX-99.4 d684190dex994.htm

Ceres Orion Earnings 2018-12-31

OFFLP 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 d684190d10k.htm 10-K 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

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 0-50271

CERES ORION L.P.

 

(Exact name of registrant as specified in its charter)

 

New York    22-3644546
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)    Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address and Zip Code of principal executive offices)

 

(855) 672-4468

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Redeemable Units of Limited Partnership Interest

                (Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes _ No X     

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes _ No X     

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No _     

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. X

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


Large accelerated filer     

  

Accelerated filer     

  

Non-accelerated filer X

Smaller reporting company       

  

Emerging growth company     

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

Yes _ No X

Limited Partnership Redeemable Units with an aggregate value of $716,504,695 of Class A and $4,490,074 of Class Z were outstanding and held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter.

As of February 28, 2019, 210,927.3638 Limited Partnership Class A Redeemable Units were outstanding and 4,026.0042 Limited Partnership Class Z Redeemable Units were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

[None]


PART I

Item 1. Business.

(a) General development of business. Ceres Orion L.P. (formerly, Orion Futures Fund L.P.) (the “Partnership”) is a limited partnership organized on March 22, 1999, under the partnership laws of the State of New York, to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, livestock, indices, U.S. and non-U.S. interest rates, softs and metals. The commodity interests that are traded by the Partnership, directly and indirectly through its investment in the Funds (as defined below), are volatile and involve a high degree of market risk. The Partnership commenced trading on June 10, 1999. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets (directly or indirectly through its investment in the Funds) 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.

During the initial offering period (March 31, 1999 through June 10, 1999) the Partnership sold 10,499 Redeemable Units at $1,000 per Redeemable Unit. The Partnership commenced trading activities on June 10, 1999.

Subscriptions and redemptions of Redeemable Units and General Partner contributions and redemptions for the years ended December 31, 2018, 2017 and 2016 are reported in the Statements of Changes in Partners’ Capital under “Item 8. Financial Statements and Supplementary Data.”

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership and is the trading manager (the “Trading Manager”) of Transtrend Master (as defined below) and FORT Contrarian Master (as defined below). As of January 1, 2017, the General Partner became a wholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD 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 January 1, 2017, the General Partner was a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC.

As of December 31, 2018, all trading decisions were made for the Partnership by Winton Capital Management Limited (“Winton”), Transtrend B.V. (“Transtrend”), Willowbridge Associates Inc. (“Willowbridge”) and FORT L.P. (“FORT”) (each an “Advisor” and, collectively, the “Advisors”), each of which is a registered commodity trading advisor. Effective the close of business on October 31, 2018, Systematica Investments Limited (“Systematica”) ceased to act as a commodity trading advisor to the Partnership. Effective November 30, 2014, AAA Capital Management Advisors, Ltd. (“AAA”) ceased to act as a commodity trading advisor for the Partnership. The portion of the Partnership’s assets that were allocated to AAA were reallocated among Winton, Transtrend and Willowbridge. References herein to an “Advisor” or the “Advisors” may also include, as relevant, AAA and Systematica. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors either directly, through a managed account in the Partnership’s name, or indirectly, through its investment in the Funds. 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.

Prior to its termination effective October 31, 2018, Systematica directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to Systematica’s BlueTrend Program.

On June 1, 2011, the Partnership began offering “Class A” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to June 1, 2011 were deemed Class A Redeemable Units. The rights, powers, duties and obligations associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions and non-U.S. investors. Class Z Redeemable Units were first issued on August 1, 2011. Class Z Redeemable Units are offered to limited partners who receive advisory services from Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”) and certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Redeemable Units that a limited partner receives upon a subscription will generally depend upon 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.

During the years ended December 31, 2018, 2017 and 2016, the Partnership’s/Funds’ commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. JPMorgan Chase Bank, N.A. (“JPMorgan”) was also a foreign exchange forward contract counterparty for certain Funds. The Partnership/Funds deposited a portion of their cash in non-trading bank accounts at JPMorgan.

Effective February 28, 2018, the Partnership changed its name from Orion Futures Fund L.P. to Ceres Orion L.P.

 

1


The Partnership, CMF Winton Master L.P. (“Winton Master”), CMF TT II, LLC (formerly, Morgan Stanley Smith Barney TT II, LLC) (“Transtrend Master”) and CMF Willowbridge Master Fund L.P. (“Willowbridge Master”) have entered into futures brokerage account agreements and foreign exchange brokerage account agreements with MS&Co. CMF FORT Contrarian Master Fund LLC (“FORT Contrarian Master”) has entered into a futures brokerage account agreement with MS&Co. Prior to its liquidation, AAA Master LLC (“AAA Master”) entered into a futures brokerage agreement with MS&Co. Winton Master, Transtrend Master, Willowbridge Master and FORT Contrarian Master are collectively referred to as the “Funds.” References herein to the “Funds” may include, as relevant, AAA Master.

Effective July 12, 2017, Winton Master, Transtrend Master and Willowbridge Master each entered into certain agreements with JPMorgan in connection with trading in forward foreign currency contracts on behalf of the referenced Funds and indirectly, the Partnership. These agreements include a foreign exchange and bullion authorization agreement (“FX Agreement”), an International Swap Dealers Association, Inc. master agreement (“Master Agreement”), a schedule to the Master Agreement, a 2016 credit support annex for variation margin to the schedule and an institutional account agreement. In addition to Willowbridge Master, Willowbridge is party to the FX Agreement for Willowbridge Master. Under each FX Agreement, JPMorgan charges a fee on the aggregate foreign currency transactions entered into on behalf of the respective Fund during a month.

The Partnership, directly and through its investment in the Funds, pays MS&Co. trading fees for the clearing, and where applicable, the execution of transactions.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2019; the net asset value per Redeemable Unit of any Class decreases to less than $400 as of a close of any business day; or under certain other circumstances as set forth in the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the aggregate net assets of the Partnership decline to less than $1,000,000.

On November 1, 2004, the assets allocated to Winton for trading were invested in Winton Master, a limited partnership organized under the partnership laws of the State of New York. Winton Master permits accounts managed by Winton using the Winton Futures Program (formerly, the Winton Diversified Program as applied without equities), a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership, are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Winton have agreed that Winton will trade the Partnership’s assets allocated to Winton at a level that is up to 1.5 times the amount of assets allocated.

On June 1, 2011, the Partnership allocated a portion of its assets to Transtrend Master, a limited liability company organized under the limited liability company laws of the State of Delaware. Transtrend Master permits accounts managed by Transtrend using the Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system, to invest together in one trading vehicle. Individual and pooled accounts managed by Transtrend, including the Partnership, are permitted to be non-managing members of Transtrend Master. The Trading Manager and Transtrend believe that trading through this structure promotes efficiency and economy in the trading process.

On August 1, 2014, the assets allocated to Willowbridge for trading were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. Willowbridge Master permits accounts managed by Willowbridge using its wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Willowbridge have agreed that Willowbridge will trade the Partnership’s assets at a level that is up to three times the amount of the assets allocated.

On February 1, 2018, the assets allocated to FORT for trading were invested in FORT Contrarian Master, a limited liability company organized under the limited liability company laws of the State of Delaware. FORT Contrarian Master permits accounts managed by FORT using its Global Contrarian Trading Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the Trading Manager of FORT Contrarian Master. Individual and pooled accounts currently managed by FORT are permitted to be members of FORT Contrarian Master. The Trading Manager and FORT believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. The Trading Manager and FORT have agreed that FORT will trade the Partnership’s assets allocated to FORT at a level that is up to 1.25 times the amount of assets allocated. The amount of leverage may be increased or decreased in the future.

On September 1, 2001, the assets allocated to AAA for trading were invested in AAA Master, a limited liability company formed under the New York Limited Liability Company Law. AAA Master permitted accounts managed by AAA using the Energy Program-Futures and Swaps, a proprietary, discretionary trading system, to invest together in one trading vehicle. The Partnership fully redeemed its investment in AAA Master on November 30, 2014. The General Partner was also the managing member of AAA Master.

The General Partner is not aware of any material changes to any of the trading programs discussed above during the year ended December 31, 2018.

 

2


The Funds’ and the Partnership’s trading of futures, forward, swap and option contracts, if 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/member 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/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, for all Funds other than Winton Master, a limited partner/member may request a withdrawal as of the end of any day if such request is received by the General Partner/Trading Manager at least three days in advance of the proposed withdrawal day.

Management fees, ongoing selling agent fees, General Partner fees and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Transtrend which are charged at the Transtrend Master level. Clearing fees are borne by the Funds and allocated to the Funds’ limited partners/non-managing members, including the Partnership. Clearing fees are also borne by the Partnership directly. Professional fees are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level.

The General Partner fees, management fees, incentive fees and professional fees of the Partnership are allocated proportionally to each Class based on the net asset value of the Class.

For the period January 1, 2018 through December 31, 2018, the approximate average market sector distribution for the Partnership was as follows:

 

LOGO

At December 31, 2018, the Partnership owned approximately 45.1% of Winton Master, 99.2% of Transtrend Master, 100.0% of Willowbridge Master and 87.3% of FORT Contrarian Master. Prior to the close of business on December 31, 2017, the Partnership owned approximately 45.8% of Winton Master, 95.8% of Transtrend Master and 82.5% of Willowbridge 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 investing directly and the redemption rights are not affected.

The General Partner administers the business and affairs of the Partnership, including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly fee equal to 1/12 of 0.75% (0.75% per year) of month-end net assets. Prior to October 1, 2014, the Partnership paid the General Partner a monthly fee equal to 1/24 of 1% (0.5% per year) of month-end net assets. Month-end net assets, for the purpose of calculating the General Partner fees, are net assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.

The General Partner, on behalf of the Partnership, has entered into management agreements (each, a “Management Agreement”) with the Advisors. The Advisors are not affiliated with one another, the General Partner or MS&Co., and are not responsible for the organization or operation of the Partnership.

 

3


The Partnership pays to FORT a monthly management fee equal to 1.15% per year of month-end net assets allocated to FORT. Winton receives a monthly management fee equal to 1.5% per year of month-end net assets allocated to Winton. As of April 1, 2018, Willowbridge receives a monthly management fee equal to 1.25% per year of month-end net assets allocated to Willowbridge. Prior to April 1, 2018, Willowbridge received a monthly management fee equal to 1.5% per year of month-end net assets allocated to Willowbridge. Prior to its termination effective October 31, 2018, Systematica received a monthly management fee equal to 1.0% per year of month-end net assets allocated to Systematica. The Partnership paid AAA a monthly management fee equal to 1.5% per year of month-end net assets allocated to AAA. Month-end net assets, for the purpose of calculating management fees, are net assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.

As of January 1, 2017, Transtrend Master pays Transtrend a monthly management fee of 0.85% per year on the aggregate net assets of Transtrend Master as of the first day of each month. For the period from November 1, 2015 to December 31, 2016, Transtrend Master paid Transtrend a monthly management fee of 1.0% per year on the aggregate net assets of Transtrend Master as of the first day of each month. For the period from October 1, 2014 to October 31, 2015, Transtrend Master paid Transtrend a monthly management fee of 1.25% per year on the aggregate net assets of Transtrend Master as of the first day of each month. Prior to September 30, 2014, Transtrend Master paid Transtrend a monthly management fee of either 1.25% per year or 1.5% per year depending on the aggregate net assets of Transtrend Master as of the first day of each month. The management fee paid by Transtrend Master is allocated to the Partnership based on its proportionate ownership interest of Transtrend Master.

In addition, the Partnership is obligated to pay Winton and Willowbridge an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Winton and Willowbridge for the Partnership during each calendar quarter. The Partnership is obligated to pay FORT an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by FORT for the Partnership during each calendar year. Transtrend receives an incentive fee equal to 20% of the New Trading Profits earned by Transtrend Master payable at the end of each calendar half year. Prior to its termination, AAA was eligible to receive an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by AAA for the Partnership during each calendar quarter. From January 1, 2016 to its termination effective October 31, 2018, Systematica was eligible to receive an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by Systematica for the Partnership. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership. Only the incentive fees paid by Transtrend Master for New Trading Profits earned for the Partnership are allocated to the Partnership.

Each Management Agreement may be terminated upon notice by either party.

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

The Partnership has entered into a futures brokerage account agreement with MS&Co. (the “Partnership Customer Agreement”). Under the Partnership Customer Agreement, the Partnership pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of trading fees for the clearing and, where applicable, the execution of transactions, as well as its allocable share of exchange, clearing, user, give-up and National Futures Association (“NFA”) fees (collectively, the “clearing fees”) directly and through its investment in the Funds. Clearing fees are allocated to the Partnership based on its proportionate ownership interest of the Funds. The Partnership’s assets available for trading in commodity interests not held in the Funds’ brokerage accounts at MS&Co. and JPMorgan are deposited in the Partnership’s brokerage account at MS&Co. The Partnership’s cash deposited with MS&Co. is held in segregated bank accounts to the extent required by Commodity Futures Trading Commission (“CFTC”) regulations. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At December 31, 2018 and 2017, the amount of cash held by the Partnership for margin requirements was $0 and $42,619,216, respectively. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Funds’, except for Transtrend Master’s) brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. MS&Co. has agreed to pay Transtrend Master interest on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. All other interest income will be retained by the Partnership and/or the Funds, as applicable. For purposes of these interest credits, daily funds do not include monies due to Transtrend Master on or with respect to futures, forwards, or option contracts that have not been received. The Partnership Customer Agreement may generally be terminated upon notice by either party.

Effective March 1, 2014, the Partnership has entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee. Prior to October 1, 2014, the amount of the ongoing selling agent fee was calculated by multiplying the Partnership’s (i) round-turn futures transactions by $18.00 each, swaps by up to an equivalent amount and options transactions by $9.00 each per side, with respect to Class A Redeemable Units and (ii) round-turn futures transactions by $3.00 each, swaps by up to an equivalent amount and options transactions by $1.50 each per side, with respect to Class Z Redeemable Units.

 

4


Effective October 1, 2014, the ongoing selling agent fee was (i) reduced to $15.00 each for futures transactions and up to an equivalent amount for swaps and $7.50 each per side for options transactions, with respect to Class A Redeemable Units and (ii) eliminated with respect to Class Z Redeemable Units. The ongoing selling agent fee amount is reduced by applicable floor brokerage fees. The Partnership may pay an ongoing selling agent fee to other properly licensed and/or registered selling agents who sell Class A Redeemable Units, and such additional selling agents may share all or a substantial portion of such fees with their properly registered or exempted financial advisors who have sold Class A Redeemable Units.

Under the prior futures brokerage account agreement (the “Prior Customer Agreement”), the Partnership paid MS&Co. a monthly brokerage commission equal to (i) $18.00 per round-turn on futures transactions, up to an equivalent amount for swaps and $9.00 per side on options transactions, with respect to Class A Redeemable Units and (ii) $3.00 per round-turn on futures transactions, up to an equivalent amount for swaps and $1.50 per side on options transactions, with respect to Class Z Redeemable Units. The brokerage commissions were inclusive of applicable floor brokerage fees. The Partnership also paid MS&Co. clearing fees through its investment in the Funds. Clearing fees were allocated to the Partnership based on its proportionate share of the Funds. During the term of the Prior Customer Agreement, all of the Partnership’s assets not held in the Funds’ brokerage accounts at MS&Co. were deposited in the Partnership’s brokerage account at MS&Co. The Partnership’s cash was also deposited by MS&Co. in segregated bank accounts to the extent required by CFTC regulations. MS&Co. also agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Funds’, except for Transtrend Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. MS&Co. also agreed to pay Transtrend Master interest on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. For purposes of these interest credits, daily funds did not include monies due to Transtrend Master on or with respect to futures, forwards, or option contracts that have not been received. The Partnership has terminated the Prior Customer Agreement.

As of November 1, 2018, the Partnership entered into an alternative investment placement agent agreement (the “Harbor Selling Agreement”), by and among the Partnership, the General Partner, Morgan Stanley Distribution Inc. (“MSDI”), and Harbor Investment Advisory, LLC, a Maryland limited liability company (“Harbor”), which supersedes and replaces the alternative investment selling agent agreement, dated January 19, 2018, between the Partnership, the General Partner and Harbor. Pursuant to the Harbor Selling Agreement, MSDI and Harbor have been appointed as a non-exclusive selling agent and sub-selling agent, respectively, of the Partnership for the purpose of finding eligible investors for Redeemable Units through offerings that are exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder and for Harbor to serve as an investment advisor to its customers investing in one or more of the partnerships party to the Harbor Selling Agreement; provided, that, included within such appointment, Harbor will provide certain services to certain holders of Redeemable Units of the Partnership, who had acquired such Redeemable Units prior to such holders becoming clients of Harbor. The Harbor Selling Agreement continues in effect until September 30, 2019 unless terminated in certain circumstances as set forth in the Harbor Selling Agreement, including by any party on thirty days’ prior written notice, after which the General Partner or the Partnership may, in its sole discretion, renew the Harbor Selling Agreement for additional one year periods. Pursuant to the Harbor Selling Agreement, the Partnership pays Harbor an ongoing selling agent fee equal to $15.00 per round turn, swaps by up to an equivalent amount and options transactions by $7.50 each per side, with respect to Class A Redeemable Units held by Harbor clients. In each case, the amount will be reduced by applicable floor brokerage fees.

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.

(b) Financial Information about Segments. The Partnership’s business consists of only one segment, speculative trading of commodity interests. The Partnership does not engage in sales of goods or services. The Partnership’s net income (loss) from operations for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 are set forth under “Item 6. Selected Financial Data.” The Partnership’s capital as of December 31, 2018 was $606,058,475.

(c) Narrative Description of Business. See Paragraphs (a) and (b) above.

(i) through (xii) — Not applicable.

(xiii) — The Partnership has no employees.

(d) Financial Information About Geographic Areas. The Partnership does not engage in sales of goods or services or own any long-lived assets, and therefore this item is not applicable.

(e) Available Information. The Partnership does not have an Internet address. The Partnership will provide paper copies of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports free of charge upon request.

(f) Reports to Security Holders. Not applicable.

(g) Enforceability of Civil Liabilities Against Foreign Persons. Not applicable.

(h) Smaller Reporting Companies. Not applicable.

 

5


Item 1A. Risk Factors.

As a result of leverage, small changes in the price of the Partnership’s positions may result in major losses.

The trading of commodity interests is speculative, volatile and involves a high degree of leverage. A small change in the market price of a commodity interest contract can produce major losses for the Partnership. Market prices can be influenced by, among other things, changing supply and demand relationships, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events, weather and climate conditions, insects and plant disease, purchases and sales by foreign countries and changing interest rates.

