Company Quick10K Filing
Quick10K
Potomac Futures Fund
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 2019-03-06 Officers
8-K 2019-01-01 Sale of Shares
8-K 2018-09-15 Officers
CBRE CBRE Group 17,040
GRFS Grifols 13,300
GMED Globus Medical 4,570
SIX Six Flags Entertainment 4,270
ANAB Anaptysbio 2,090
HCCI Heritage-Crystal Clean 660
AIRT Air T 57
APXR Apex Resources 0
PTIE Pain Therapeutics 0
CAVF Cavendish Futures Fund 0
POTO 2018-12-31
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. Not Applicable.
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-10.5(D) d684135dex105d.htm
EX-31.1 d684135dex311.htm
EX-31.2 d684135dex312.htm
EX-32.1 d684135dex321.htm
EX-32.2 d684135dex322.htm

Potomac Futures Fund Earnings 2018-12-31

POTO 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 d684135d10k.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 000-50735

POTOMAC FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York                        13-3937275            
(State or other jurisdiction of incorporation or organization)                        (I.R.S. Employer Identification No.)            

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address 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 this 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 the 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 $19,047,530 of Class A 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, 29,415.5668 Limited Partnership Class A Redeemable Units were outstanding and 22.3230 Limited Partnership Class Z Redeemable Units were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

[None]


Item 1. Business.

(a) General Development of Business. Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership organized on March 14, 1997 under the partnership laws of the State of New York to engage, directly and 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, indices, U.S. and non-U.S. interest rates, livestock, metals and softs. The Partnership commenced trading operations on October 1, 1997. The commodity interests traded directly by the Partnership, and which were previously traded indirectly through its investment in CMF Campbell Master Fund L.P. (the “Master”), prior to the Partnership’s full redemption from the Master effective July 14, 2017, are volatile and involve a high degree of market risk. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates.

Beginning April 22, 1997, 200,000 redeemable units of limited partnership interest (“Redeemable Units”) were offered to qualified investors at $1,000 per Redeemable Unit for a period of ninety days, subject to increase for up to an additional sixty days at the sole discretion of the general partner. Between April 22, 1997 (commencement of the offering period) and September 30, 1997, 1,383 Redeemable Units were sold. Proceeds of the offering were held in an escrow account and were transferred, along with the general partner’s contribution of $1,400,000 to the Partnership’s trading account on October 1, 1997 when the Partnership commenced trading. The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

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. 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. (“MSSB Holdings”). Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority equity interest in MSSB Holdings. All trading decisions for the Partnership are made by Campbell & Company, LP (the “Advisor”).

As of March 22, 2016, the Partnership began offering two classes of limited partnership interests, Class A Redeemable Units and Class Z Redeemable Units. All Redeemable Units issued prior to February 29, 2016 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” 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 July 1, 2016 at $1,000 per Redeemable Unit. 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 may also be offered to certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units are identical, except that Class Z Redeemable Units are not subject to monthly ongoing selling agent fees.

On January 1, 2005, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the State of New York. Effective at the close of business on July 14, 2017, the Partnership fully redeemed its investment in the Master. As of July 17, 2017, all positions from the Master were transferred to the Partnership and the Advisor commenced trading the Partnership’s assets directly pursuant to the Campbell Managed Futures Portfolio, a proprietary, systematic trading program. Consequently, the General Partner liquidated the Master, effective July 31, 2017. The units of the Master were used solely for accounting purposes and did not represent legally distinct units. Prior to the Master’s termination of operations on July 31, 2017, the Master permitted accounts managed by the Advisor using the Campbell Managed Futures Portfolio to invest together in one trading vehicle. The General Partner was also the general partner of the Master. Expenses to investors as a result of the investment in the Master, prior to the Partnership’s full redemption from the Master effective July 14, 2017, were approximately the same as expenses to investors as a result of the Partnership trading directly, and redemption rights were not affected. The Partnership’s and the Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. The Partnership and the Master deposited a portion of their cash in non-trading bank accounts at JPMorgan Chase Bank, N.A. (“JPMorgan”).

 

1


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

 

LOGO

Prior to the Partnership’s full redemption from the Master effective July 14, 2017, the Partnership owned 100% of the Master. The performance of the Partnership was directly affected by the performance of the Master.