An investor may lose all of its investment.

Due to the speculative nature of trading commodity interests, an investor could lose all of its investment in the Partnership.

The Partnership will pay substantial fees and expenses regardless of profitability.

Regardless of its trading performance, the Partnership will incur fees and expenses, including, but not limited to, ongoing selling agent fees, clearing fees, management fees, and General Partner fees. Substantial incentive fees may be paid to one or more of the Advisors even if the Partnership experiences a net loss for the full year.

An investor’s ability to redeem or transfer Redeemable Units is limited.

An investor’s ability to redeem Redeemable Units is limited and no market exists for the Redeemable Units.

Conflicts of interest exist.

The Partnership is subject to numerous conflicts of interest including those that arise from the fact that:

1. The General Partner and the Partnership’s/Funds’ commodity broker are affiliates;

 

  2.

Each of the Advisors, the Partnership’s/Funds’ commodity broker, the General Partner, and their respective principals and affiliates may trade in commodity interests for their own accounts;

 

  3.

An investor’s financial advisor will receive ongoing compensation for providing services to the investor’s account with respect to Class A Redeemable Units; and

 

  4.

The General Partner, on behalf of the Partnership, may purchase shares from money market mutual funds affiliated and/or unaffiliated with the General Partner.

Investing in Redeemable Units might not provide the desired diversification of an investor’s overall portfolio.

One of the Partnership’s objectives is to add an element of diversification to a traditional stock and bond portfolio, but any benefit of portfolio diversification is dependent upon the Partnership/Funds achieving positive returns and such returns being independent of stock and bond market returns.

Past performance is no assurance of future results.

The Advisors’ trading strategies may not perform as they have performed in the past. The Advisors have from time to time incurred substantial losses in trading on behalf of clients.

An investor’s tax liability may exceed cash distributions.

Investors are taxed on their share of the Partnership’s income, even though the Partnership does not intend to make any distributions.

The General Partner may allocate the Partnership’s assets to undisclosed advisors.

The General Partner at any time may select and allocate the Partnership’s assets to undisclosed advisors. Investors may not be advised of such changes in advance, or at all. Investors must rely on the ability of the General Partner to select commodity trading advisors and allocate assets among them.

 

6


Regulatory changes could restrict the Partnership’s operations and increase its operational costs.

Regulatory changes could adversely affect the Partnership by restricting its markets or activities, limiting its trading and/or increasing the costs or taxes to which investors are subject. Pursuant to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, the CFTC and the Securities and Exchange Commission (the “SEC”) have promulgated rules to regulate swap dealers and to mandate additional reporting and disclosure requirements and continue to promulgate rules regarding capital and margin requirements, to require that certain swaps be traded on an exchange or a swap execution facility, and to require that derivatives (such as those traded by the Partnership) be moved into central clearinghouses. The CFTC and the prudential regulators that oversee swap dealers have adopted rules regarding margin requirements for certain derivatives. In addition, the CFTC and such prudential regulators have proposed or adopted, respectively, rules regarding capital requirements for swap dealers. These rules may negatively impact the manner in which swap contracts are traded and/or settled, increase the cost of such trading, and limit trading by speculators (such as the Partnership) in futures and over-the-counter (“OTC”) markets.

Speculative position and trading limits may reduce profitability.

The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person or a group of persons may hold or control in particular futures, options on futures and swaps that perform a significant price discovery function. Most exchanges also limit the amount of fluctuation in commodity futures contract prices on a single trading day. Each of the Advisors believes that established speculative position and trading limits will not materially adversely affect trading for the Partnership/Funds. The trading instructions of an Advisor, however, may have to be modified, and positions held by the Partnership/Funds may have to be liquidated, in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Partnership/Funds by increasing transaction costs to liquidate positions and limiting potential profits on the liquidated positions.

In December 2016, the CFTC re-proposed new rules regarding speculative position limits, replacing a prior proposal from November 2013. These rules, if adopted in substantially the same form, will impose position limits on certain futures and option contracts and physical commodity swaps that are “economically equivalent” to such contracts. If enacted, these rules could have an adverse effect on an Advisors’ trading for the Partnership/Funds.

The General Partner, the Partnership and its Service Providers and their Respective Operations Are Potentially Vulnerable to Cyber-Security Attacks or Incidents.

Like other business enterprises, the use of the internet and other electronic media and technology exposes the General Partner, the Partnership and its service providers, and their respective operations, to potential risks from cyber-security attacks or incidents (collectively, “cyber events”). Cyber events may include, for example, unauthorized access to systems, networks or devices, infection from computer viruses or other malicious software code, mishandling or misuse of information and attacks which shut down, disable, slow or otherwise disrupt operations, business processes or website access or functionality. In addition to intentional cyber events, unintentional cyber events can occur. Unintentional cyber events may include, for example, the inadvertent release of confidential information, the mishandling or misuse of information and/or technological limitations or hardware failures (in the markets or otherwise) that constrain the Partnership’s and/or the Funds’ ability to gather, process and communicate information efficiently and securely, without interruption.

Any cyber event could adversely affect the Partnership’s business, financial condition or results of operations and cause the Partnership to incur financial loss and expense, as well as face exposure to regulatory penalties or legal claims, reputational damage and additional costs associated with corrective measures. A cyber-security breach could also jeopardize a limited partner’s personal, confidential, proprietary or other information processed and stored in, and transmitted through, the General Partner’s or a service provider’s computer systems. A cyber event may cause the Partnership or its service providers to lose proprietary information, suffer data corruption, lose operational capacity (such as, for example, the loss of the ability to process transactions, calculate the Partnership’s net asset value, or allow investors to transact business) and/or fail to comply with applicable privacy and other laws. Among other potentially harmful effects, cyber events also may result in theft, unauthorized monitoring and failures in the physical infrastructure or operating systems that support the Partnership or its service providers.

The nature of malicious cyber-attacks is becoming increasingly sophisticated and neither the General Partner nor the Partnership can control the cyber systems and cyber-security systems of the Advisors or other third-party service providers.

Tax Laws Are Subject to Change at Any Time.

Tax laws and court and Internal Revenue Service (“IRS”) interpretations thereof are subject to change at any time, possibly with retroactive effect. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law and is generally effective after December 31, 2018. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, including, in the case of individuals, reducing the top federal income rate to 37%, and eliminating or limiting various deductions, including capping the deduction for state and local taxes at $10,000 per year. Most of the changes applicable to

 

7


individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. For corporations, the Tax Cuts and Jobs Act reduces the top corporate income tax rate to 21%.

The Partnership does not anticipate that a limited partner’s share of income from the Partnership will be eligible for the 20% deduction established by the Tax Cuts and Jobs Act for qualified business income. However, in certain limited circumstances unlikely to apply to the Partnership, a portion of a limited partner’s gain upon a taxable disposition of an interest in the Partnership or a complete withdrawal may be eligible for the deduction.

The Tax Cuts and Jobs Act makes numerous other large and small changes to the federal income tax rules that may affect the Partnership’s investors and may directly or indirectly affect the Partnership. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification, and unintended consequences that will have to be reviewed in subsequent tax legislation. At this point, it is not clear when Congress will address these issues or when the IRS will issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.

Prospective investors are urged to consult with their tax advisors with respect to the Tax Cuts and Jobs Act and any other regulatory or administrative developments and proposals, and their potential effects on them based on their unique circumstances.

Item 2. Properties.

The Partnership does not own or lease any properties. The General Partner operates from facilities provided by Morgan Stanley and/or one of its subsidiaries.

 

8


Item 3. 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 2018, 2017, 2016, 2015, and 2014. 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. Please refer to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2018 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.

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.

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

 

9


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 intended 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 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.

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 under the Exchange Act 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 United States 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 CFTC 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.

On December 20, 2016, MS&Co. consented to and became the subject of an order by the SEC in connection with allegations that MS&Co. willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3(e), 17a-5(a), and 17a-5(d) thereunder, by inaccurately calculating its Reserve Account requirement under Rule 15c3-3 by including margin loans to an affiliate in its calculations, which resulted in making inaccurate records and

 

10


submitting inaccurate reports to the SEC. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. consented to a cease and desist order, a censure, and a civil monetary penalty of $7,500,000.

On September 28, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. regarding violations of CFTC Rule 166.3 by failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on multiple exchanges. The order and settlement required MS&Co. to pay a $500,000 penalty and cease and desist from violating Rule 166.3.

On November 2, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. for non-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC. The order requires MS&Co. to pay a $350,000 penalty and cease and desist from further violations of the Commodity Exchange Act.

Civil Litigation

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. On June 27, 2018, the Firm filed a motion for summary judgment and spoliation sanctions against CDIB. On December 21, 2018, the court denied MS&Co.’s motion for summary judgment and granted in part MS&Co.’s motion for sanctions related to the spoliation of evidence. On January 18, 2019, CDIB filed a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, MS&Co. filed a notice of appeal from the same order. 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, which 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. On January 18, 2017, the court entered an order dismissing all claims related to an additional securitization at issue. After those dismissals, the remaining amount of

 

11


certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $65 million. At December 31, 2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $37 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 $37 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 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 $133 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 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At December 31, 2018, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $23 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 $23 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. 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 September 30, 2016, the court granted MS&Co.’s demurrer, with leave to replead. On October 21, 2016, the California Attorney General filed an amended complaint. On January 25, 2017, the court denied MS&Co.’s demurrer with respect to the amended complaint.

In August of 2017, MS&Co. was named as a defendant in a purported antitrust class action in the United States District Court for the United States District Court for the Southern District of New York styled Iowa Public Employees’ Retirement System et al. v. Bank of America Corporation et al. Plaintiffs allege, inter alia, that MS&Co., together with a number of other financial institution defendants, violated U.S. antitrust laws and New York state law in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for securities lending. The class action complaint was filed on behalf of a purported class of borrowers and lenders who entered into stock loan transactions with the defendants. The

 

12


class action complaint seeks, among other relief, certification of the class of plaintiffs and treble damages. On September 27, 2018, the court denied the defendants’ motion to dismiss the class action complaint.

Settled 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. On January 23, 2017, the parties reached an agreement to settle the litigation.

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 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 December 21, 2016, the parties reached an agreement to settle the litigation.

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 alleged 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

 

13


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 alleged 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 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 alleged 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.

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 alleged 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 sought, 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

 

14


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 raised 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 Racketeer Influenced and Corrupt Organizations Act, and included 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.

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 alleged 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

 

15


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 asserted claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and sought, 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.

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 alleged 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 raised claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. 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. On July 13, 2018, the parties reached an agreement in principle to settle the litigation.

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 alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $634 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 26, 2018, the parties entered into an agreement to settle the litigation.

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.

Item 4. Mine Safety Disclosures. Not Applicable.

 

16


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

  (a)

Market Information. The Partnership has issued no stock. There is no public market for the Redeemable Units.

 

  (b)

Holders. The number of holders of Redeemable Units as of February 28, 2019 was 5,947 for Class A Redeemable Units and 62 for Class Z Redeemable Units.

 

  (c)

Dividends. The Partnership did not declare any distributions in 2018 or 2017. The Partnership does not intend to declare distributions in the foreseeable future.

 

  (d)

Securities Authorized for Issuance Under Equity Compensation Plans. None.

 

  (e)

Performance Graph. Not applicable.

 

  (f)

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities. For the twelve months ended December 31, 2018, there were subscriptions of 10,485.7950 Redeemable Units of Class A totaling $29,451,751 and 1,407.0670 Redeemable Units of Class Z totaling $1,554,831. For the twelve months ended December 31, 2017, there were subscriptions of 11,683.0890 Redeemable Units of Class A totaling $33,736,567 and 1,074.6210 Redeemable Units of Class Z totaling $1,180,838. For the twelve months ended December 31, 2016, there were subscriptions of 28,744.7430 Redeemable Units of Class A totaling $87,337,421 and 576.7720 Redeemable Units of Class Z totaling $663,409. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as described in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

 

   

Proceeds of net offering were used for the trading of commodity interests including futures, option and forward contracts and any other interests pertaining thereto, including interests in commodity pools.

 

  (g)

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

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

 

Period  

Class A

(a) Total Number of

Redeemable

Units Purchased*

   

Class A

(b) Average

Price Paid per

Redeemable

Unit**

   

Class Z

(a) Total Number of

Redeemable

Units Purchased*

   

Class Z

(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

 

October 1, 2018 - October 31, 2018

    3,820.6960     $ 2,684.10       23.5360     $ 1,061.16       N/A       N/A  

November 1, 2018 - November 30, 2018

    9,201.3670     $ 2,703.90       125.8870     $ 1,070.67       N/A       N/A  

December 1, 2018 - December 31, 2018

    5,331.5200     $ 2,608.11       21.8510     $ 1,034.06       N/A       N/A  
      18,353.5830     $ 2,671.95       171.2740     $ 1,064.69                  
  *

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 may 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 end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

 

17


Item 6. Selected Financial Data.

Total investment income, total expenses, total trading results, net income (loss) and increase (decrease) in net asset value per Redeemable Unit for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 and net asset value per Redeemable Unit and total assets at December 31, 2018, 2017, 2016, 2015 and 2014 were as follows:

 

     2018   2017   2016   2015   2014

Total investment income

     $ 11,614,455       $ 6,686,384       $ 2,461,219       $ 207,603       $ 117,686  

Total expenses

     (33,988,325     (38,086,579     (43,596,347     (56,173,898     (77,711,096

Total trading results

     (48,172,549     (1,840,380     35,131,599       30,010,980       234,777,294  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

     $ (70,546,419     $ (33,240,575     $ (6,003,529     $ (25,955,315     $ 157,183,884  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in net asset value per Redeemable Unit:

          

Class A

     $ (279.35     $ (95.18     $ (22.20     $ (71.94     $ 424.55  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class Z

     $ (88.75     $ (17.17     $ 6.50       $ (14.75     $ 170.88  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value per Redeemable Unit

          

Class A

     $ 2,608.11       $ 2,887.46       $ 2,982.64       $ 3,004.84       $ 3,076.78  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class Z

     $ 1,034.06       $ 1,122.81       $ 1,139.98       $ 1,133.48       $ 1,148.23  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

     $     623,296,907       $     818,584,324       $     1,021,476,101       $     1,105,487,549       $     1,154,055,168  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Partnership seeks to achieve substantial capital appreciation through speculative trading, directly or indirectly through its investment in the Funds, in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals. The Partnership/Funds may employ futures, options on futures and forward contracts in those markets. The Funds may also engage in swap transactions and other derivative transactions with the approval of the General Partner.

The General Partner manages all business of the Partnership/Funds. The General Partner has delegated its responsibility for the investment of the Partnership’s capital to the Advisors. The General Partner engages a team of approximately 20 professionals whose primary emphasis is on attempting to maintain quality control among the Advisors to the funds operated or managed by the General Partner. A full-time staff of due diligence professionals use proprietary technology and on-site evaluations to monitor new and existing futures money managers. The accounting and operations staff provide processing of subscriptions and redemptions and reporting to limited partners and regulatory authorities. The General Partner also includes staff involved in marketing and sales support. In selecting the Advisors for the Partnership, the General Partner considered, among other factors, past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisors at any time and may allocate assets to additional advisors at any time.

Responsibilities of the General Partner include:

 

   

due diligence examinations of the Advisors;

 

   

selection, appointment and termination of the Advisors;

 

   

negotiation of the Management Agreements; and

 

   

monitoring the activity of the Advisors.

In addition, the General Partner will prepare, or will assist the Administrator in preparing, the books and records and will provide, or will assist the Administrator in providing, the administrative and compliance services that are required by law or regulation, from time to time, in connection with the operation of the Partnership/Funds.

 

18


While the Partnership and the Funds have the right to seek lower commission rates from other commodity brokers at any time, the General Partner believes that the customer agreements and other arrangements with the commodity broker are fair, reasonable, and competitive.

The programs traded by each Advisor on behalf of the Partnership are: Transtrend — Diversified Trend Program — Enhanced Risk Portfolio (US Dollar); Willowbridge — wPraxis Futures Trading Approach; Winton — the Winton Futures Program; FORT — Global Contrarian Program; and, prior to its termination effective October 31, 2018, Systematica — BlueTrend Program. As of December 31, 2018 and September 30, 2018, the Partnership’s assets were allocated among the trading Advisors in the following approximate percentages:

 

        Advisor        

    December 31, 2018       December 31, 2018
 (percentage of net assets) 
      September 30, 2018       September 30, 2018
 (percentage of net assets) 
 

  Winton

    $         153,404,221         25       $         170,483,017         24  

  Transtrend

    $ 148,199,017         24       $ 170,256,724         24  

  Willowbridge

    $ 148,560,121         25       $ 171,595,147         25  

  FORT

    $ 155,895,116         26       $ 165,809,282         24  

  Systematica

    $ -             0       $ 23,976,153         3  

Winton Capital Management Limited

The portion of the Partnership’s assets that are currently allocated to Winton for trading are not invested in commodity interests directly. Winton’s allocation of the Partnership’s assets is currently invested in Winton Master. Winton trades the Winton Futures Program, a proprietary, systematic trading program, on behalf of Winton Master.

The investment objective of the Winton Futures Program is to achieve long-term investment growth.

The Winton Futures Program follows a disciplined investment process that is based on statistical analysis of historical data. The initial stage of the process involves collecting, cleaning and organizing large amounts of data. The Winton Futures Program uses a wide variety of data inputs including factors that are intrinsic to markets, such as price, volume and open interest; and those that are external to markets, such as economic statistics, industrial and commodity data and public company financial data. Winton conducts statistical research into the data in an attempt to quantify the probability of particular markets rising or falling, conditional on a variety of quantifiable factors. Winton’s research is used to develop mathematical models that attempt to forecast market returns, the variability or volatility associated with such returns (often described as “risk”), and the correlation between markets and transaction costs. These forecasts are used in investment strategies that determine what positions should be held to maximize profit within a certain range of risk. As a result of Winton’s research, Winton expects that the investments made in accordance with this process will have an improved chance of being successful, which is expected to lead to profits over the long-term.

Winton’s investment programs are operated as automated, computer-based investment systems. The programs are modified over time as Winton monitors their operation and undertakes further research. Changes to the programs occur as a result of, amongst other things, the discovery of new relationships, changes in market liquidity, the availability of new data or the reinterpretation of existing data.

Most of Winton’s investment decisions are made strictly in accordance with the output of the programs. However, Winton may, in exceptional circumstances (such as the occurrence of events that fall outside the input parameters of the programs), make investment decisions based on other factors and take action to override the output of the programs to seek to protect the interests of investors.

Winton does not take any responsibility for the accuracy or completeness of the contents of this document, any representations made herein, or the performance of the Partnership. Winton disclaims any liability for any direct, indirect, consequential or other losses or damages, including loss of profits incurred by limited partners or by any third party that may arise from any reliance on this document. Winton is neither responsible for, nor involved in, the marketing, distribution or sales of shares or interests in the Partnership and is not responsible for compliance with any marketing or promotion laws, rules or regulations; and no third party other than Winton is authorized to make any statement about any of Winton’s products or services in connection with any such marketing, distribution or sales. Past performance by any other fund advised by Winton is not indicative of any future performance by the Partnership.

Transtrend B.V.

The portion of the Partnership’s assets that are currently allocated to Transtrend for trading are not invested in commodity interests directly. Transtrend’s allocation of the Partnership’s assets is currently in Transtrend Master. Transtrend trades Transtrend Master’s assets, and thereby the Partnership’s assets, in accordance with its Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system. Transtrend generally trades its Enhanced Risk Profile using 1.5 times the leverage employed by the Standard Risk Profile.

 

19


Transtrend Master currently trades Financial Instruments (i.e., futures, options, options on futures, swaps, swaps on futures, forward contracts on foreign exchange, interest rates, interest rates instruments, commodities and equity related indices and instruments and other indices) on U.S. and non-U.S. exchanges and OTC markets. One of the potential strengths of the program is the disciplined, systematic and dynamic nature of market participation. The overall performance is determined by the entirety of all markets and all trades. In a systematic market approach, the disciplined application by Transtrend and a consistent participation by the client are both essential to realize the pursued returns over the course of time, although profitability cannot be guaranteed and clients may incur substantial losses on their investment.

Transtrend’s market approach attempts to benefit from directional price moves in outright Financial Instruments and in combinations of Financial Instruments.

Under the Diversified Trend Program’s Standard Risk Profile, Transtrend generally commits an average of approximately 14% of the assets in a client’s account as margin or a premium for Financial Instruments positions. Such percentage has varied, however, and is affected by various factors including, without limitation, nominal account size, market conditions, traded markets or the level of margins set by brokers or exchanges. The Diversified Trend Program’s Enhanced Risk Profile generally means 1.5 times the leverage, and as such the average margin commitments, of the Standard Risk Profile.

Willowbridge Associates Inc.

The portion of the Partnership’s assets that are allocated to Willowbridge for trading are not invested in commodity interests directly. Willowbridge’s allocation of the Partnership’s assets is currently invested in Willowbridge Master. Willowbridge trades the Partnership’s assets allocated to it in accordance with the wPraxis Futures Trading Approach (“Praxis”), a proprietary, discretionary trading system. Praxis will utilize a fully discretionary trading strategy to build a portfolio consisting of futures on currency, fixed income, stock indices and commodities. The approach may trade commodities, futures, forwards, options, swaps, spot contracts in the commodities, currencies and fixed income markets. All positions are closely monitored to evaluate risk parameter status. As markets move, positions are refined and expectations updated in response to current market conditions.

FORT L.P.

The portion of the Partnership’s assets that are allocated to FORT for trading are not invested in commodity interests directly. FORT’s allocation of the Partnership’s assets is currently invested in FORT Contrarian Master. FORT trades the Partnership’s assets allocated to it pursuant to its Global Contrarian Program, a systematic, technical, trend-anticipating futures trading strategy.

The Global Contrarian Trading Program attempts to profit from emerging trends by identifying price behaviors that signal possible turning points. Rather than attempting to identify existing trends, the Global Contrarian Trading Program attempts to anticipate trends before they occur. Trading decisions are based primarily on an analysis of market prices, volume and volatility; factors external to the trading markets are incorporated only in rare cases. The Global Contrarian Trading Program generally operates on the theory that market prices reflect all known factors affecting supply and demand of a particular financial instrument.

The Global Contrarian Trading Program is designed to incorporate concepts akin to “channels,” which FORT defines using systematic, mathematical tools. The Global Contrarian Trading Program estimates a large number of channels and identifies a confluence of channels to find resistance and support points. FORT believes that this style is markedly different from most trend-following strategies, which are generally late to enter and exit a trend. In contrast, the Global Contrarian Trading Program is designed to enter and exit a trend early. The Global Contrarian Trading Program generally seeks to anticipate and capitalize on short to intermediate-term trends. Because the Global Contrarian Trading Program seeks to anticipate trends in market prices, it has the potential to perform well even in what standard trend-following systems perceive as directionless periods.

The Global Contrarian Trading Program takes positions while a market is moving against one of its signals. As a result, its performance can be much more volatile than traditional trend-following models, but the potential for diversification is much greater. In an attempt to reduce the volatility of returns, the allocation of the Global Contrarian Trading Program’s capital is geographically diversified across Asia, Europe, Australia and North America. This diversification also provides the Global Contrarian Trading Program with opportunities to seek profits in a variety of market environments.

Total risk is measured primarily by using the margin-to-equity ratio, which is targeted not to exceed 14% for a fully funded account. The margin-to-equity ratio is monitored systematically as well as by FORT’s trading principals.

 

20


Systematica Investments Limited

Prior to its termination effective October 31, 2018, Systematica directly traded a managed account in the name of the Partnership pursuant to Systematica’s BlueTrend Program. The BlueTrend Program had maximum flexibility to invest in a wide range of derivative instruments, including currencies, futures, options and, with prior written approval of the General Partner, swaps and other derivative instruments. Derivative instruments may have been exchange-traded or OTC, as permitted by the Commodity Exchange Act and the rules promulgated thereunder. The BlueTrend Program may have engaged in short sales. The BlueTrend Program may have also retained amounts in cash pending reinvestment or if this was considered appropriate to the investment objective.

The BlueTrend Program sought to achieve its investment objective through the implementation of a systematic trading model or portfolio of systematic trading models. Such model(s) traded in a number of foreign exchange and commodity instruments, and derivatives relating to those instruments, including swaps, indices, forwards, futures and option contracts.

AAA Capital Management Advisors, Ltd.

The portion of the Partnership’s assets that were allocated to AAA for trading were not invested in commodity interests directly. AAA’s allocation of the Partnership’s assets was invested in AAA Master. AAA traded AAA Master’s, and thereby the Partnership’s, assets in accordance with its Energy Program — Futures and Swaps, a proprietary, discretionary trading system.

AAA Master traded energy futures contracts and options on energy futures contracts on domestic and international exchanges, as well as the Goldman Sachs Commodity Index (an index future comprised of energy and other products) traded on the Chicago Mercantile Exchange. AAA Master also engaged in swap transactions involving crude oil and other energy related products. References herein to energy and energy related products include all of the foregoing.

AAA generally based its trading decisions on “fundamental” factors, namely supply and demand for a particular group or type of commodity. AAA attempted to buy undervalued commodities and sell overvalued commodities, often but not always simultaneously. AAA used options in attempt to either reduce or define risks.

AAA was aware of price trends but did not trade upon trends. AAA often took profits in positions with specific trends even though that trend may have still been intact or perhaps even strong. AAA occasionally established positions that were countertrend.

Effective risk management was a crucial aspect of AAA’s trading program. Account size, expectation, volatility of the market traded and the nature of other positions taken were all factors in determining the amount of equity committed to each trade. AAA Master was AAA’s largest account.

No assurance could be given that the Advisors’ strategies will be successful or that they will generate profits for the Partnership.

 

21


Specific Fund level performance information is included in Note 6 to the Partnership’s financial statements included in “Item 8. Financial Statements and Supplementary Data.”

For the period January 1, 2018 through December 31, 2018, the average allocation by commodity market sector for each of the Funds was as follows:

 

     Winton Master     

Currencies

      41.4  %

Energy

      9.4  %

Grains

      4.4  %

Indices

      9.7  %

Interest Rates U.S.

      2.7  %

Interest Rates Non-U.S.

      6.7  %

Livestock

      0.9  %

Metals

      18.2  %

Softs

      6.6  %
   Transtrend Master   

Currencies

      27.9  %

Energy

      6.6  %

Grains

      4.5  %

Indices

      20.1  %

Interest Rates U.S.

      9.5  %

Interest Rates Non-U.S.

      18.5  %

Livestock

      1.1  %

Metals

      6.1  %

Softs

      5.7  %
   Willowbridge Master   

Currencies

      50.3  %

Energy

      8.7  %

Grains

      1.3  %

Indices

      4.5  %

Interest Rates U.S.

      18.0  %

Interest Rates Non-U.S.

      12.2  %

Livestock

      0.2  %

Metals

      3.9  %

Softs

      0.9  %
   FORT Contrarian Master (a)   

Currencies

      15.0  %

Energy

      6.0  %

Indices

      45.0  %

Interest Rates U.S.

      5.5  %

Interest Rates Non-U.S.

      27.3  %

Metals

      1.2  %

(a) The Partnership was invested in FORT Contrarian Master from February 1, 2018 to December 31, 2018.

 

22


(a) Liquidity.

The Partnership does not engage in sales of goods or services. Its assets are its (i) investment in the Funds, (ii) redemptions receivable from the Funds, (iii) equity in trading account, consisting of unrestricted and restricted cash, 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, (iv) cash at bank and (v) interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Funds and direct investments. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2018.

To minimize the risk relating to low margin deposits, the Partnership and Funds follow certain trading policies, including:

 

  (i)

The Partnership/Funds invest their assets only in commodity interests that an Advisor believes are traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that an Advisor believes will permit it to enter and exit trades without noticeably moving the market.

 

  (ii)

An Advisor will not initiate additional positions in any commodity if these positions would result in aggregate positions requiring a margin of more than 66 2/3% of the Partnership’s net assets allocated to that Advisor.

 
  (iii)

The Partnership/Funds may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is fully hedged.

 
  (iv)

The Partnership/Funds do not employ the trading technique commonly known as “pyramiding,” in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities.

 
  (v)

The Partnership/Funds do not utilize borrowings other than short-term borrowings if the Partnership/Funds take delivery of any cash commodities.

 
  (vi)

The Advisors may, from time to time, employ trading strategies such as spreads or straddles on behalf of the Partnership/Funds. “Spreads” and “straddles” describe commodity futures trading strategies involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets.

 
  (vii)

The Partnership/Funds will not permit the churning of their commodity trading accounts. The term “churning” refers to the practice of entering and exiting trades with a frequency unwarranted by legitimate efforts to profit from the trades, driven by the desire to generate commission income.

From January 1, 2018 through December 31, 2018, the Partnership’s average margin to equity ratio (i.e., the percentage of assets on deposit required for margin) was approximately 15.2%. The foregoing margin to equity ratio takes into account cash held in the Partnership’s name, as well as the allocable value of the positions and cash held on behalf of the Partnership in the name of the Funds.

In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options, and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, 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 OTC. Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 5.8% to 44.5% of the Partnership’s/Funds’ contracts are traded OTC.

 

23


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 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 due to 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.

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 market risk equal to the value of the futures and forward contracts held and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Partnership’s/Funds’ 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., an MS&Co. affiliate, or JPMorgan are counterparties or brokers with respect to the Partnership’s and the 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.

The General Partner monitors and attempts to mitigate 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, exchange-cleared swaps, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions. (See also “Item 8. Financial Statements and Supplementary Data.” for further information on financial instrument risk included in the notes to financial statements.)

The majority of these financial 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. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

Other than the risks inherent in U.S. Treasury bills, money market mutual fund securities, commodity futures, forward, option and swap contracts, the Partnership and the Funds know of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership’s/Funds’ liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the Partnership shall terminate under certain circumstances including a decrease in net asset value per Redeemable Unit to less than $400 as of the close of business on any business day. In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the Partnership’s aggregate net assets decline to less than $1,000,000.

(b) Capital Resources.

(i) The Partnership has made no material commitments for capital expenditures.

(ii) The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by net income or losses on trading and by expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any. Gains or losses on trading cannot be predicted. Market movements in commodities are dependent upon fundamental and technical factors which the Advisors may or may not be able to identify, such as changing supply and demand relationships, weather, government, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. Partnership expenses consist of, among other things, clearing fees, ongoing selling agent fees, management fees, General Partner fees and expenses allocated from Funds. The level of these expenses is dependent upon trading performance and the level of net assets maintained. In addition, the amount of interest income earned by the Partnership/Funds is dependent upon (1) the average daily equity maintained in cash in the Partnership’s and/or the Funds’ accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or the Funds and (3) interest rates over which none of the Partnership, the Funds, MS&Co. or JPMorgan has control.

 

24


No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem some or all of their Redeemable Units at the net asset value per Redeemable Unit as of the end of each month on three business days notice to the General Partner. There is no fee charged to limited partners in connection with redemptions. Redemptions are generally funded out of the Partnership’s cash holdings and/or redemptions from the Funds. For the year ended December 31, 2018, 54,390.7030 limited partner Redeemable Units of Class A were redeemed totaling $150,354,149, 260.3190 limited partner Redeemable Units of Class Z were redeemed totaling $280,456 and 2,056.7070 General Partner Redeemable Units of Class Z were redeemed totaling $2,300,010. For the year ended December 31, 2017, 69,458.8670 limited partner Redeemable Units of Class A were redeemed totaling $198,980,126, 742.9280 limited partner Redeemable Units of Class Z were redeemed totaling $802,540 and 1,178.1120 General Partner Redeemable Units of Class Z were redeemed totaling $1,274,988. For the year ended December 31, 2016, 56,915.7560 limited partner Redeemable Units of Class A were redeemed totaling $173,180,117, 494.8170 limited partner Redeemable Units of Class Z were redeemed totaling $562,971 and 872.2020 General Partner Redeemable Units of Class Z were redeemed totaling $1,039,843.

The Partnership continues to offer Redeemable Units at the net asset value per Redeemable Unit as of the end of each month. For the year ended December 31, 2018, there were subscriptions of 10,485.7950 limited partner Redeemable Units of Class A totaling $29,451,751 and 1,407.0670 limited partner Redeemable Units of Class Z totaling $1,554,831. For the year ended December 31, 2017, there were subscriptions of 11,683.0890 limited partner Redeemable Units of Class A totaling $33,736,567 and 1,074.6210 limited partner Redeemable Units of Class Z totaling $1,180,838. For the year ended December 31, 2016, there were subscriptions of 28,744.7430 limited partner Redeemable Units of Class A totaling $87,337,421 and 576.7720 limited partner Redeemable Units of Class Z totaling $663,409.

(c) Results of Operations.

For the year ended December 31, 2018, the net asset value per Redeemable Unit for Class A decreased 9.7% from $2,887.46 to $2,608.11. For the year ended December 31, 2018, the net asset value per Redeemable Unit for Class Z decreased 7.9% from $1,122.81 to $1,034.06. For the year ended December 31, 2017, the net asset value per Redeemable Unit for Class A decreased 3.2% from $2,982.64 to $2,887.46. For the year ended December 31, 2017, the net asset value per Redeemable Unit for Class Z decreased 1.5% from $1,139.98 to $1,122.81. For the year ended December 31, 2016, the net asset value per Redeemable Unit for Class A decreased 0.7% from $3,004.84 to $2,982.64. For the year ended December 31, 2016, the net asset value per Redeemable Unit for Class Z increased 0.6% from $1,133.48 to $1,139.98.

The Partnership experienced a net trading loss of $48,172,549 before fees and expenses in 2018. Losses were primarily attributable to the Partnership’s/Funds’ trading in currencies, energy, grains, indices, U.S. interest rates, livestock and metals and were partially offset by gains in non-U.S. interest rates and softs.

During the first quarter, the most notable losses were recorded during February from long positions in global stock indices as prices reversed sharply lower early in the month after previously trending higher for several months. Smaller losses in global stock indices were recorded in March. In commodities, losses were incurred in the grains markets throughout the quarter as weather related factors resulted in short-term price volatility. Additional commodity losses were experienced from long positions in industrial metals as prices reversed lower in February on equity market weakness and in March on concerns of a burgeoning trade war. Smaller losses from long positions in the energy sector during February offset gains recorded during January and March. The Partnership’s overall trading losses for the first quarter were partially offset by trading gains in U.S. interest rate futures during January and in European interest rate futures during March. Smaller gains were also recorded in sugar futures trading during January and March.

During the second quarter, the most significant gains were achieved within the energy markets during April and May from long positions in crude oil and its refined products as prices surged amid fears tensions in the Middle East region could affect oil supplies. Within the global interest rate sector, gains were achieved during May from long positions in European fixed income futures as turmoil surrounding the election of a populist Prime Minister in Italy sparked investor demand for the safety of government debt. Additional gains within the fixed income sector were recorded during June from short positions in U.S. fixed income futures as a strengthening U.S. economy limited demand for safe-haven assets. A portion of the Partnership’s gains for the second quarter was offset by losses incurred within the currency sector during April from long positions in the Russian ruble versus the U.S. dollar as the value of the ruble slumped following the announcement of new economic sanctions to be imposed on Russia. Additional losses in currencies occurred during May due to positions in the Mexican peso, Turkish lira, and Japanese yen. Within the agricultural markets, losses were experienced during May from long positions in soybean, soybean meal, and soybean oil futures as prices slumped on prospects of a potential trade war between the U.S. and China. Further losses in the agricultural complex were incurred during May from positions in sugar and cocoa futures.

 

25


During the third quarter, the most significant gains were achieved within the metals markets during July and August from short positions in gold and silver futures as a strengthening U.S. dollar diminished investor demand for precious metals. Additional gains were experienced within the agriculturals during July from short positions in coffee and sugar futures as global supply stocks swelled. Within the global stock index sector, gains were achieved primarily during July from long positions in European and Asian equity index futures as positive global economic sentiment overcame trade war concerns, pushing stock prices higher. The Partnership’s gains for the third quarter were offset by losses incurred within the global interest rate markets during July and September from long positions in European fixed income futures as comments from the European Central Bank indicated a more hawkish position on raising interest rates. Within the currency sector, losses were recorded during July and September from positions in the euro versus the U.S. dollar as competing geopolitical and economic tensions resulted in choppy price action for the European currency.

During the fourth quarter, the most significant losses were experienced in global stock index futures primarily during October from long positions amid fears of stagnating global economic growth. In the energies, losses were recorded during October from long positions in crude oil futures and during December from long positions in natural gas futures. Further losses were incurred during December from short positions in the euro and Japanese yen as the value of the respective currencies rallied on safe-haven demand. Losses in the agricultural markets were incurred during October from short positions in coffee and sugar futures as prices experienced a sharp rally. In the metals, losses were experienced from positions in industrial metals futures in October and precious metals futures positions during December. The Partnership’s losses were partially offset by gains from long positions in European fixed income futures as bond prices trended higher throughout the fourth quarter.