The Partnership’s/Master’s trading of futures, forward, swap and option contracts, if applicable, on commodities are or were done primarily on U.S. and foreign commodity exchanges. During the years ended December 31, 2018, 2017 and 2016, the Partnership and the Master engaged in such trading through commodity brokerage accounts maintained with MS&Co.

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 contributions and profits, if any, net of distributions, redemptions and losses, if any.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2057; the net asset value per Redeemable Unit of any Class decreases to less than $ 400 per Redeemable Unit as of a close of any business day; or under certain other circumstances as defined in the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).

The General Partner administers the business and affairs of the Partnership. The Partnership pays the General Partner a monthly fee (the “General Partner fee”) in return for its services to the Partnership. Effective October 1, 2014, the General Partner fee was equal to 1/12 of 1% (1% per year) of month-end adjusted Net Assets per Class for each outstanding Class. Effective January 1, 2019, the General Partner fee was reduced to 1/12 of 0.90% (0.90% per year) of month-end adjusted Net Assets per Class for each outstanding Class. Month-end adjusted Net Assets per Class, for the purpose of calculating the General Partner fees, are Net Assets per Class, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accruals, the monthly management fee, the General Partner fee and any redemptions or distributions as of the end of such month. This fee may be increased or decreased at the discretion of the General Partner. Effective January 1, 2017, the General Partner instituted a cap on the Partnership’s operating expenses such that the General Partner will be responsible for any such expenses to the extent they exceed 0.50% of the Partnership’s Net Assets in any calendar year.

The General Partner, on behalf of the Partnership, has entered into a management agreement (the “Management Agreement”) with the Advisor, a registered commodity trading advisor. The Advisor is not affiliated with the General Partner or MS&Co. The Advisor is not responsible for the organization or operation of the Partnership. The Management Agreement provides that the Advisor has discretion in determining the investment of the assets of the Partnership allocated to the Advisor by the General Partner. The Partnership pays a monthly management fee equal to 1/12 of 1.5% (1.5% per year) of month- end Net Assets per Class, for each outstanding Class, allocated to the Advisor as of the end of each month. Prior to June 1, 2014, the Partnership paid a monthly management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets for each outstanding Class allocated to the Advisor. Month-end Net Assets, for the purpose of calculating management fees, are Net Assets per Class, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s incentive fee accrual, the monthly management fee, the General Partner fee and any redemptions or distributions as of the end of such month. The Management Agreement may be terminated upon notice by either party.

 

2


In addition, the Partnership is obligated to pay the Advisor an incentive fee, payable quarterly, equal to 20% of the new trading profits, as defined in the Management Agreement, earned by the Advisor for the Partnership during each calendar quarter. The Advisor’s incentive fee will be allocated proportionally to each Class based on the net asset value of the respective Class. 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.

During the third quarter of 2013, the Partnership entered into a Customer Agreement with MS&Co. (the “MS&Co. Customer Agreement”) and during the fourth quarter of 2013, the Partnership entered into a Selling Agent Agreement with Morgan Stanley Wealth Management (the “Selling Agreement”).

Under the MS&Co. Customer Agreement and the foreign exchange brokerage account agreement, the Partnership pays and paid through its investment in the Master (prior to full redemption from the Master effective July 14, 2017) trading fees for the clearing and, where applicable, the execution of transactions as well as exchange, user, give-up, floor brokerage and National Futures Association (“NFA”) fees (collectively, the “MS&Co. clearing fees”). Clearing fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. Prior to the Partnership’s full redemption from the Master, effective July 14, 2017, the MS&Co. clearing fees were allocated to the Partnership based on its proportionate share of the Master. Prior to the Partnership’s full redemption from the Master, all of the Partnership’s assets available for trading commodity interests not held in the Master’s accounts at MS&Co. were deposited in the Partnership’s account at MS&Co. The Partnership’s cash is deposited by MS&Co. in segregated bank accounts to the extent required by Commodity Futures Trading Commission (“CFTC”) regulations. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or prior to the Partnership’s full redemption from the Master effective July 14, 2017, the Partnership’s allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. Prior to April 1, 2017, MS&Co. paid the Partnership interest on 80% of the average daily equity maintained in cash in the Partnership’s (or allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. The MS&Co. Customer Agreement may generally be terminated upon notice by either party.