The Partnership experienced a net trading loss of $1,840,380 before fees and expenses in 2017. Losses were primarily attributable to the Partnership’s/Funds’ trading in currencies, energy, grains, metals, softs and U.S. and non-U.S interest rates and were partially offset by gains in livestock and indices.

During the first quarter, the most notable losses were recorded during January and March from long positions in European and U.S. fixed income as prices declined amid growing hawkish sentiment from central banks across the globe. Losses were also recorded during January and March from long positions in natural gas futures, as well as in currencies from short positions in the euro and Japanese yen. Additional losses were recorded within the metals markets during March and in the agricultural sector during January. The Partnership’s first quarter losses were partially offset by gains achieved during February and March from long positions in global equity index futures as prices were buoyed by positive economic sentiment globally.

During the second quarter, the most meaningful losses were recorded in the currency markets during April and May from short positions in the euro versus the U.S. dollar as the dollar weakened amid the debate surrounding the Trump Administration’s alleged ties to Russia. Further losses during April and May were recorded in the energy markets from long positions in the crude oil complex as oil prices pushed lower, as well as in the metals sector. Losses were also recorded during June in global interest rate and agricultural futures. These losses were partially offset by gains recorded in the global equity index sector as long positions in the U.S., Europe, and Asia profited from prices climbing higher during April and May.

During the third quarter, losses were incurred within the global interest rate sector during September from long futures positions in U.S. and European fixed income as hawkish sentiment among the world’s major central banks remained. Additional losses were experienced in the agricultural markets during July from short positions in coffee, sugar, and cocoa and during both July and September from short positions in wheat and soybeans. Smaller losses were incurred in currencies during September and in the energy sector during July. A portion of the Partnership’s losses for the third quarter was offset by gains recorded during July and September from long positions in global equity index futures as stock prices continued to rise on growing confidence in the strength of the global economy. Additional gains were recorded in metals during August from long positions in copper futures.

During the fourth quarter, the Partnership recorded gains in global stock index futures from long positions as equity prices continued their rally on optimism for global economic growth. Gains were also recorded in the energy markets from long positions in crude oil and its refined products as prices rose throughout the quarter on expectations for further output cuts from OPEC and Russia. Additional trading gains were recorded in metals and grains during October and December. The Partnership’s gains for the fourth quarter were partially offset by currency losses experienced October from positions in the Turkish lira, Brazilian real, Mexican peso, and Australian dollar. Net trading results in the fixed income sector were relatively flat for the quarter.

Interest income is earned on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of Willowbridge Master’s, Winton Master’s or FORT Contrarian Master’s) brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. MS&Co. will pay monthly interest to Transtrend Master on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. Any interest earned on the Partnership’s and/or each Fund’s cash 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 earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership and/or the Funds, as applicable. Any interest income earned on collateral or excess cash deposited by certain of the Funds and held by JPMorgan in its capacity as such Funds’ forward foreign currency counterparty will be retained by such Funds, and the Partnership will receive its allocable portion of such interest from the applicable Fund. Interest income earned by the Partnership for the three and twelve months ended December 31, 2018 increased by $1,187,229 and $4,928,071, respectively, as compared to the corresponding periods in 2017. The increase in interest income is primarily due to higher 4-week U.S. Treasury bill discount rates during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017. Interest earned by the Partnership will increase the net

 

26


asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership’s and/or the Funds’ accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or the Funds and (3) interest rates over which none of the Partnership, the Funds, MS&Co. or JPMorgan has control.

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 twelve months ended December 31, 2018 decreased by $182,217 and $515,693, respectively, as compared to the corresponding periods in 2017. The decrease in these clearing fees is primarily due to a decrease in the number of direct trades made by the Partnership during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017.

Ongoing selling agent fees are based on the number of trades executed by the Advisors. Accordingly, they must be compared in relation to the number of trades executed during the period. Ongoing selling agent fees for the three and twelve months ended December 31, 2018 decreased by $891,845 and $1,031,628, respectively, as compared to the corresponding periods in 2017. The decrease in ongoing selling agent fees is primarily due to a decrease in the number of trades during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017.

Management fees, except fees payable to Transtrend, are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees payable to Transtrend are charged at the Transtrend Master level and are affected by trading performance, subscriptions and redemptions of Transtrend Master. Management fees for the three and twelve months ended December 31, 2018 decreased by $550,671 and $2,296,656, respectively, as compared to the corresponding periods in 2017. The decrease in management fees is due to lower average adjusted net assets during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017.

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 as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. The General Partner fees for the three and twelve months ended December 31, 2018 decreased by $305,225 and $1,214,461, respectively, as compared to the corresponding periods in 2017. The decrease in the General Partner fees is due to lower average adjusted net assets during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017.

Incentive fees paid by the Partnership are based on the New Trading Profits, as defined in the respective Management Agreements among the Partnership, the General Partner and each Advisor, generated by each Advisor at the end of the quarter, calendar half year or annually, as applicable. Trading performance for the three and twelve months ended December 31, 2018 resulted in incentive fees of $0 and $47,039, respectively. Trading performance for the three and twelve months ended December 31, 2017 resulted in incentive fees of $0 and $25,157, respectively. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid an incentive fee until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

The Partnership pays professional fees, which generally include legal, accounting expenses, administrative, filing, reporting and data processing fees. Professional fees for the years ended December 31, 2018 and 2017 were $1,489,943 and $1,713,581, respectively.

The Partnership experienced a net trading gain of $35,131,599 before fees and expenses in 2016. Gains were primarily attributable to the Partnership’s/Funds’ trading in currencies and U.S. and non-U.S interest rates and were partially offset by losses in energy, livestock, metals, softs, grains and indices.

The most significant gains were achieved within the global interest rate sector during January and February from long positions in European and Asian fixed income futures as prices advanced after weakness in Chinese economic data revived concern about the stability of the global economy. Additional gains were recorded during June from long positions in European and U.S. fixed income futures as prices moved higher as uncertainty surrounding the economic and political fallout following the U.K.’s vote in late June to leave the European Union increased demand for the relative “safety” of government debt. Within the currency sector, gains were recorded during June from short positions in the British pound and euro versus the U.S. dollar as the relative value of the European currencies weakened, particularly the pound which dropped sharply, after the U.K. voted to leave the European Union. During October, gains within the currency markets were experienced from short positions in the British pound versus the U.S. dollar as the relative value of the British currency continued to struggle following the June referendum vote. Additional gains were achieved during December from short positions in the Japanese yen versus the U.S. dollar as the relative value of the dollar was spurred higher by positive sentiment following the U.S. presidential election and in anticipation of the Federal Reserve Bank maintaining an aggressive interest rate policy in 2017. The Partnership’s trading gains for the year were offset by trading losses incurred within the energy markets during August and September from short positions in crude oil and its related products as prices moved higher amid speculation of a potential agreement among the OPEC nations to curtail oil production. Losses within the energy sector were also recorded during April from short positions in crude oil and its related products as prices surged as data from the Energy Information Agency showed U.S. crude oil production continued to decline. Within the metals markets, losses were recorded during January and February from short positions in gold and silver futures as prices rose as a weakening U.S. dollar spurred

 

27


investor demand for precious metals. Within the agricultural sector, losses were incurred during March from short positions in wheat futures as prices moved higher after rainy weather conditions threatened U.S. Midwest farmland. Additional losses in this sector were recorded during January and April from corn futures positions. Losses within the global stock index markets were experienced during June from long positions in U.S., European, and Asian equity index futures as prices declined amid uncertainty surrounding the economic situation in Europe. Additional losses within the global stock index sector were experienced during April from short positions in Asian and European equity index futures as prices rallied early in the month amid signs of optimism about the global economy.

In the General Partner’s opinion, the Partnership’s Advisors continue to employ trading methods consistent with the objectives of the Partnership/Funds. The General Partner monitors the Advisors’ performance on a daily, weekly, monthly and annual basis to assure these objectives are met.

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 Funds and the Partnership expect to increase capital through operations.

In allocating the assets of the Partnership among the Advisors, the General Partner considers, among other factors, each Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time. Each Advisor’s percentage allocation and trading program is described in the “Overview” section of this Item 7.

(d) Off-balance Sheet Arrangements. None.

(e) Contractual Obligations. None.

(f) Operational Risk.

The Partnership, directly or indirectly through its investment in the Funds, is exposed to market risk and credit risk, which arise in the normal course of its business activities. Slightly less direct, but of critical importance, are risks pertaining to operational and back office support. This is particularly the case in a rapidly changing and increasingly global environment with increasing transaction volumes and an expansion in the number and complexity of products in the marketplace.

Such risks include:

Operational/Settlement Risk — the risk of financial and opportunity loss and legal liability attributable to operational problems, such as inaccurate pricing of transactions, untimely trade execution, clearance and/or settlement, or the inability to process large volumes of transactions. The Partnership/Funds are subject to increased risks with respect to their trading activities in emerging market instruments, where clearance, settlement, and/or custodial risks are often greater than in more established markets.

Technological Risk — the risk of loss attributable to technological limitations or hardware failure that constrain the Partnership’s/Funds’ ability to gather, process, and communicate information efficiently and securely, without interruption, to customers and in the markets where the Partnership/Funds participate. Additionally, the General Partner’s computer systems may be vulnerable to unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events that could have a security impact on such systems. If one or more of such events occur, this potentially could jeopardize a limited partner’s personal, confidential, proprietary or other information processed and stored in, and transmitted through, the General Partner’s computer systems, and adversely affect the Partnership’s business, financial condition or results of operations.

Legal/Documentation Risk — the risk of loss attributable to deficiencies in the documentation of transactions (such as trade confirmations) and customer relationships (such as master netting agreements) or errors that result in non-compliance with applicable legal and regulatory requirements.

Financial Control Risk — the risk of loss attributable to limitations in financial systems and controls. Strong financial systems and controls ensure that assets are safeguarded, that transactions are executed in accordance with the General Partner’s authorization, and that financial information utilized by the General Partner and communicated to external parties, including the Partnership’s Redeemable Unit holders, creditors, and regulators, is free of material errors.

(g) Critical Accounting Policies.

The preparation of financial statements 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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. As a result, actual results could differ from these estimates. A summary of the Partnership’s significant accounting policies is described in Note 2 to the Partnership’s financial statements included in “Item 8. Financial Statements and Supplementary Data.”

The Partnership’s most significant accounting policy is the valuation of its investment in the Funds and in futures, option and forward contracts and U.S. Treasury bills, as applicable. The fair value of the investment in the Funds is determined based on the respective Fund’s net asset value per unit as calculated by the Fund or the Partnership’s (1) net contribution to the Funds and (2) its allocated share of the undistributed profits and losses, including

 

28


realized gains (losses) and net change in unrealized gains (losses), of the Funds. 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.

 

29


Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by the Partnership/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/Funds’ main line of business.

The limited partners will not be liable for losses exceeding the current net asset value of their investment. This limited liability is a result of the organization of the Partnership as a limited Partnership under New York law.

Market movements result in frequent changes in the fair value of the Partnership’s/Funds’ open contracts and, consequently, in their earnings and cash balances. The Partnership’s/Funds’ market risk is influenced by a wide variety of factors. These primarily include factors which affect energy price levels, including supply factors and weather conditions, but could also include 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 performances are not necessarily indicative of their future results.

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

Materiality as used in this section is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Partnership’s/Funds’ market sensitive instruments.

Quantifying the Partnership’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership’s/Funds’ market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor except for statements of historical fact (such as the terms of particular contracts and the number of market risk sensitive instruments held during or at the end of the reporting period).

The Partnership’s/Funds’ risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership’s/Funds’ mark-to-market accounting, any loss in the fair value of the Partnership’s/Funds’ open positions, including investments in the Funds, is directly reflected in the Partnership’s earnings (realized or unrealized) and cash balances.

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.

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

The fair value of the Partnership’s/Funds’ futures and forward positions does not have any optionality component. However, the Advisors do trade commodity options. Where this instrument is a futures contract, the futures margin has been used, and where this instrument is a physical commodity, the futures-equivalent margin has been used. This calculation is conservative in that it assumes that the fair value of an option will decline by the same amount as the fair value of the underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership/Funds in almost all cases fluctuate to a lesser extent than those of the underlying instruments.

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

 

30


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

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The Advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the master funds over which they have been granted limited authority to make trading decisions. Prior to its termination effective October 31, 2018, Systematica directly traded a managed account in the name of the Partnership. 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 as of December 31, 2017 (i.e. in the managed account in the Partnership’s name traded by Systematica) and indirectly by each Fund separately as of December 31, 2018 and 2017.

The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of December 31, 2018 and 2017. As of December 31, 2018, the Partnership’s total capitalization was $606,058,475.

December 31, 2018

 

  Market Sector

     Value at Risk        % of Total
Capitalization
 

  Commodities

       $             40,258,019            6.64  

  Currencies

       26,292,766            4.34    

  Interest Rates

       11,318,101            1.87    

  Equities

       8,935,678            1.47    
    

 

 

      

 

 

 

  Total

       $             86,804,564                                            14.32  
    

 

 

      

 

 

 

As of December 31, 2017, the Partnership’s total capitalization was $798,532,927.

December 31, 2017

 

  Market Sector

     Value at Risk        % of Total
Capitalization
 

  Commodities

       $             31,695,545            3.97  

  Currencies

       67,295,666            8.43    

  Interest Rates

       21,758,941            2.72    

  Equities

       40,033,293            5.01    
    

 

 

      

 

 

 

  Total

       $             160,783,445                                            20.13  
    

 

 

      

 

 

 

 

31


The following tables indicate the trading Value at Risk associated with the Partnership’s direct investments as of December 31, 2017 and indirect investments in the Funds by market category as of December 31, 2018 and 2017, the highest and lowest at any point and average value during the years. All open position trading risk exposures have been included in calculating the figures set forth below.

As of December 31, 2017, the Partnership’s Value at Risk for the portion of its assets that were traded directly was as follows:

December 31, 2017

 

                Twelve Months Ended December 31, 2017  

  Market Sector                                         

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

  Currencies

     $     16,587,445          2.08     %      $ 44,314,503          $ 16,281,723          $ 29,394,065    

  Energy

     3,259,297          0.41         4,922,921          1,292,232          3,057,028    

  Grains

     1,413,905          0.18         2,933,816          734,795          2,212,317    

  Indices

     14,823,350          1.86         19,782,557          9,987,367          14,365,095    

  Interest Rates U.S.

     849,657          0.11         3,122,851          849,657          2,039,105    

  Interest Rates Non-U.S.

     2,728,281          0.34         6,750,624          1,672,930          3,702,845    

  Livestock

     27,720          0.00     **      534,628          27,720          250,623    

  Metals

     2,081,248          0.26         3,289,718          1,068,033          2,113,256    

  Softs

     831,695          0.10         1,073,556          258,210          696,301    
  

 

 

 

  

 

 

         

  Total

     $ 42,602,598          5.34     %         
  

 

 

 

  

 

 

         

 

*

Annual average of month-end Values at Risk.

 

**

Due to rounding.

 

32


At December 31, 2018, Winton Master’s total capitalization was $339,199,614 and the Partnership owned approximately 45.1% of Winton Master. As of December 31, 2018, Winton Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Winton for trading) was as follows:

December 31, 2018

 

                       Twelve Months Ended December 31, 2018  

  Market Sector                                     

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

  Currencies

     $ 14,022,930             4.13     %      $ 40,819,997             $ 8,567,370             $ 16,973,741    

  Energy

     8,028,684             2.37         8,036,912             829,228             4,157,377    

  Grains

     2,334,001             0.69         2,334,001             1,061,131             1,716,066    

  Indices

     2,227,828             0.66         20,796,191             1,604,411             4,148,554    

  Interest Rates U.S.

     254,895             0.08         2,463,087             231,014             1,064,575    

  Interest Rates Non-U.S.

     3,164,144             0.93         4,678,955             563,863             2,628,833    

  Livestock

     275,880             0.08         608,080             53,482             353,539    

  Metals

     3,821,887             1.13         10,784,203             3,821,887             6,988,060    

  Softs

     3,145,874             0.93         3,315,733             1,909,209             2,622,981    
  

 

 

 

     

 

 

               

  Total

     $ 37,276,123             11.00     %               
  

 

 

 

     

 

 

               

 

  *

Annual average of month-end Values at Risk.

Prior to the close of business on December 31, 2017, Winton Master’s total capitalization was $408,679,588 and the Partnership owned approximately 45.8% of Winton Master. Prior to the close of business on December 31, 2017, Winton Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Winton for trading) was as follows:

December 31, 2017

 

                       Twelve Months Ended December 31, 2017  

  Market Sector                                         

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

  Currencies

     $ 37,375,662             9.15     %      $ 41,685,050             $ 6,859,203             $ 29,801,089    

  Energy

     6,288,778             1.54         6,288,778             660,791             2,375,862    

  Grains

     1,358,483             0.33         2,712,999             1,100,657             1,778,122    

  Indices

     20,126,411             4.92         31,470,290             17,643,595             23,398,714    

  Interest Rates U.S.

     1,109,639             0.27         5,362,330             514,996             2,048,055    

  Interest Rates Non-U.S.

     2,562,664             0.63         5,374,331             1,520,731             3,434,888    

  Livestock

     502,480             0.12         850,960             359,920             611,098    

  Metals

     10,415,048             2.55         10,465,318             1,732,090             4,070,470    

  Softs

     2,704,190             0.66         2,735,012             1,140,436             1,782,061    
  

 

 

 

     

 

 

               

  Total

     $ 82,443,355             20.17     %               
  

 

 

 

     

 

 

               

 

  *

Annual average of month-end Values at Risk.

 

33


At December 31, 2018, Transtrend Master’s total capitalization was $149,798,704 and the Partnership owned approximately 99.2% of Transtrend Master. As of December 31, 2018, Transtrend Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Transtrend for trading) was as follows:

December 31, 2018

 

                    Twelve Months Ended December 31, 2018

  Market Sector                                         

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

  Commodities

     $ 11,359,550          7.58     %      $ 14,981,202          $ 6,863,159          $ 9,335,476  

  Currencies

     12,331,353          8.23         19,222,620          8,109,796          10,820,662  

  Interest Rates

     6,559,093          4.38         16,853,641          4,706,163          10,921,313  

  Equities

     3,385,302          2.26         17,625,278          2,908,791          7,919,437  
  

 

 

 

    

 

 

             

  Total

     $ 33,635,298          22.45     %             
  

 

 

 

    

 

 

             

 

  *

Annual average of daily Values at Risk.

Prior to the close of business on December 31, 2017, Transtrend Master’s total capitalization was $216,893,179 and the Partnership owned approximately 95.8% of Transtrend Master. Prior to the close of business on December 31, 2017, Transtrend Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Transtrend for trading) was as follows:

December 31, 2017

 

                    Twelve Months Ended December 31, 2017

  Market Sector                                         

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

  Commodities

     $ 14,981,202            6.91     %      $ 16,281,307          $ 8,420,726          $ 13,271,018  

  Currencies

     19,248,396            8.87         32,480,250          11,349,411          20,816,692  

  Interest Rates

     12,582,632            5.80         18,335,424          4,377,363          10,507,441  

  Equities

     16,705,050            7.70         23,325,397          9,893,398          15,903,292  
  

 

 

 

    

 

 

             

  Total

     $ 63,517,280            29.28     %             
  

 

 

 

    

 

 

             

 

  *

Annual average of daily Values at Risk.

 

34


At December 31, 2018, Willowbridge Master’s total capitalization was $148,381,987 and the Partnership owned 100.0% of Willowbridge Master. As of December 31, 2018, 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, 2018

 

                Twelve Months Ended December 31, 2018

  Market Sector                                         

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

  Currencies

     $ 5,779,812          3.90     %      $ 56,907,657        $ 184,957        $ 18,447,956  

  Energy

     20,523,927          13.83         20,523,927        -            2,590,789  

  Metals

     141,653          0.10         3,485,776        -            995,874  
  

 

 

 

  

 

 

         

  Total

     $ 26,445,392          17.83     %         
  

 

 

 

  

 

 

         

 

*

Annual average of month-end Values at Risk.

Prior to the close of business on December 31, 2017, Willowbridge Master’s total capitalization was $332,211,210 and the Partnership owned approximately 82.5% of Willowbridge Master. Prior to the close of business on December 31, 2017, 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, 2017

 

                Twelve Months Ended December 31, 2017  

  Market Sector                                         

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

  Currencies

     $ 18,377,762        5.53     %      $ 83,446,338          $ 3,531,563          $ 34,901,146    

  Interest Rates Non-U.S.

     5,390,008        1.62         21,928,085          -                6,693,730    
  

 

 

 

  

 

 

         

  Total

     $ 23,767,770        7.15     %         
  

 

 

 

  

 

 

         

 

*

Annual average of month-end Values at Risk.

 

35


At December 31, 2018, FORT Contrarian Master’s total capitalization was $178,393,437 and the Partnership owned approximately 87.3% of FORT Contrarian Master. As of December 31, 2018, FORT Contrarian Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to FORT Contrarian for trading) was as follows:

December 31, 2018

 

                Twelve Months Ended December 31, 2018

  Market Sector                                         

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

  Currencies

     $ 2,240,447        1.26     %      $ 2,757,775        $ 172,452        $ 1,520,555  

  Energy

     244,947        0.14         967,522        73,178        531,249  

  Indices

     5,237,924        2.94         7,387,056        456,333        4,533,675  

  Interest Rates U.S.

     349,766        0.20         1,397,202        20,173        551,742  

  Interest Rates Non-U.S.

     3,395,359        1.90         4,340,103        151,500        2,533,930  

  Metals

     194,128        0.11         264,990        6,732        114,975  
  

 

 

 

  

 

 

         

  Total

     $ 11,662,571        6.55     %         
  

 

 

 

  

 

 

         

 

*

Annual average of month-end Values at Risk.

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

The face value of the market sector instruments held by the Partnership/Funds is typically many times the applicable maintenance margin requirement (margin requirements generally range between 1% and 15% of contract face value, although an exchange may increase margin requirements on short notice) as well as many times the capitalization of the Partnership/Funds. The magnitude of the Partnership’s/Funds’ open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of the Partnership’s/Funds’ positions, certain market conditions—unusual, but historically recurring from time to time—could cause the Partnership/Funds to incur severe losses over a short period of time. The foregoing Value at Risk tables—as well as the past performance of the Partnership/Funds—give no indication of this “risk of ruin.”

 

36


Non-Trading Risk

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

A decline in short-term interest rates would result in a decline in the Partnership’s cash management income. This cash flow risk is not considered to be material.

Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality and multiplier features of the Partnership’s/Funds’ market-sensitive instruments, in relation to the Partnership’s/Funds’ net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

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

The following were the primary trading risk exposures of the Partnership at December 31, 2018 by market sector. It may be anticipated, however, that these market exposures will vary materially over time.

Currencies. The Partnership’s/Funds’ currency exposure is to exchange rate fluctuations, primarily fluctuations that disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions. The General Partner does not anticipate that the risk profile of the Partnership’s/Funds’ currency sector will change significantly in the future.

Equities. The Partnership’s/Funds’ primary equity exposure is to equity price risk in the G8 countries. The stock index futures traded by the Partnership/Funds are limited to futures on broadly based indices. As of December 31, 2018, the Partnership’s/Funds’ primary exposures were in the Dow Jones Euro STOXX 50 (European Union), Dow Jones Industrials 30 (U.S.), S&P 500 (U.S.), TOPIX (Japan) and FTSE 100 (United Kingdom) stock indices. The Partnership/Funds are primarily exposed to the risk of adverse price trends or static markets in the major European, U.S., and Pacific Rim indices, as well as in emerging markets. (Static markets would not cause major market changes but would make it difficult for the Partnership/Funds to avoid being “whipsawed” into numerous small losses.)

Interest Rates. Interest rate movements directly affect the price of the futures positions held by the Partnership/Funds and indirectly the value of their stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially affect the Partnership’s/Funds’ profitability. The Partnership’s/Funds’ primary interest rate exposure is to interest rate fluctuations in the United States and the other G8 countries. However, the Partnership/Funds may also take futures positions on the government debt of smaller nations — e.g., Australia and New Zealand.

Commodities:

Energy. The Partnership’s/Funds’ primary energy market exposure is to oil and natural gas price movements, often resulting from political developments in the Middle East, weather conditions, and other factors contributing to supply and demand. Energy prices can be volatile and substantial profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets in the future.

Metals. The Partnership’s/Funds’ primary metal market exposure as of December 31, 2018 was to fluctuations in the prices of copper, aluminum, silver, nickel, zinc, lead, and gold.

Grains. The Partnership’s/Funds’ trading risk exposure in the grains is primarily to agricultural price movements, which are often directly affected by severe or unexpected weather conditions. Corn, wheat and the soybean complex accounted for the majority of the Partnership’s/Funds’ grain exposure as of December 31, 2018.

Softs. The Partnership’s/Funds’ trading risk exposure in the soft commodities is to agricultural-related price movements, which are often directly affected by severe or unexpected weather conditions. Coffee, sugar, cocoa, and cotton accounted for the majority of the Partnership’s/Funds’ soft commodities exposure as of December 31, 2018.

Livestock. The Partnership’s/Funds’ primary risk exposure in livestock is to fluctuations in cattle prices.

 

37


Qualitative Disclosures Regarding Non-Trading Risk Exposure

The following was the only non-trading risk exposure of the Partnership/Funds as of December 31, 2018.

Foreign Currency Balances. The Partnership/Funds may hold various foreign currency balances. The Advisors regularly convert foreign currency balances to U.S. dollars in an attempt to control the Partnership’s/Funds’ non- trading risk.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The General Partner monitors and attempts to mitigate 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.

The General Partner monitors the Partnership’s/Funds’ performance and the concentration of their open positions, and consults with the Advisors concerning the Partnership’s/Funds’ overall risk profile. If the General Partner felt it necessary to do so, the General Partner could require the Advisors to close out positions as well as enter positions traded on behalf of the Partnership/Funds. However, any such intervention would be a highly unusual event. The General Partner primarily relies on the Advisors’ own risk control policies while maintaining a general supervisory overview of the Partnership’s/Funds’ market risk exposures.

The Advisors apply their own risk management policies to their trading. The Advisors often follow diversification guidelines, margin limits and stop loss points to exit a position. The Advisors’ research of risk management often suggests ongoing modifications to their trading programs.

As part of the General Partner’s risk management, the General Partner periodically meets with each Advisor to discuss its risk management and to look for any material changes to the Advisor’s portfolio balance and trading techniques. Each Advisor is required to notify the General Partner of any material changes to its programs.

 

38


Item 8. Financial Statements and Supplementary Data.

CERES ORION L.P.

The following financial statements and related items of the Partnership are filed under this Item 8: Oath or Affirmation, Management’s Report on Internal Control over Financial Reporting, Report of Independent Registered Public Accounting Firm, for the years ended December 31, 2018, 2017, and 2016; Statements of Financial Condition at December 31, 2018 and 2017; Condensed Schedules of Investments at December 31, 2018 and 2017; Statements of Income and Expenses for the years ended December 31, 2018, 2017 and 2016; Statements of Changes in Partners’ Capital for the years ended December 31, 2018, 2017 and 2016; and Notes to Financial Statements. Additional financial information has been filed as Exhibits to this Form 10-K.

 

39


To the Limited Partners of

Ceres Orion L.P.

To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.

 

LOGO

By:   Patrick T. Egan
  President and Director
  Ceres Managed Futures LLC
  General Partner,
  Ceres Orion L.P.
Ceres Managed Futures LLC
522 Fifth Avenue
New York, NY 10036
(855) 672-4468

 

40


Management’s Report on Internal Control Over Financial Reporting

The management of Ceres Orion L.P. (the “Partnership”), Ceres Managed Futures LLC, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a – 15(f) and 15d – 15(f) under the Securities Exchange Act of 1934 and for our assessment of internal control over financial reporting. The Partnership’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Partnership’s internal control over financial reporting includes those policies and procedures that:

 

  (i)

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

 

  (ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and

 

  (iii)

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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The management of Ceres Orion L.P. has assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, management concluded that the Partnership maintained effective internal control over financial reporting as of December 31, 2018 based on the criteria referred to above.

 

LOGO     LOGO
Patrick T. Egan    

 

Steven Ross

President and Director     Chief Financial Officer and Director
Ceres Managed Futures LLC     Ceres Managed Futures LLC
General Partner,     General Partner,
Ceres Orion L.P.     Ceres Orion L.P.

 

41


Report of Independent Registered Public Accounting Firm

To the Partners of Ceres Orion L.P.,

Opinion on the Financial Statements

We have audited the accompanying statements of financial condition of Ceres Orion L.P. (the “Partnership”), including the condensed schedules of investments, as of December 31, 2018 and 2017, and the related statements of income and expenses and changes in partners’ capital for each of the two years in the period then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2018 and 2017, and the results of its operations and changes in its partners’ capital for each of the two years in the period then ended, in conformity with U.S. generally accepted accounting principles.

The statements of income and expenses and changes in partners’ capital for the year ended December 31, 2016 were audited by another independent registered public accounting firm whose report, dated March 24, 2017, expressed an unqualified opinion on those statements.

Basis for Opinion

These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of the Partnership’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2018, by correspondence with the custodian and brokers. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the auditor of the Partnership since 2017.

Boston, MA

March 19, 2019

 

42


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Ceres Orion L.P.:

We have audited the accompanying statements of income and expenses and changes in partners’ capital of Ceres Orion L.P. (formerly, Orion Futures Fund L.P.) (the “Partnership”) for the year ended December 31, 2016. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the results of operations and changes in partners’ capital of Ceres Orion L.P. for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

New York, New York

March 24, 2017

 

43


Ceres Orion L.P.

Statements of Financial Condition

December 31, 2018 and 2017

 

         December 31,    
2018
      December 31,    
2017

Assets:

    

Investment in the Funds(1) , at fair value (Note 6)

     $ 606,579,513       $ 656,495,374  

Redemptions receivable from the Funds

     15,961,188       12,837,759  
  

 

 

 

 

 

 

 

Equity in trading account:

    

Unrestricted cash (Note 3c)

     727,149       100,615,185  

Restricted cash (Note 3c)

     -           42,619,216  

Net unrealized appreciation on open futures contracts

     -           5,004,060  

Net unrealized appreciation on open forward contracts

     29,057       873,274  
  

 

 

 

 

 

 

 

Total equity in trading account

     756,206       149,111,735  
  

 

 

 

 

 

 

 

Cash at bank (Note 1)

     -           436  

Interest receivable (Note 3c)

     -           139,020  
  

 

 

 

 

 

 

 

Total assets

     $ 623,296,907       $ 818,584,324  
  

 

 

 

 

 

 

 

Liabilities and Partners’ Capital:

    

Liabilities:

    

Accrued expenses:

    

Ongoing selling agent fees (Notes 3d and 3e)

     $ 1,777,733       $ 2,622,825  

Management fees (Note 3b)

     512,011       699,501  

General Partner fees (Note 3a)

     388,049       509,718  

Professional fees

     371,405       412,503  

Subscriptions payable to the Funds

     261,448       -      

Redemptions payable to Limited Partners (Note 7)

     13,927,786       15,806,850  
  

 

 

 

 

 

 

 

Total liabilities

     17,238,432       20,051,397  
  

 

 

 

 

 

 

 

Partners’ Capital (Notes 1 and 7):

    

General Partner, Class Z, 6,495.6793 and 8,552.3863 Redeemable Units outstanding at December 31, 2018 and 2017, respectively

     6,716,925       9,602,692  

Limited Partners, Class A, 228,146.2478 and 272,051.1558 Redeemable Units outstanding at December 31, 2018 and 2017, respectively

     595,031,425       785,537,773  

Limited Partners, Class Z, 4,168.1552 and 3,021.4072 Redeemable Units outstanding at December 31, 2018 and 2017, respectively

     4,310,125       3,392,462  
  

 

 

 

 

 

 

 

Total partners’ capital (net asset value)

     606,058,475       798,532,927  
  

 

 

 

 

 

 

 

Total liabilities and partners’ capital

     $ 623,296,907       $ 818,584,324  
  

 

 

 

 

 

 

 

Net asset value per Redeemable Unit:

    

Class A

     $ 2,608.11       $ 2,887.46  
  

 

 

 

 

 

 

 

Class Z

     $ 1,034.06       $ 1,122.81  
  

 

 

 

 

 

 

 

(1) Defined in Note 1.

 

See accompanying notes to financial statements.

 

44


Ceres Orion L.P.

Condensed Schedule of Investments

December 31, 2018

 

        Number of    
Contracts
            Fair Value             % of Partners’  
Capital
 

Unrealized Appreciation on Open Forward Contracts

     

Metals

    33       $ 137,302        0.02 
   

 

 

 

 

 

 

 

Total unrealized appreciation on open forward contracts

      137,302        0.02   
   

 

 

 

 

 

 

 

Unrealized Depreciation on Open Forward Contracts

     

Metals

    23       (108,245)       (0.02)  
   

 

 

 

 

 

 

 

Total unrealized depreciation on open forward contracts

      (108,245)       (0.02)  
   

 

 

 

 

 

 

 

Net unrealized appreciation on open forward contracts

      $ 29,057        0.00  %* 
   

 

 

 

 

 

 

 

Investment in the Funds

     

CMF Winton Master L.P.

      $ 153,304,033        25.30 

CMF TT II, LLC

      148,573,425        24.51   

CMF Willowbridge Master Fund L.P.

      148,663,921        24.53   

CMF FORT Contrarian Master Fund LLC

      156,038,134        25.75   
   

 

 

 

 

 

 

 

Total investment in the Funds

      $ 606,579,513        100.09 
   

 

 

 

 

 

 

 

*         Due to rounding.

 

See accompanying notes to financial statements.

 

45


Ceres Orion L.P.

Condensed Schedule of Investments

December 31, 2017

 

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

Futures Contracts Purchased

     

Energy

    842       $ 3,926,924        0.49  

Grains

    40       (7,380)       (0.00) 

Indices

    2,560       248,920        0.03    

Interest Rates U.S.

    2,389       (673,740)       (0.08)   

Interest Rates Non-U.S.

    2,820       (1,016,225)       (0.13)   

Metals

    135       664,797        0.08    

Softs

    185       459,870        0.06    
   

 

 

 

 

 

 

 

Total futures contracts purchased

      3,603,166        0.45    
   

 

 

 

 

 

 

 

Futures Contracts Sold

     

Energy

    659       (203,923)       (0.03)   

Grains

    1,662       607,241        0.08    

Indices

    1,980       990,738        0.12    

Interest Rates U.S.

    194       (12,188)       (0.00) 

Interest Rates Non-U.S.

    3,696       335,531        0.04    

Livestock

    19       (27,290)       (0.00) 

Metals

    93       (262,045)       (0.03)   

Softs

    304       (27,170)       (0.00) 
   

 

 

 

 

 

 

 

Total futures contracts sold

      1,400,894        0.18    
   

 

 

 

 

 

 

 

Net unrealized appreciation on open futures contracts

      $ 5,004,060        0.63  
   

 

 

 

 

 

 

 

Unrealized Appreciation on Open Forward Contracts

     

Currencies

    $504,572,117       $ 8,187,150        1.03  

Metals

    873       3,586,972        0.45    
   

 

 

 

 

 

 

 

Total unrealized appreciation on open forward contracts

      11,774,122        1.48    
   

 

 

 

 

 

 

 

Unrealized Depreciation on Open Forward Contracts

     

Currencies

    $547,763,469       (7,330,639)       (0.92)   

Metals

    818       (3,570,209)       (0.45)   
   

 

 

 

 

 

 

 

Total unrealized depreciation on open forward contracts

      (10,900,848)       (1.37)   
   

 

 

 

 

 

 

 

Net unrealized appreciation on open forward contracts

      $ 873,274        0.11  
   

 

 

 

 

 

 

 

Investment in the Funds

     

CMF Winton Master L.P.

      $ 186,666,465        23.38  

CMF TT II, LLC

      201,709,447        25.26    

CMF Willowbridge Master Fund L.P.

      268,119,462        33.58    
   

 

 

 

 

 

 

 

Total investment in the Funds

      $ 656,495,374        82.22  
   

 

 

 

 

 

 

 

*         Due to rounding.

 

See accompanying notes to financial statements.

 

46


Ceres Orion L.P.