Under the Selling Agreement with Morgan Stanley Wealth Management, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee. Prior to April 1, 2014, the monthly ongoing selling agent fee was paid at a rate equal to 5.5% per year of month- end Net Assets. Effective April 1, 2014, the monthly ongoing selling agent fee was reduced to 3% per year of month-end Net Assets. Effective October 1, 2014, the monthly ongoing selling agent fee was reduced to 2% per year of month-end Net Assets for Class A Redeemable Units. Class Z Redeemable Units are not subject to the ongoing selling agent fee. Morgan Stanley Wealth Management will pay a portion of its ongoing selling agent fees to properly registered or exempted financial advisors who have sold Class A Redeemable Units in the Partnership. Month-end Net Assets, for the purpose of calculating ongoing selling agent fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fee, management fee, the incentive fee accrued, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month.

Generally, a limited partner in the Master (prior to its termination effective July 31, 2017) withdrew all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request had been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals were classified as a liability when the limited partner in the Master elected to redeem and informed the Master. However, a limited partner in the Master may have requested a withdrawal as of the end of any day if such request was received by the General Partner at least three days in advance of the proposed withdrawal day.

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 is set forth under “Item 6. Selected Financial Data.” The Partnership’s Capital as of December 31, 2018 was $17,188,757.

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

(i) through (xii) — Not applicable.

(xiii) — The Partnership has no employees.

 

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(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.

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, clearing, ongoing selling agent, General Partner and management fees.

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

An investor’s ability to redeem 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 commodity broker are affiliates;

 

  2.

The Advisor, the Partnership’s 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 achieving positive returns and such returns being independent of stock and bond market returns.

 

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Past performance is no assurance of future results.

The Advisor’s trading strategies may not perform as they have performed in the past. The Advisor has 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.

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 costs of such trades, 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. The Advisor believes that established speculative position and trading limits will not materially adversely affect trading for the Partnership. The trading instructions of the Advisor, however, may have to be modified, and positions held by the Partnership 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 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 the Advisor’s trading for the Partnership.

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 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

 

5


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 Advisor 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, 2017. 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 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 out of facilities provided by Morgan Stanley and/or one of its subsidiaries.

 

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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

 

7


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

 

8


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

 

9


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

 

10


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

 

11


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

 

12


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

 

13


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.

 

14


Item 4. Mine Safety Disclosures. Not applicable.

 

15


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 2,561.

(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 additional subscriptions of 46.5100 Class A Redeemable Units totaling $60,000. For the twelve months ended December 31, 2017, there were additional subscriptions of 11,319.9380 Class A Redeemable Units totaling $15,266,995. For the twelve months ended December 31, 2016, there were additional subscriptions of 145.6740 Class A Redeemable Units totaling $218,400. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 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 from the sale of Redeemable Units described above are used in the trading of commodity interests including futures, option and forward contracts.

(g) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

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

 

          Class A   (c) Total Number of   (d) Maximum Number (or
       Class A     (b) Average   Redeemable Units   Approximate Dollar Value)
       (a) Total Number       Price Paid per       Purchased as Part of     of Redeemable Units
       of Redeemable     Redeemable   Publicly Announced   that May Yet Be Purchased
Period     Units Purchased *     Unit**   Plans or Programs     Under the Plans or Programs  

October 1, 2018 - October 31, 2018

  151.2690     $        1,203.95     N/A   N/A

November 1, 2018 - November 30, 2018

  268.6700     $        1,197.54     N/A   N/A

December 1, 2018 - December 31, 2018

  84.8040     $        1,230.07     N/A   N/A
    504.7430     $        1,204.93          

 

*

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

 

**

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

 

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Item 6. Selected Financial Data.

Total investment income, total expenses, expenses borne by the General Partner, 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 the 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

     $ 317,438         $ 202,014         $ 45,442         $ 2,081         $ 4,188   

Total expenses

     (1,231,296)        (1,619,813)        (1,562,054)        (1,865,782)        (2,042,094)  

Expenses borne by the General Partner

     181,320         181,311         -            -            -      

Total trading results

     (1,252,771)        1,183,022         (1,818,407)        (24,523)        6,464,660   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss)

     $ (1,985,309)        $ (53,466)        $ (3,335,019)        $ (1,888,224)        $ 4,426,754   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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

              