Statements of Income and Expenses

For the Years Ended

December 31, 2018, 2017 and 2016

 

     2018    2017    2016

Investment Income:

        

Interest income

     $ 1,042,227         $ 1,376,191         $ 447,040   

Interest income allocated from the Funds

     10,572,228         5,310,193         2,014,179   
  

 

 

 

  

 

 

 

  

 

 

 

Total investment income

     11,614,455         6,686,384         2,461,219   
  

 

 

 

  

 

 

 

  

 

 

 

Expenses:

        

Expenses allocated from the Funds

     5,678,961         5,007,436         7,949,409   

Clearing fees related to direct investments (Note 3c)

     282,874         798,567         682,545   

Ongoing selling agent fees (Notes 3d and 3e)

     13,875,364         14,906,992         13,923,750   

Management fees (Note 3b)

     7,223,233         9,007,592         10,669,966   

General Partner fees (Note 3a)

     5,437,950         6,652,411         8,098,845   

Professional fees

     1,489,943         1,713,581         2,271,832   
  

 

 

 

  

 

 

 

  

 

 

 

Total expenses

     33,988,325         38,086,579         43,596,347   
  

 

 

 

  

 

 

 

  

 

 

 

Net investment loss

     (22,373,870)        (31,400,195)        (41,135,128)  
  

 

 

 

  

 

 

 

  

 

 

 

Trading Results:

        

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

        

Net realized gains (losses) on closed contracts

     (8,020,735)        923,428         (25,004,534)  

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

     (18,104,021)        (5,736,352)        46,956,695   

Net change in unrealized gains (losses) on open contracts

     (5,757,588)        2,963,870         2,202,920   

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

     (16,290,205)        8,674         10,976,518   
  

 

 

 

  

 

 

 

  

 

 

 

Total trading results

     (48,172,549)        (1,840,380)        35,131,599   
  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss)

     $ (70,546,419)        $ (33,240,575)        $ (6,003,529)  
  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss) per Redeemable Unit* (Note 8):

        

Class A

     $ (279.35)        $ (95.18)        $ (22.20)  
  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     $ (88.75)        $ (17.17)        $ 6.50   
  

 

 

 

  

 

 

 

  

 

 

 

Weighted average Redeemable Units outstanding:

        

Class A

     255,692.4903         304,610.1982         348,898.7336   
  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     11,355.4058         12,023.4060         12,872.7303   
  

 

 

 

  

 

 

 

  

 

 

 

*  Represents the change in net asset value per Redeemable Unit.

 

See accompanying notes to financial statements.

 

47


Ceres Orion L.P.

Statements of Changes in Partners’ Capital

For the Years Ended

December 31, 2018, 2017 and 2016

 

    Class A   Class Z   Total
    Amount   Redeemable Units   Amount   Redeemable Units   Amount       Redeemable Units  

Partners’ Capital, December 31, 2015

  $  1,075,725,600       357,997.9468     $  14,973,781       13,210.4595     $  1,090,699,381       371,208.4063  

Subscriptions - Limited Partners

    87,337,421       28,744.7430       663,409       576.7720       88,000,830       29,321.5150  

Redemptions - General Partner

    -           -           (1,039,843     (872.2020     (1,039,843     (872.2020

Redemptions - Limited Partners

    (173,180,117     (56,915.7560     (562,971     (494.8170     (173,743,088     (57,410.5730

Net income (loss)

    (6,127,946     -           124,417       -           (6,003,529     -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2016

    983,754,958       329,826.9338       14,158,793       12,420.2125       997,913,751       342,247.1463  

Subscriptions - Limited Partners

    33,736,567       11,683.0890       1,180,838       1,074.6210       34,917,405       12,757.7100  

Redemptions - General Partner

    -           -           (1,274,988     (1,178.1120     (1,274,988     (1,178.1120

Redemptions - Limited Partners

    (198,980,126     (69,458.8670     (802,540     (742.9280     (199,782,666     (70,201.7950

Net income (loss)

    (32,973,626     -           (266,949     -           (33,240,575     -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2017

    785,537,773       272,051.1558       12,995,154       11,573.7935       798,532,927       283,624.9493  

Subscriptions - Limited Partners

    29,451,751       10,485.7950       1,554,831       1,407.0670       31,006,582       11,892.8620  

Redemptions - General Partner

    -           -           (2,300,010     (2,056.7070     (2,300,010     (2,056.7070

Redemptions - Limited Partners

    (150,354,149     (54,390.7030     (280,456     (260.3190     (150,634,605     (54,651.0220

Net income (loss)

    (69,603,950     -           (942,469     -           (70,546,419     -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2018

    $ 595,031,425       228,146.2478       $ 11,027,050       10,663.8345       $ 606,058,475       238,810.0823  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value per Redeemable Unit:

 

 

     Class A      Class Z  

2016

     $ 2,982.64          $  1,139.98    
  

 

 

    

 

 

 

2017

     $ 2,887.46          $ 1,122.81    
  

 

 

    

 

 

 

2018

     $ 2,608.11          $ 1,034.06    
  

 

 

    

 

 

 

 

See accompanying notes to financial statements.

 

48


Ceres Orion L.P.

Notes to Financial Statements

 

1.

Organization:

Ceres Orion L.P. (formerly, Orion Futures Fund L.P.) (the “Partnership”) is a limited partnership organized on March 22, 1999, under the partnership laws of the State of New York, to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests, including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, livestock, indices, U.S. and non-U.S. interest rates, softs and metals. The commodity interests that are traded by the Partnership, directly and indirectly through its investment in the Funds (as defined below), are volatile and involve a high degree of market risk. The Partnership commenced trading on June 10, 1999. The Partnership privately and continuously offers redeemable units of limited partnership interest (“Redeemable Units”) to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets (directly or indirectly through its investment in the Funds) 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.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership and is the trading manager (the “Trading Manager”) of Transtrend Master (as defined below) and FORT Contrarian Master (as defined below). As of January 1, 2017, the General Partner became a wholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD 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 January 1, 2017, the General Partner was a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC.

As of December 31, 2018, all trading decisions were made for the Partnership by Winton Capital Management Limited (“Winton”), Transtrend B.V. (“Transtrend”), Willowbridge Associates Inc. (“Willowbridge”) and FORT L.P. (“FORT”) (each an “Advisor” and, collectively, the “Advisors”), each of which is a registered commodity trading advisor. Effective the close of business on October 31, 2018, Systematica Investments Limited (“Systematica”) ceased to act as a commodity trading advisor to the Partnership. Reference herein to “Advisors” may include, as relevant, Systematica. Each Advisor is allocated a portion of the Partnership’s assets to manage. The Partnership invests the portion of its assets allocated to each of the Advisors either directly, through a managed account in the Partnership’s name, or indirectly, through its investment in the Funds. 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.

Prior to its termination effective October 31, 2018, Systematica directly traded the Partnership’s assets allocated to it through a managed account in the name of the Partnership pursuant to Systematica’s BlueTrend Program.

On June 1, 2011, the Partnership began offering “Class A” Redeemable Units and “Class Z” Redeemable Units pursuant to the offering memorandum. All Redeemable Units issued prior to June 1, 2011 were deemed Class A Redeemable Units. The rights, powers, duties and obligations associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions and non-U.S. investors. Class Z Redeemable Units were first issued on August 1, 2011. Class Z Redeemable Units are offered to limited partners who receive advisory services from Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”) and certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” The Class of Redeemable Units that a limited partner receives upon a subscription will generally depend upon 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.

During the periods covered by this report, the Partnership’s/Funds’ commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. JPMorgan Chase Bank, N.A. (“JPMorgan”) was also a foreign exchange forward contract counterparty for certain Funds. The Partnership/Funds deposited a portion of their cash in non-trading bank accounts at JPMorgan.

 

49


Ceres Orion L.P.

Notes to Financial Statements

 

Effective February 28, 2018, the Partnership changed its name from Orion Futures Fund L.P. to Ceres Orion L.P.

The Partnership, CMF Winton Master L.P. (“Winton Master”), CMF TT II, LLC (formerly, Morgan Stanley Smith Barney TT II, LLC) (“Transtrend Master”) and CMF Willowbridge Master Fund L.P. (“Willowbridge Master”) have entered into futures brokerage account agreements and foreign exchange brokerage account agreements with MS&Co. CMF FORT Contrarian Master Fund LLC (“FORT Contrarian Master”) has entered into a futures brokerage account agreement with MS&Co. Winton Master, Transtrend Master, Willowbridge Master and FORT Contrarian Master are collectively referred to as the “Funds.”

Effective July 12, 2017, Winton Master, Transtrend Master and Willowbridge Master each entered into certain agreements with JPMorgan in connection with trading in forward foreign currency contracts on behalf of the referenced Funds and indirectly, the Partnership. These agreements include a foreign exchange and bullion authorization agreement (“FX Agreement”), an International Swap Dealers Association, Inc. master agreement (“Master Agreement”), a schedule to the Master Agreement, a 2016 credit support annex for variation margin to the schedule and an institutional account agreement. In addition to Willowbridge Master, Willowbridge is party to the FX Agreement for Willowbridge Master. Under each FX Agreement, JPMorgan charges a fee on the aggregate foreign currency transactions entered into on behalf of the respective Fund during a month.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2019; the net asset value per Redeemable Unit of any Class decreases to less than $400 as of a close of any business day; or under certain other circumstances as set forth in the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”). In addition, the General Partner may, in its sole discretion, cause the Partnership to dissolve if the aggregate net assets of the Partnership decline to less than $1,000,000.

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.

 

2.

Basis of Presentation and Summary of Significant Accounting Policies:

 

  a.

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, and those differences could be material.

 

  b.

Profit Allocation. The General Partner and each limited partner of the Partnership 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, redemptions and losses, if any.

 

  c.

Statement of Cash Flows. The Partnership has not provided a Statement of Cash Flows, as permitted by Accounting Standards Codification (“ASC”) 230, “Statement of Cash Flows.” The Statements of Changes in Partners’ Capital is included herein, and as of and for the years ended December 31, 2018, 2017 and 2016, the Partnership carried no debt and all of the Partnership’s and the Funds’ investments were carried at fair value and classified as Level 1 and Level 2 measurements.

 

  d.

Partnership’s Investment in the Funds. The Partnership carries its investment in Winton Master and Willowbridge Master based on the respective Fund’s net asset value per unit as calculated by the Fund. The Partnership carries its investment in Transtrend Master and FORT Contrarian Master based on the Partnership’s (1) net contributions to Transtrend Master and FORT Contrarian Master and (2) its allocated share of the undistributed profits and losses, including realized gains (losses) and net change in unrealized gains (losses), of Transtrend Master and FORT Contrarian Master.

 

50


Ceres Orion L.P.

Notes to Financial Statements

 

  e.

Partnership’s/Funds’ Derivative Investments. All commodity interests held by 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.

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 due to 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.

 

  f.

Partnership’s Cash. The Partnership’s restricted and unrestricted cash includes cash denominated in foreign currencies of $0 and $(4,275,539) (proceeds of $4,184,850) at December 31, 2018 and 2017, respectively.

 

  g.

Income Taxes. Income taxes have not been recorded as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The Partnership follows the guidance of ASC 740, “Income Taxes,” which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions determined not to meet the more-likely-than-not threshold would be recorded as a tax benefit or liability in the Partnership’s Statements of Financial Condition for the current year. If a tax position does not meet the minimum statutory threshold to avoid the incurring of penalties, an expense for the amount of the statutory penalty and interest, if applicable, shall be recognized in the Statements of Income and Expenses in the years in which the position is claimed or expected to be claimed. The General Partner has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2015 through 2018 tax years remain subject to examination by U.S. federal and most state tax authorities.

 

  h.

Investment Company Status. Effective January 1, 2014, the Partnership adopted Accounting Standards Update 2013-08 “Financial Services—Investment 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.

 

  i.

Net Income (Loss) Per Redeemable Unit. Net income (loss) per Redeemable Unit is calculated in accordance with ASC 946, “Financial Services - Investment Companies.” See Note 8, “Financial Highlights.”

 

51


Ceres Orion L.P.

Notes to Financial Statements

 

3.

Agreements:

 

  a.

Limited Partnership Agreement:

The General Partner administers the business and affairs of the Partnership, including selecting one or more advisors to make trading decisions for the Partnership. The Partnership pays the General Partner a monthly fee equal to 1/12 of 0.75% (0.75% per year) of month-end net assets. Month-end net assets, for the purpose of calculating the General Partner fees, are net assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.

 

  b.

Management Agreement:

The General Partner, on behalf of the Partnership, has entered into management agreements (each, a “Management Agreement”) with the Advisors. The Advisors are not affiliated with one another, the General Partner or MS&Co., and are not responsible for the organization or operation of the Partnership.

The Partnership pays to FORT a monthly management fee equal to 1.15% per year of month-end net assets allocated to FORT. Winton receives a monthly management fee equal to 1.5% per year of month-end net assets allocated to Winton. As of April 1, 2018, Willowbridge receives a monthly management fee equal to 1.25% per year of month-end net assets allocated to Willowbridge. Prior to April 1, 2018, Willowbridge received a monthly management fee equal to 1.5% per year of month-end net assets allocated to Willowbridge. Prior to its termination effective October 31, 2018, Systematica received a monthly management fee equal to 1.0% per year of month-end net assets allocated to Systematica. Month-end net assets, for the purpose of calculating management fees, are net assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fees, the General Partner fee and any redemptions or distributions as of the end of such month.

As of January 1, 2017, Transtrend Master pays Transtrend a monthly management fee of 0.85% per year on the aggregate net assets of Transtrend Master as of the first day of each month. Prior to January 1, 2017, Transtrend Master paid Transtrend a monthly management fee of 1.0% per year on the aggregate net assets of Transtrend Master as of the first day of each month. The management fee paid by Transtrend Master is allocated to the Partnership based on its proportionate ownership interest of Transtrend Master.

In addition, the Partnership is obligated to pay Winton and Willowbridge an incentive fee, payable quarterly, equal to 20% of the New Trading Profits, as defined in each Management Agreement, earned by Winton and Willowbridge for the Partnership during each calendar quarter. The Partnership is obligated to pay FORT an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by FORT for the Partnership during each calendar year. Prior to its termination effective October 31, 2018, Systematica was eligible to receive an incentive fee, payable annually, equal to 20% of the New Trading Profits, as defined in the Management Agreement, earned by Systematica for the Partnership. Transtrend receives an incentive fee equal to 20% of the New Trading Profits earned by Transtrend Master payable at the end of each calendar half year. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred and earns additional new trading profits for the Partnership. Only the incentive fees paid by Transtrend Master for New Trading Profits earned for the Partnership are allocated to the Partnership.

Each Management Agreement may be terminated upon notice by either party.

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

 

52


Ceres Orion L.P.

Notes to Financial Statements

 

  c.

Customer Agreement:

The Partnership has entered into a futures brokerage account agreement with MS&Co. (the “Partnership Customer Agreement”). Under the Partnership Customer Agreement and the foreign exchange brokerage account agreement (described in Note 1, “Organization”), the Partnership pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of trading fees for the clearing and, where applicable, the execution of transactions, as well as its allocable share of exchange, clearing, user, give-up and National Futures Association (“NFA”) fees (collectively, the “clearing fees”) directly and through its investment in the Funds. Clearing fees are allocated to the Partnership based on its proportionate ownership interest of each Fund. The Partnership’s assets available for trading in commodity interests not held in the Funds’ brokerage accounts at MS&Co. and JPMorgan are deposited in the Partnership’s brokerage account at MS&Co. The Partnership’s cash deposited with MS&Co. is held in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At December 31, 2018 and 2017, the amount of cash held by the Partnership for margin requirements was $0 and $42,619,216, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Funds’, except for Transtrend Master’s) brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. MS&Co. has agreed to pay Transtrend Master interest on 100% of the average daily equity maintained in cash in Transtrend Master’s brokerage account during each month at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of these interest credits, daily funds do not include monies due to Transtrend Master on or with respect to futures, forward, or option contracts that have not been received. The Partnership Customer Agreement may generally be terminated upon notice by either party.

 

  d.

Selling Agreement:

The Partnership has entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee. The ongoing selling agent fee is $15.00 each for futures transactions and up to an equivalent amount for swaps and $7.50 each per side for options transactions, with respect to Class A Redeemable Units. Class Z Redeemable Units are not subject to an ongoing selling agent fee. The ongoing selling agent fee amount is reduced by applicable floor brokerage fees. The Partnership may pay an ongoing selling agent fee to other properly licensed and/or registered selling agents who sell Class A Redeemable Units, and such additional selling agents may share all or a substantial portion of such fees with their properly registered or exempted financial advisors who have sold Class A Redeemable Units.

 

  e.

Harbor Selling Agreement:

As of November 1, 2018, the Partnership entered into an alternative investment placement agent agreement (the “Harbor Selling Agreement”), by and among the Partnership, the General Partner, Morgan Stanley Distribution Inc. (“MSDI”), and Harbor Investment Advisory, LLC, a Maryland limited liability company (“Harbor”), which supersedes and replaces the alternative investment selling agent agreement, dated January 19, 2018, between the Partnership, the General Partner and Harbor. Pursuant to the Harbor Selling Agreement, MSDI and Harbor have been appointed as a non-exclusive selling agent and sub-selling agent, respectively, of the Partnership for the purpose of finding eligible investors for Redeemable Units through offerings that are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506 of Regulation D promulgated thereunder and for Harbor to serve as an investment advisor to its customers investing in one or more of the partnerships party to the Harbor Selling Agreement; provided, that, included within such appointment, Harbor will provide certain services to certain holders of Redeemable Units of the Partnership, who had acquired such Redeemable Units

 

53


Ceres Orion L.P.

Notes to Financial Statements

 

prior to such holders becoming clients of Harbor. The Harbor Selling Agreement continues in effect until September 30, 2019 unless terminated in certain circumstances as set forth in the Harbor Selling Agreement, including by any party on thirty days’ prior written notice, after which the General Partner or the Partnership may, in its sole discretion, renew the Harbor Selling Agreement for additional one year periods. Pursuant to the Harbor Selling Agreement, the Partnership pays Harbor an ongoing selling agent fee equal to $15.00 per round turn, swaps by up to an equivalent amount and options transactions by $7.50 each per side, with respect to Class A Redeemable Units held by Harbor clients. In each case, the amount will be reduced by applicable floor brokerage fees.

The General Partner fees, management fees, incentive fees and professional fees of the Partnership are allocated proportionally to each Class based on the net asset value of the Class.

 

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. The Partnership also invests certain of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Funds’ trading activities are shown in the Partnership’s Statements of Income and Expenses.

The Partnership Customer Agreement and the Funds’ futures brokerage agreements (the “Master Customer Agreements” and, together with the Partnership Customer Agreement, the “Customer Agreements”) with MS&Co. give the Partnership and the Funds, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts in their respective Statements of Financial Condition. The Partnership and the Funds net, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in their respective Statements of Financial Condition, as the criteria under ASC 210-20,Balance Sheet,” have been met.

All of the commodity interests owned directly 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 years ended December 31, 2018 and 2017 were 7,474 and 20,043, respectively. The monthly average number of metals forward contracts traded directly by the Partnership during the years ended December 31, 2018 and 2017 were 758 and 2,202, respectively. The monthly average notional value of currency forward contracts traded directly by the Partnership during the years ended December 31, 2018 and 2017 were $316,081,746 and $1,253,145,597, 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 by the Partnership for its direct trading. In addition, clearing fees are borne by the Funds and are allocated to the limited partners/members, including the Partnership.