Class A

     $ (128.41)        $ 9.76         $ (222.31)        $ (105.58)        $ 265.30   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     $ (71.37)        $ 25.25         $ (87.50)        $ -            $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net asset value per Redeemable Unit:

              

Class A

     $ 1,230.07         $ 1,358.48         $ 1,348.72         $ 1,571.03         $ 1,676.61   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     $ 866.38         $ 937.75         $ 912.50         $ -            $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $   17,500,161         $   22,980,344         $   18,397,452         $   27,155,807         $   30,832,872  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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

Overview

The Partnership aims and the Master (prior to the Master’s termination of operations effective July 31, 2017) aimed to achieve substantial capital appreciation through speculative trading, directly and indirectly, in U.S. and international markets for currencies, interest rates, stock indices, agricultural and energy products and precious and base metals. The Partnership may employ, and the Master may have employed, futures, options on futures, and forward, spot and swap contracts in those markets.

The General Partner manages all business of the Partnership and managed all business of the Master (prior to the Master’s termination of operations effective July 31, 2017). The General Partner has delegated its responsibility for the investment of the Partnership’s assets to the Advisor. The Partnership has invested these assets in a managed account in the Partnership’s name managed by the Advisor. Prior to its full redemption from the Master effective July 14, 2017, the Partnership had invested these assets in the Master. 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 uses proprietary technology and on-site evaluations to monitor new and existing futures money managers. The accounting and operations staff provides 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 Advisor for the Partners/Master, the General Partner considered among other factors, past performance, trading style, volatility of markets traded and fee requirement. The General Partner may modify or terminate the allocation of the Advisor at any time.

Responsibilities of the General Partner include:

 

 

due diligence examinations of the Advisor;

 

 

selection, appointment and termination of the Advisor;

 

 

negotiation of the Management Agreement; and

 

 

monitoring the activity of the Advisor.

 

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In addition, the General Partner prepares, or assists the Administrator in preparing, the books and records and provides, or assists 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 and of the Master prior to its termination of operations effective July 31, 2017.

While the Partnership has and the Master had the right to seek lower commission rates and fees from other commodity brokers at any time, the General Partner believes that the customer agreement and other arrangements with MS&Co. are fair, reasonable, and competitive.

Prior to the Partnership’s full redemption from the Master effective July 14, 2017, the Partnership’s assets allocated to the Advisor for trading were not invested in commodity interests directly and the Advisor’s allocation of the Partnership’s assets was invested in the Master. As of July 17, 2017, all positions from the Master have been transferred to the Partnership and the Advisor commenced trading the Partnership’s assets directly pursuant to the Campbell Managed Futures Portfolio, a proprietary, systematic trading system. The Advisor’s trading models are designed to detect and exploit medium-term to long-term price changes, while also applying risk management and portfolio management principles.

The Advisor believes that utilizing multiple trading models provides an important level of diversification and is most beneficial when multiple contracts of each market are traded. Every trading model may not trade every market. It is possible that one trading model may signal a long position while another trading model signals a short position in the same market. It is the Advisor’s intention to offset those signals to reduce unnecessary trading, but if the signals are not simultaneous, both trades will be taken and since it is unlikely that both positions would prove profitable, in retrospect, one or both trades will appear to have been unnecessary. It is the Advisor’s policy to follow trades signaled by each trading model independently of the other models.

As a managed futures partnership, the Partnership’s performance is, and the Master’s performance was, dependent upon the successful trading of the Advisor to achieve the Partnership/Master’s objectives. It is the business of the General Partner to monitor the Advisor’s performance to assure compliance with the Partnership’s trading policies and to determine if the Advisor’s performance is meeting the Partnership’s objectives.

(a) Liquidity.

The Partnership does not engage in sales of goods or services. The Partnership’s only assets are its (i) equity in trading accounts, consisting of unrestricted and restricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts and investment in U.S. Treasury bills at fair value, if applicable, (ii) receivable from the General Partner, (iii) interest receivable and (iv) cash at bank. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred during the year ended December 31, 2018.

To minimize the risk relating to low margin deposits, the Partnership and the Master (prior to the Master’s termination of operations effective July 31, 2017) follow or followed certain trading policies, including:

 

  (i)

The Partnership invests, and the Master invested, its assets only in commodity interests that the Advisor believes are or were traded in sufficient volume to permit ease of taking and liquidating positions. Sufficient volume, in this context, refers to a level of liquidity that the Advisor believes will permit it to enter and exit trades without noticeably moving the market.

 

  (ii)

The Partnership normally will not establish new positions in a futures interest for any one contract month or option if such additional positions would result in a net long or short position for that futures interest requiring as margin or premium more than 15% of the Partnership’s net assets.

 

  (iii)

The Advisor will not and would 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/Master’s net assets allocated to the Advisor.

 

  (iv)

The Partnership will trade currencies and other commodities in the interbank and forward contract markets only with banks, brokers, dealers, and other financial institutions which the general partner, in conjunction with MS & Co., has determined to be creditworthy. In determining the creditworthiness of a counterparty to a forward contract, the general partner and MS&Co. will consult with the Corporate Credit Department of MS&Co.

 

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  (v)

The Advisor will not generally take a position after the first notice day in any futures interest during the delivery month of that futures interest, except to match trades to close out a position on the interbank foreign currency or other forward markets or liquidate trades in a limit market.

 

  (vi)

The Partnership may occasionally accept, and the Master may have occasionally accepted, delivery of a commodity. Unless such delivery is or was disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearinghouse, the physical commodity position is or was fully hedged.

 

  (vii)

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

 

  (viii)

The Partnership/Master does not and did not utilize borrowings other than short-term borrowings if the Partnership/Master takes or had taken delivery of any cash commodities.

 

  (ix)

If the Partnership borrows money from the general partner or any affiliate thereof, the lending entity may not receive interest in excess of its interest costs, nor may the lender receive interest in excess of the amounts which would be charged to the Partnership (without reference to the general partner’s financial abilities or guarantees) by unrelated banks on comparable loans for the same purpose, nor may the lender or any affiliate thereof receive any points or other financing charges or fees regardless of the amount.

 

  (x)

The Partnership will not purchase, sell, or trade securities (except securities permitted by the CFTC for investment of customer funds). The Partnership may, however, trade in futures contracts on securities and securities indexes, options on such futures contracts, and other commodity options.

 

  (xi)

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

 

  (xii)

The Partnership/Master will not and did 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, indicating 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 17.1%. 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 Master prior to the Partnership’s full redemption from the Master effective July 14, 2017.

In the normal course of business, the Partnership is and through its investment in the Master prior to its full redemption effective July 14, 2017, was party to financial instruments with off-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include or may have included forwards, futures, options and swaps, whose values are or were based upon an underlying asset, index, or reference rate, and generally represent or represented 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 or may have been 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 related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates at any given time approximately 17.6 to 60.8% of the Partnership’s contracts are traded OTC.

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.

 

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

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

The General Partner monitors and attempts for the Partnership, and monitored and attempted for the Master, to mitigate the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has or had effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be, and the Master may have been, subject. These monitoring systems generally allow and allowed the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide and provided account analysis of futures, forward and options 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.)

Other than the risks inherent in commodity futures, forwards, option and swap trading, U.S. Treasury bills and money market mutual fund securities, the General Partner knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way. The Limited Partnership Agreement provides that the General Partner may cause the Partnership to cease trading operations 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.

(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 gains 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 Advisor 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, ongoing selling agent, General Partner, management fees and, prior to the Partnership’s full redemption from the Master effective July 14, 2017, expenses allocated from the Master. The level of these expenses is dependent upon the level of trading and the ability of the Advisor to identify and take advantage of price movements in the commodity markets, in addition to the level of Net Assets maintained. In addition, the amount of interest income earned by the Partnership’s commodity broker is dependent upon (i) the average daily equity maintained in cash in the Partnership’s and/or (prior to the Partnership’s full redemption from the Master effective July 14, 2017) the Master’s accounts, (ii) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or prior to July 14, 2017 the Master and (iii) interest rates over which the Partnership and MS&Co. has, and the Master had, no control.

No forecast can be made as to the level of redemptions in any given period. A limited partner may require the Partnership to redeem its Redeemable Units at their net asset value as of the end of a month on three business days’ notice to the General Partner. There is no fee charged to limited partners in connection with redemptions. Redemptions generally are funded out of the Partnership’s cash holdings. For the year ended December 31, 2018, 2,429.9180 Class A Redeemable Units were redeemed totaling $3,099,311 and 50.2550 Class Z General Partner Redeemable Units were redeemed totaling $50,000.