 

54


Ceres Orion L.P.

Notes to Financial Statements

 

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 or similar arrangements as of December 31, 2018 and 2017, respectively.

 

December 31, 2018

   Gross
Amounts
Recognized
  Gross Amounts
Offset in the
Statements of
Financial
Condition
  Amounts
Presented in the
Statements of
Financial
Condition
   Gross Amounts Not Offset in the
    Statements of Financial Condition     
      
   Financial
Instruments
   Cash Collateral
Received/
    Pledged*    
    

  Net Amount  

 

Assets

               

Forwards

     $ 137,302       $ (108,245     $         29,057        $                     -            $                     -            $ 29,057    
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Total assets

     $ 137,302       $ (108,245     $ 29,057        $ -            $ -            $ 29,057   
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Liabilities

               

Forwards

     $ (108,245     $ 108,245       $ -            $ -            $ -            $ -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Total liabilities

     $ (108,245     $ 108,245       $ -            $ -            $ -            $ -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Net fair value

                  $  29,057   * 
               

 

 

 

December 31, 2017

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

Assets

               

Futures

     $ 9,793,492       $ (4,789,432     $  5,004,060        $  -          $  -            $  5,004,060   

Forwards

     11,774,122       (10,900,848     873,274        -            -            873,274   
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Total assets

     $ 21,567,614       $  (15,690,280     $ 5,877,334        $ -            $ -            $ 5,877,334   
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Liabilities

               

Futures

     $  (4,789,432     $ 4,789,432       $ -            $ -            $ -            $ -      

Forwards

     (10,900,848     10,900,848       -            -            -            -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Total liabilities

     $  (15,690,280     $ 15,690,280       $ -            $ -            $ -            $ -      
  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

    

 

 

 

Net fair value

                  $  5,877,334    * 
               

 

 

 

 

*

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’s non-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. In certain instances, MS&Co. may not post collateral 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 funds may be available in the event of a default.

 

55


Ceres Orion L.P.

Notes to Financial Statements

 

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 December 31, 2018 and 2017, respectively.

 

         December 31, 2018      

Assets

  

Forward Contracts

  

Metals

    $         137,302    
  

 

 

 

Total unrealized appreciation on open forward contracts

     137,302    
  

 

 

 

Liabilities

  

Forward Contracts

  

Metals

     (108,245)   
  

 

 

 

Total unrealized depreciation on open forward contracts

     (108,245)   
  

 

 

 

Net unrealized appreciation on open forward contracts

    $ 29,057  
  

 

 

 

 

*

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

 

56


Ceres Orion L.P.

Notes to Financial Statements

 

    

December 31, 2017

   

Assets

    

Futures Contracts

    

Energy

     $        4,510,786    

Grains

   629,298    

Indices

   2,719,041    

Interest Rates U.S.

   71,430    

Interest Rates Non-U.S.

   641,412    

Metals

   666,037    

Softs

   555,488    
  

 

 

Total unrealized appreciation on open futures contracts

   9,793,492    
  

 

 

Liabilities

    

Futures Contracts

    

Energy

   (787,785)   

Grains

   (29,437)   

Indices

   (1,479,383)   

Interest Rates U.S.

   (757,358)   

Interest Rates Non-U.S.

   (1,322,106)   

Livestock

   (27,290)   

Metals

   (263,285)   

Softs

   (122,788)   
  

 

 

Total unrealized depreciation on open futures contracts

   (4,789,432)   
  

 

 

Net unrealized appreciation on open futures contracts

     $5,004,060     *
  

 

 

Assets

    

Forward Contracts

    

Currencies

     $ 8,187,150    

Metals

   3,586,972    
  

 

 

Total unrealized appreciation on open forward contracts

   11,774,122    
  

 

 

Liabilities

    

Forward Contracts

    

Currencies

   (7,330,639)   

Metals

   (3,570,209)   
  

 

 

Total unrealized depreciation on open forward contracts

   (10,900,848)   
  

 

 

Net unrealized appreciation on open forward contracts

     $873,274      **
  

 

 

 

*

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

 

**

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

 

57


Ceres Orion L.P.

Notes to Financial Statements

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the years ended December 31, 2018, 2017 and 2016, respectively.

 

Sector

   2018     2017            2016        

Currencies

     $         (3,364,175)       $             (7,867,522)           $ 3,080,007     

Energy

     2,715,862        (106,263)           (12,279,027)    

Grains

     (3,115,089)       (4,270,109)           (210,422)    

Indices

     (6,559,366)       29,363,266            (6,694,075)    

Interest Rates U.S.

     (2,158,832)       (4,548,710)           (4,607,629)    

Interest Rates Non-U.S.

     (631,329)       (7,142,822)           4,717,308     

Livestock

     (155,263)       (902,168)           (1,279,792)    

Metals

     (1,219,114)       (404,789)           (4,359,666)    

Softs

     708,983        (233,585)           (1,168,318)    
  

 

 

   

 

 

      

 

 

   

Total

     $             (13,778,323)  ***      $         3,887,298    ***         $             (22,801,614)       ***  
  

 

 

   

 

 

      

 

 

   

 

***

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

 

5.

Fair Value Measurements:

Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the value 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 commodity futures, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the years ended December 31, 2018 and 2017, 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).

 

58


Ceres Orion L.P.

Notes to Financial Statements

 

December 31, 2018                     

   Total      Level 1      Level 2      Level 3  

Assets

           

Forwards

     $                          137,302          $                          -            $                          137,302          $                         -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 137,302          $ -            $ 137,302          $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Forwards

     $ 108,245          $ -            $ 108,245          $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 108,245          $ -            $ 108,245          $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2017                    

   Total      Level 1      Level 2      Level 3  

Assets

           

Futures

     $ 9,793,492          $ 9,793,492          $ -            $ -      

Forwards

     11,774,122          -            11,774,122          -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 21,567,614          $ 9,793,492          $ 11,774,122          $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 4,789,432          $ 4,789,432          $ -            $ -      

Forwards

     10,900,848          -            10,900,848          -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 15,690,280          $ 4,789,432          $ 10,900,848          $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

6.

Investment in the Funds:

On November 1, 2004, the assets allocated to Winton for trading were invested in Winton Master, a limited partnership organized under the partnership laws of the State of New York. Winton Master permits accounts managed by Winton using the Winton Futures Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Winton Master. Individual and pooled accounts currently managed by Winton, including the Partnership, are permitted to be limited partners of Winton Master. The General Partner and Winton believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Winton have agreed that Winton will trade the Partnership’s assets allocated to Winton at a level that is up to 1.5 times the amount of assets allocated.

On June 1, 2011, the Partnership allocated a portion of its assets to Transtrend Master, a limited liability company organized under the limited liability company laws of the State of Delaware. Transtrend Master permits accounts managed by Transtrend using the Diversified Trend Program-Enhanced Risk Profile (US Dollar), a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the trading manager of Transtrend Master. Individual and pooled accounts managed by Transtrend, including the Partnership, are permitted to be members of Transtrend Master. The Trading Manager and Transtrend believe that trading through this structure promotes efficiency and economy in the trading process.

On August 1, 2014, the assets allocated to Willowbridge for trading were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. Willowbridge Master permits accounts managed by Willowbridge using its wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Willowbridge have agreed that Willowbridge will trade the Partnership’s assets at a level that is up to 3.0 times the amount of the assets allocated.

 

59


Ceres Orion L.P.

Notes to Financial Statements

 

On February 1, 2018, the assets allocated to FORT for trading were invested in FORT Contrarian Master, a limited liability company organized under the limited liability company laws of the State of Delaware. FORT Contrarian Master permits accounts managed by FORT using its Global Contrarian Trading Program, a proprietary, systematic trading system, to invest together in one trading vehicle. The General Partner is also the Trading Manager of FORT Contrarian Master. Individual and pooled accounts currently managed by FORT, including the Partnership, are permitted to be members of FORT Contrarian Master. The Trading Manager and FORT believe that trading through this structure promotes efficiency and economy in the trading process. The Trading Manager and FORT have agreed that FORT will trade the Partnership’s assets allocated to FORT at a level that is up to 1.25 times the amount of the assets allocated.

The General Partner is not aware of any material changes to any of the trading programs discussed above or in Note 1, “Organization” during the year ended December 31, 2018.

The Funds’ and the Partnership’s trading of futures, forward, swap, and option contracts, if 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/member 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/Trading Manager at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner/member elects to redeem and informs the Funds. However, for all Funds other than Winton Master, a limited partner/member may request a withdrawal as of the end of any day if such request is received by the General Partner/Trading Manager at least three days in advance of the proposed withdrawal day.

Management fees, ongoing selling agent fees, General Partner fees and incentive fees are charged at the Partnership level, except for management and incentive fees payable to Transtrend which are charged at the Transtrend Master level. Clearing fees are borne by the Funds and allocated to the Funds’ limited partners/non-managing members, including the Partnership. Clearing fees are also borne by the Partnership directly. Professional fees are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level.

At December 31, 2018, the Partnership owned approximately 45.1% of Winton Master, 99.2% of Transtrend Master, 100.0% of Willowbridge Master and 87.3% of FORT Contrarian Master. Prior to the close of business on December 31, 2017, the Partnership owned approximately 45.8% of Winton Master, 95.8% of Transtrend Master and 82.5% of Willowbridge 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 redemption rights are not affected.

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

 

    December 31, 2018  
    Total Assets     Total Liabilities     Total Capital  

Winton Master

    $             352,978,637         $             13,779,023         $             339,199,614    

Transtrend Master

    150,331,839         533,135         149,798,704    

Willowbridge Master

    192,211,165         43,829,178         148,381,987    

FORT Contrarian Master

    180,042,210         1,648,773         178,393,437    
    December 31, 2017  
    Total Assets     Total Liabilities     Total Capital  

Winton Master

    $             408,725,040         $             11,076,733         $             397,648,307    

Transtrend Master

    217,045,353         15,335,906         201,709,447    

Willowbridge Master

    336,101,673         39,096,772         297,004,901    

 

60


Ceres Orion L.P.

Notes to Financial Statements

 

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

 

     For the year ended December 31, 2018  
     Net Investment
Income (Loss)
     Total Trading
Results
     Net Income
(Loss)
 

Winton Master

     $ 5,588,690         $             (7,829,505)      $             (2,240,815)    

Transtrend Master

     (299,102)        (17,683,526)        (17,982,628)    

Willowbridge Master

     906,473         (4,843,521)        (3,937,048)    

FORT Contrarian Master (a)

     2,172,289         (12,008,806)        (9,836,517)    
     For the year ended December 31, 2017  
     Net Investment
Income (Loss)
     Total Trading
Results
     Net Income
(Loss)
 

Winton Master

     $              2,498,543           $ 41,177,241           $ 43,675,784     

Transtrend Master

     (2,170,265)          (2,700,598)          (4,870,863)    

Willowbridge Master

     1,244,821           (27,512,190)          (26,267,369)    

 

  (a)

Summarized information presented is for the twelve months ended December 31, 2018. The Partnership was invested in Fort Contrarian Master from February 1, 2018 to December 31, 2018.

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

 

    December 31, 2018     For the year ended December 31, 2018        
    % of
  Partners’  
Capital
              Expenses   Net
Income
(Loss)
       

                Funds             

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

Winton Master

    25.30      $   153,304,033      $ 241,406        $ 214,137      $ 30,606      $ -          $ -          $ (3,337)        Commodity Portfolio       Monthly    

Transtrend Master

    24.51       148,573,425       (15,288,450)        1,039,887       274         1,449,384         47,039         (17,825,034)        Commodity Portfolio       Monthly    

Willowbridge Master

    24.53       148,663,921       (825,674)          2,381,900         64,577       -           -           (3,272,151)        Commodity Portfolio       Monthly    

FORT Contrarian Master (a)

    25.75       156,038,134        (7,949,280)        398,224       52,933       -           -           (8,400,437)        Commodity Portfolio       Monthly    
   

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Total

     $ 606,579,513      $ (23,821,998)       $ 4,034,148      $ 148,390      $ 1,449,384      $ 47,039      $ (29,500,959)       
   

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     
    December 31, 2017     For the year ended December 31, 2017              
    % of
Partners’
Capital
              Expenses   Net
Income
(Loss)
             

            Funds            

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

Winton Master

    23.38      $ 186,666,465      $ 20,307,233        $ 235,397      $ 29,118      $ -          $ -          $ 20,042,718         Commodity Portfolio       Monthly    

Transtrend Master

    25.26       201,709,447       (857,440)        1,529,471       839         1,961,681         25,157       (4,374,588)        Commodity Portfolio       Monthly    

Willowbridge Master

    33.58         268,119,462       (19,867,278)          1,170,473         55,300       -           -           (21,093,051)        Commodity Portfolio       Monthly    
   

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Total

     $ 656,495,374      $ (417,485)       $ 2,935,341       $ 85,257       $ 1,961,681       $ 25,157       $ (5,424,921)       
   

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

(a) From February 1, 2018, the date the Partnership invested into FORT Contrarian Master, through December 31, 2018.

 

61


Ceres Orion L.P.

Notes to Financial Statements

 

7.

Subscriptions, Distributions and Redemptions:

Subscriptions are accepted monthly from investors who become limited partners on the first day of the month after their subscriptions are processed. Distributions are made on a pro-rata basis at the sole discretion of the General Partner. No distributions have been made to date. The General Partner does not intend to make any distributions of the Partnership’s profits. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value as of the end of each month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions.

 

8.

Financial Highlights:

Financial highlights for the limited partner Classes as a whole for the years ended December 31, 2018, 2017 and 2016 were as follows:

 

     2018     2017     2016  
     Class A     Class Z     Class A     Class Z     Class A     Class Z  

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

            

Net realized and unrealized gains (losses)

   $ (192.42)     $ (75.81)     $ 7.10      $ 3.30      $ 94.62      $ 35.78   

Net investment loss

     (86.93)       (12.94)       (102.28)       (20.47)       (116.82)       (29.28)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the year

     (279.35)       (88.75)       (95.18)       (17.17)       (22.20)       6.50   

Net asset value per Redeemable Unit, beginning of year

     2,887.46        1,122.81        2,982.64        1,139.98        3,004.84        1,133.48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of year

   $ 2,608.11      $ 1,034.06      $ 2,887.46      $ 1,122.81      $ 2,982.64      $ 1,139.98   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2018     2017     2016  
     Class A     Class Z     Class A     Class Z     Class A     Class Z  

Ratios to Average Limited Partners’ Capital:

            

Net investment loss**

     (3.2)      (1.2)      (3.6)      (1.9)      (3.9)      (2.6) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

     4.8       2.9      4.4      2.7      3.9      2.6 

Incentive fees

     0.0   %***      0.0  %***      0.0  %***      0.0  %***      0.2      0.2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     4.8       2.9      4.4      2.7      4.1      2.8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

            

Total return before incentive fees

     (9.7)      (7.9)      (3.2)      (1.5)      (0.5)      0.8 

Incentive fees

     (0.0)  %***      (0.0)  %***      (0.0)  %***      (0.0)  %***      (0.2)      (0.2) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (9.7)      (7.9)      (3.2)      (1.5)      (0.7)      0.6 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Net investment loss per Redeemable Unit is calculated by dividing the interest income less total expenses 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.

 

**

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 Classes using the limited partners’ share of income, expenses and average partners’ capital of the Partnership and include the income and expenses allocated from the Funds.

 

62


Ceres Orion L.P.

Notes to Financial Statements

 

9.

Financial Instrument Risks:

In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options, and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, 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, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 5.8% to 44.5% 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 the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, 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.

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 the Funds’ net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward foreign exchange 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 and are included in the Partnership’s/Funds’ Statements of Income and Expenses.

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metal 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. 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, 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.

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

 

63


Ceres Orion L.P.

Notes to Financial Statements

 

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.

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.

Futures-Style Options. The Funds may trade futures-style option contracts. Unlike traditional option contracts, the premiums for futures-style option contracts are not received or paid upon the onset of the trade. The premiums are recognized and received or paid as part of the sales price when the contract is closed. Similar to a futures contract, variation margin for the futures-style option contract may be made or received by the Funds each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Funds. Transactions in futures-style option 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. Futures-style option contracts are presented as part of “Net unrealized appreciation on open futures contracts” or “Net unrealized depreciation on open futures contracts,” as applicable, in the Funds’ Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on futures-style option contracts are included in the Funds’ Statements of Income and Expenses.

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 market risk equal to the value of the futures and forward contracts held and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Funds’ risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Partnership’s/Funds’ 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., an MS&Co. affiliate, or JPMorgan are counterparties or brokers with respect to the Partnership’s and the 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.

The General Partner monitors and attempts to mitigate 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, exchange-cleared swaps, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

 

64


Ceres Orion L.P.

Notes to Financial Statements

 

The majority of these financial 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. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

In the ordinary course of business, the Partnership/Funds enter into contracts and agreements that contain various representations and warranties and which provide general indemnifications. The Partnership’s/Funds’ maximum exposure under these arrangements cannot be determined, as this could include future claims that have not yet been made against the Partnership/Funds. The Partnership/Funds consider the risk of any future obligation relating to these indemnifications to be remote.

 

10.

Subsequent Events:

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

On January 31, 2019, the Partnership fully redeemed its investment in Willowbridge Master. Also, effective January 31, 2019, Willowbridge ceased to act as a commodity trading advisor to the Partnership.

Effective on or about February 1, 2019, the Partnership allocated a portion of its assets to John Street Capital LLP (“John Street”), which is managed and traded by John Street pursuant to John Street’s Systematic Strategy Program.

Effective March 6, 2019, Maureen O’Toole resigned as a director of the General Partner.

 

65


Selected unaudited quarterly financial data for the years ended December 31, 2018 and 2017 are summarized below:

 

    For the period from 
October 1, 2018 to 
December 31, 2018 
    For the period from 
July 1, 2018 to 
September 30, 2018 
    For the period from 
April 1, 2018 to 
June 30, 2018 
    For the period from 
January 1, 2018 to 
March 31, 2018 
 

Total investment income

   $ 3,250,073       $ 3,013,685       $ 2,750,309       $ 2,600,388   

Total expenses

    (7,339,376)       (8,421,129)       (8,604,437)       (9,623,383)  

Total trading results

    (45,841,086)       2,992,940        18,174,973        (23,499,376)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (49,930,389)      $ (2,414,504)      $ 12,320,845       $ (30,522,371)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in Net Asset Value per Redeemable Unit of Class A

   $ (204.32)      $ (9.35)      $ 46.15       $ (111.83)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in Net Asset Value per Redeemable Unit of Class Z

   $ (76.36)      $ 1.66      $ 23.63       $ (37.68)  
 

 

 

   

 

 

   

 

 

   

 

 

 
    For the period from 
October 1, 2017 to 
December 31, 2017 
    For the period from 
July 1, 2017 to 
September 30, 2017 
    For the period from 
April 1, 2017 to 
June 30, 2017 
    For the period from 
January 1, 2017 to 
March 31, 2017 
 

Total investment income

   $ 2,062,844       $ 1,856,705       $ 1,598,425       $ 1,168,410   

Total expenses

    (9,032,943)       (9,529,759)       (9,620,049)       (9,903,828)  

Total trading results

    55,084,453        (18,586,532)       (34,706,587)       (3,631,714)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 48,114,354       $ (26,259,586)     $ (42,728,211)      $ (12,367,132)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in Net Asset Value per Redeemable Unit of Class A

   $ 167.01       $ (88.76)      $ (136.03)      $ (37.40)  
 

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in Net Asset Value per Redeemable Unit of Class Z

   $ 69.64       $ (29.06)      $ (47.71)      $ (10.04)  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

66


Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. 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 Exchange Act is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2018 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.

The report included in “Item 8. Financial Statements and Supplementary Data.” includes the General Partner’s report on internal control over financial reporting (“Management’s Report”).

There were no changes in the Partnership’s internal control over financial reporting during the fiscal quarter ended December 31, 2018, that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

Item 9B. Other Information.

On January 31, 2019, the Partnership fully redeemed its investment in Willowbrige Master. Also, effective January 31, 2019, Willowbridge ceased to act as a commodity trading advisor to the Partnership.

Effective on or about February 1, 2019, the Partnership allocated a portion of its assets to John Street Capital LLP (“John Street”), which is managed and traded by John Street pursuant to John Street’s Systematic Strategy Program.

Effective March 6, 2019, Maureen O’Toole resigned as a director of the General Partner.

On or about March 26, 2019, the Limited Partnership Agreement of the Partnership was amended and restated to extend the term of the Partnership from December 31, 2019 to December 31, 2055, effective March 31, 2019.

 

67


PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The Partnership has no directors or executive officers and its affairs are managed by its General Partner. Investment decisions are made by the Advisors.

The directors and executive officers of the General Partner are Patrick T. Egan (President and Chairman of the Board of Directors of the General Partner), Steven Ross (Chief Financial Officer and Director), Feta Zabeli (Director), Matthew R. Graver (Director) and Etsuko Jennings (Director). Each director holds office until the earlier of his or her death, resignation or removal. Vacancies on the board of directors may be filled by either (i) the majority vote of the remaining directors or (ii) MSD Holdings, as the sole member of the General Partner. The officers of the General Partner are designated by the General Partner’s board of directors. Each officer will hold office until his or her successor is designated and qualified or until his or her death, resignation or removal.

Directors of the General Partner are responsible for overall corporate governance of the General Partner and meet periodically to consider strategic decisions regarding the General Partner’s activities. Under CFTC rules, each Director of the General Partner is deemed to be a principal of the General Partner and, as a result, is listed as such with the NFA. Patrick T. Egan, Feta Zabeli and Steven Ross serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions.

Patrick T. Egan, age 50, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Egan has been a principal and registered as an associated person of the General Partner, and is an associate member of NFA. Since October 2014, Mr. Egan has served as President and Chairman of the Board of Directors of the General Partner. Since August 2013, Mr. Egan has been registered as a swap associated person of the General Partner. From September 2013 to May 2014, Mr. Egan served as a Vice President of Morgan Stanley Strategies LLC, (formerly, Morgan Stanley GWM Feeder Strategies LLC), which acts as a general partner to multiple alternative investment entities, and Morgan Stanley AI GP LLC, (formerly, Morgan Stanley HedgePremier GP LLC), which acts as a general partner and administrative agent to numerous hedge fund feeder funds. From September 2013 to May 2014, Mr. Egan was registered as an associated person and listed as a principal of each such entity. Since January 2013, each such entity has been registered as a commodity pool operator with the CFTC. Mr. Egan was responsible for overseeing the implementation of certain CFTC and NFA regulatory requirements applicable to such entities. From June 2009 to December 2014, Mr. Egan was employed by Morgan Stanley Smith Barney LLC, a financial services firm, where his responsibilities included serving as Executive Director and as Co-Chief Investment Officer for Morgan Stanley Managed Futures from June 2009 through June 2011 and as Chief Risk Officer for Morgan Stanley Managed Futures from June 2011 through October 2014. Since October 2014, Mr. Egan has been responsible for management of the day-to-day operations of Morgan Stanley Managed Futures. Since January 2015, Mr. Egan has been employed by the General Partner. From November 2010 to October 2014, Mr. Egan was registered as an associated person of Morgan Stanley Smith Barney LLC. From April 2007 through June 2009, Mr. Egan was employed by MS & Co., a financial services firm, where his responsibilities included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From April 2007 through June 2009, Mr. Egan was registered as an associated person of MS & Co. From March 1993 through April 2007, Mr. Egan was employed by Morgan Stanley DW Inc., a financial services firm, where his initial responsibilities included serving as an analyst and manager within the Managed Futures Department (with primary responsibilities for product development, due diligence, investment analysis and risk management of the firm’s commodity pools) and later included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From February 1998 through April 2007, Mr. Egan was registered as an associated person of Morgan Stanley DW Inc. From August 1991 through March 1993, Mr. Egan was employed by Dean Witter Intercapital, the asset management arm of Dean Witter Reynolds, Inc., where his responsibilities included serving as a mutual fund administration associate. Mr. Egan also served as a Director from November 2004 through October 2006, and from November 2006 through October 2008 of the Managed Funds Association’s Board of Directors, a position he was elected to by industry peers for two consecutive two-year terms. Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.

Steven Ross, age 47, has been Chief Financial Officer and a principal of the General Partner since July 2014 and a Director of the General Partner since February 2016. Mr. Ross has been employed by Morgan Stanley Investment Management, a financial services firm, since September 2005, where his responsibilities include serving as an Assistant Treasurer of Morgan Stanley with respect to certain investment vehicles publicly offered by Morgan Stanley. Mr. Ross is also an Executive Director of the Morgan Stanley Fund Administration Group where he is responsible for finance and accounting matters for certain private funds offered by Morgan Stanley. Before joining Morgan Stanley Investment Management, Mr. Ross was employed by JPMorgan Investor Services Co., a financial services firm, from December 1997 through September 2005, where his responsibilities included serving as a Vice President responsible for the accounting of certain funds sponsored by JP Morgan Chase & Co. and other large fund families serviced by JPMorgan Investor Services Co. From April 1997 to December 1997, Mr. Ross was employed by Investors Bank & Trust, a financial services firm, where his responsibilities included performing mutual fund accounting for financial services firms. Mr. Ross began his career at Putnam Investments LLC, a financial services firm, where he was responsible for providing broker services for certain funds sponsored by Putnam Investments LLC from August 1996 to April 1997. Mr. Ross received a B.S. in Accounting from Rhode Island College in May 1995.

Feta Zabeli, age 59, has been a Director of the General Partner since October 2014. Mr. Zabeli has also served as a director on the Board of Directors of Morgan Stanley Investment Management, a financial services firm, since January 2015 and has been listed as a

 

68


principal since February 2015. Since May 2016, Mr. Zabeli is the Chief Risk Officer for Morgan Stanley Investment Management, responsible for all investment and operational risk management globally. From January 2012 to May 2016, Mr. Zabeli was Global Head of Risk for Morgan Stanley Investment Management’s Traditional Asset Management business where he was responsible for investment risk of all equity, fixed income, money market, multi-asset class and alternatives portfolios. He was also responsible for counterparty and quantitative model risk for the traditional asset management business. He joined Morgan Stanley in January 2012. Mr. Zabeli has been listed as a principal of General Partner since October 2014. Mr. Zabeli was on garden leave in December 2011. From February 2006 to November 2011, Mr. Zabeli was Senior Vice President, and most recently Global Co-Head of Risk, for AllianceBernstein L.P., a global investment firm, with various risk management assignments in Hong Kong, Tokyo, London and New York. From August 2006 to April 2009, Mr. Zabeli was based in Hong Kong for AllianceBernstein as the Director of Risk Management for Asia Pacific. From April 2009 to July 2011, he was based in Tokyo for AllianceBernstein as both Director of Risk Management for Asia Pacific and Head of Risk Management for Japan. From July 2011 to November 2011, he was based in London for AllianceBernstein as Global Head of Operational & Credit/Counterparty Risk. In these roles at AllianceBernstein he was responsible for the full range of risk management functions including investment, operational and credit/counterparty risk. Prior to his Risk Management roles at Morgan Stanley and AllianceBernstein, Mr. Zabeli held positions as a managing director at Citigroup Asset Management, the asset management division of Citigroup, an international financial services company, from April 1998 to January 2006, where he worked as a quantitative research analyst and portfolio manager, and director at BARRA Inc., a global provider of risk analytic tools to investment institutions, from September 1993 to March 1998, where he developed risk models and applications. Mr. Zabeli received a B.S. in Aerospace Engineering from Rensselaer Polytechnic Institute in May 1982, an M.S. in Electrical Engineering from the University of Southern California in May 1988 and an M.B.A. from the University of California at Los Angeles in August 1992.

Matthew R. Graver, age 51, has been a Director of the General Partner and listed as a principal since November 2016. Since January 2008, Mr. Graver has served as Managing Director of Morgan Stanley Investment Management, a financial services firm, and Chief Operating Officer for Morgan Stanley AIP Fund of Hedge Funds, a business unit offering managed portfolios of hedge funds. Since November 2015, Mr. Graver has been listed as a principal and director of Morgan Stanley AIP Cayman GP Ltd., a commodity pool operator. From January 2005 to January 2008, Mr. Graver served as Executive Director of Morgan Stanley Investment Management and from August 2003 to January 2005, Mr. Graver served as Vice President of Morgan Stanley Investment Management. From August 2003 to January 2008, Mr. Graver’s primary responsibilities included serving as Head of Operational Due Diligence for Morgan Stanley AIP Fund of Hedge Funds in which role he oversaw due diligence into operational factors of alternative investment entities. From July 1997 to July 2003, Mr. Graver was employed by PricewaterhouseCoopers LLP, an international auditing and professional services firm, where he served as a senior audit manager and was responsible for managing independent audits of financial services firms. From June 1993 to June 1997, Mr. Graver was employed by PNC Bank, a bank offering consumer and corporate services, where he served as a mutual fund accounting manager and was responsible for managing an accounting team that performed daily accounting functions and valuation calculations for a group of mutual funds. From July 1989 through June 1993, Mr. Graver was employed by Coopers & Lybrand LLP, a predecessor accounting firm to PricewaterhouseCoopers LLP, where he was a senior audit associate and was responsible for performing audits of financial services firms. Mr. Graver earned his Bachelor of Science degree in Accounting in May 1989 from Pennsylvania State University and Masters of Business Administration from Villanova University in May 2002.

Etsuko Jennings, age 60, has been a Director of the General Partner since September 2018. She has been a Managing Director of Morgan Stanley Investment Management since January 2007 and is currently head of the Operational Risk group for Morgan Stanley Investment Management’s Global Risk and Analysis division, responsible for ongoing analysis as well as reporting and mitigation of operational risk. She joined Morgan Stanley in 1985 and has approximately 22 years of investment experience. Previously, she managed a variety of strategic initiatives in the Global Operations group. Before that, Ms. Jennings was a member of the firm’s IT department in New York, Tokyo and London where she developed and managed trading and accounting systems. She received a B.A. from Keio University’s School of Letters/International Program in Japan and an M.A. in international relations from the University of North Carolina at Chapel Hill.

The Partnership has not adopted a code of ethics that applies to officers because it has no officers. In addition, the Partnership has not adopted any procedures by which investors may recommend nominees to the Partnership’s board of directors and has not established an audit committee because it has no board of directors.

 

69


Item 11. Executive Compensation.

The Partnership has no directors or executive officers. As a limited partnership, the business of the Partnership is managed by the General Partner, which is responsible for administration of the business affairs of the Partnership. The Partnership pays the General Partner a monthly fee equal to 1/12 of 0.75% (0.75% per year) of month-end net assets.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

(a) Security ownership of certain beneficial owners. As of February 28, 2019, the Partnership knows of no person who beneficially owns more than five percent (5%) of the Redeemable Units outstanding.

(b) Security ownership of management. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by the General Partner.

The following table indicates securities owned by management as of December 31, 2018:

 

(1) Title of Class   

  (2) Name of      

  Beneficial Owner      

     (3) Amount and
Nature of
Beneficial
Ownership
     (4) Percent of      
Class    

Class Z Redeemable Units

     General Partner          6,495.6793        60.9

(c) Changes in control. None.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

(a) Transactions with related persons. None.

(b) Review, approval or ratification of transactions with related persons. Not applicable.

(c) Promoters and certain control persons. MS&Co., Morgan Stanley Wealth Management and the General Partner could be considered promoters for purposes of Item 404(c) of Regulation S-K. The nature and the amounts of compensation each promoter received or will receive, if any, from the Partnership are set forth under “Item 1. Business.”, “Item 8. Financial Statements and Supplementary Data.” and “Item 11. Executive Compensation.”

Item 14. Principal Accountant Fees and Services.

(1) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by Ernst & Young LLP (“EY”) for the years ended December 31, 2018 and 2017 for the audit of the Partnership’s annual financial statements, review of financial statements included in the Partnership’s Forms 10-Q and 10-K and other services normally provided in connection with regulatory filings or engagements were:

2018 $183,603

2017 $131,017

(2) Audit-Related Fees. None

(3) Tax Fees. The Partnership did not pay EY any amounts in 2018 and 2017 for professional services in connection with tax compliance, tax advice, and tax planning.

(4) All Other Fees. None.

(5) Not Applicable.

(6) Not Applicable.

 

70


PART IV

 Item 15. Exhibits, Financial Statement Schedules.

(1) Financial Statements:

Statements of Financial Condition at December 31, 2018 and 2017.

Condensed Schedules of Investments at December 31, 2018 and 2017.

Statements of Income and Expenses for the years ended December 31, 2018, 2017 and 2016.

Statements of Changes in Partners’ Capital for the years ended December 31, 2018, 2017 and 2016.

Notes to Financial Statements.

 

(2) Exhibits:
3.1(a)   

Fourth Amended and Restated Limited Partnership Agreement, dated August 31, 2012 (filed as Exhibit 3.2 to the Current Report on Form 8-K filed on September 5, 2012 and incorporated herein by reference).

(b)   

Amendment No.  1 to the Fourth Amended and Restated Limited Partnership Agreement, dated as of January 1, 2016 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on January  6, 2016 and incorporated herein by reference).

(c)   

Amendment No.  2 to the Fourth Amended and Restated Limited Partnership Agreement, dated as of December 8, 2017 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on December  13, 2017 and incorporated herein by reference).

3.2(a)   

Certificate of Limited Partnership of the Partnership as filed in the office of the Secretary of State of the State of New York (filed as Exhibit 3.(I) to the General Form for Registration of Securities on Form 10-12G filed on May 1, 2003 and incorporated herein by reference).

(b)   

1st Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated April 3, 2001 (filed as Exhibit 3.(I) to the General Form for Registration of Securities on Form 10-12G filed on May 1, 2003 and incorporated herein by reference).

(c)   

2nd Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.2(b) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(d)   

3rd Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.2(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(e)   

4th Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated August 27, 2008 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 2, 2008 and incorporated herein by reference).

(f)   

5th Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.2(e) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(g)   

6th Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1(a) to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).

(h)   

1st Certificate of Change to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated January 31, 2000 (filed as Exhibit 3.2(g) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

(i)   

7th Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 29, 2010 (filed as Exhibit 3.1(h) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).

(j)   

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

(k)   

9th Certificate of Amendment to the Certificate of Limited Partnership dated August 7, 2013 (filed as Exhibit 3.2 (j) to the Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

(l)   

10th Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated February 28, 2018 (filed as Exhibit 3.1 to the Current Report on Form 8-K

 

71


  

filed on March 5, 2018 and incorporated herein by reference).

10.1       

Amended and Restated Management Agreement among the Partnership, the General Partner and Winton Capital Management Limited (filed as Exhibit 10.2 to the Current Report on Form 8-K filed on July 9, 2014 and incorporated herein by reference).

10.2(a)   

Amended and Restated Advisory Agreement among Transtrend Master, the General Partner and Transtrend B.V. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on December 22, 2015 and incorporated herein by reference).

(b)   

Amendment to the Amended and Restated Advisory Agreement among Transtrend Master, the General Partner and Transtrend B.V. (filed as Exhibit 10.2 to the Current Report on Form 8-K filed on February 28, 2017 and incorporated herein by reference).

10.3(a)   

Management Agreement among the Partnership, the General Partner and Willowbridge Advisors, Inc. (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on August 13, 2014 and incorporated herein by reference).

(b)   

Letter extending the Management Agreement among the Partnership, the General Partner and Willowbridge Advisors, Inc. from June 30, 2017 to June 30, 2018 (filed herewith).

(c)   

Amendment to the 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 March 5, 2018 and incorporated herein by reference).

10.4(a)   

Management Agreement among the Partnership, the General Partner and Systematica Investments Limited (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 18, 2015 and incorporated herein by reference).

(b)   

Amendment to the Management Agreement among the Partnership, the General Partner and Systematica Investments Limited (filed as Exhibit 10.4 to the Current Report on Form 8-K filed on July 27, 2016 and incorporated herein by reference).

(c)   

Termination of Management Agreement among the Partnership, the General Partner and Systematica Investments Limited effective October 31, 2018 (filed as Item 1.02 to the Current Report on Form 8-K filed on November 6, 2018 and incorporate herein by reference).

10.5       

Management Agreement among the Partnership, the General Partner and FORT, L.P. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on February 1, 2018 and incorporated herein by reference).

10.6(a)   

Amended and Restated Commodity Futures Customer Agreement between the Partnership and MS&Co., effective March 1, 2014 (filed as Exhibit 10.7 to the Annual Report on Form 10-K filed on March 28, 2014 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).

(c)   

Supplement to the Amended and Restated Commodity Futures Customer Agreement among the Partnership, Winton Master, Transtrend Master, Willowbridge Master and MS&Co., dated July 25, 2017 (filed as Exhibit 10.5(c) to the Current Report on Form 8-K filed on July 28, 2017 and incorporated herein by reference).

10.7       

Amended and Restated Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective March 3, 2016 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 8, 2016 and incorporated herein by reference).

10.8       

Form of Subscription Agreement (filed as Exhibit 10.6 to the Quarterly Report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

10.9(a)   

Escrow Agreement among Ceres Managed Futures LLC, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.8(a) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).