 

20


For the year ended December 31, 2017, 8,101.6680 Class A Redeemable Units were redeemed totaling $10,711,472 and 130.3980 Class Z General Partner Redeemable Units were redeemed totaling $115,002. For the year ended December 31, 2016, 4,021.8240 Class A Redeemable Units were redeemed totaling $5,889,865, 192.5786 Class A General Partner Redeemable Units were redeemed totaling $289,508 and 36.6440 Class Z General Partner Redeemable Units were redeemed totaling $35,000.

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 additional subscriptions of 46.5100 Class A Redeemable Units totaling $60,000. For the year ended December 31, 2017, there were additional subscriptions of 11,319.9380 Class A Redeemable Units totaling $15,266,995 and 199.2080 Class Z General Partner Redeemable Units totaling $181,777. For the year ended December 31, 2016, there were additional subscriptions of 145.6740 Class A Redeemable Units totaling $218,400 and 264.5080 Class Z General Partner Redeemable Units totaling $264,508.

(c) Results of Operations.

For the year ended December 31, 2018, the net asset value per Class A Redeemable Unit decreased 9.5% from $ 1,358.48 to $1,230.07 and the net asset value per Class Z Redeemable Unit decreased 7.6% from $937.75 to $866.38. For the year ended December 31, 2017, the net asset value per Class A Redeemable Unit increased 0.7% from $1,348.72 to $1,358.48 and the net asset value per Class Z Redeemable Unit increased 2.8% from $912.50 to $937.75. For the year ended December 31, 2016, the net asset value per Class A Redeemable Unit decreased 14.2% from $1,571.03 to $1,348.72 and the net asset value per Class Z Redeemable Unit decreased 8.8% from $1,000.00 to $912.50.

The Partnership experienced a net trading loss before fees and expenses for the year ended December 31, 2018 of $1,252,771. Losses were primarily attributable to the Partnership’s trading of commodity futures in grains, indices, livestock and metals and were partially offset by gains in currencies, energy, U.S. and non-U.S. interest rates and softs. The net trading gain (or loss) realized from the Partnership is disclosed under “Item 8. Financial Statements and Supplementary Data.”

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. In commodities, losses were incurred in the grains markets during January and February 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. 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 February, and in European interest rate futures during March. During January, gains were also achieved within the currency sector from positions in the British pound, Norwegian krone, and euro. Smaller gains were also recorded from trading sugar and energy futures during January and March.

During the second quarter, the Partnership’s most notable losses were recorded throughout the quarter from both long and short industrial metals positions as prices whipsawed amid concerns of sanctions, tariffs, and the rising value of the U.S. dollar. Within the agricultural markets, losses were incurred during April from short positions in sugar futures as prices rallied following a national strike by Brazilian truck drivers. In currencies, the prospect of more a hawkish U.S. monetary policy strengthened the U.S. dollar and proved challenging for the Fund during April and May. Within the global equity index sector, losses were recorded during May from long positions in Asian and European equity index futures as geopolitical events weakened investor demand for risk assets. The Partnership’s overall trading losses for the second quarter were partially offset by trading gains in the energy complex throughout the quarter from long futures positions in crude oil and its refined products as prices rose amid supply concerns and increased demand.

During the third quarter, the Partnership’s most notable losses were incurred within the global interest rate markets during July and September from long positions in European fixed income futures as central bank rhetoric grew more hawkish. Losses within the metals markets were primarily recorded during July from long positions in industrial metals futures as prices fell amid weakening Chinese manufacturing sentiment. Within the energy complex, losses were incurred during July from long positions in crude oil and its refined products as prices reversed lower as the OPEC nations signaled their intent to increase oil production. The Partnership’s losses for the third quarter were partially offset by gains achieved within the global stock index sector during July from long positions in European, U.S., and Asian equity index futures as prices rallied as an outlook for growing global economic strength overcame trade war concerns. Additional gains were achieved during August within the currency sector from long U.S. dollar positions versus developed and emerging market currencies as their relative value decreased against the dollar due to weaker-than-expected economic data and a developing crisis among emerging markets. Further gains were experienced during August in the agricultural markets from short grain futures positions as prices dropped following trade turmoil, beneficial weather, and higher yield estimates.

 

21


During the fourth quarter, the most significant losses were incurred during October within the global stock index sector from long positions in U.S. and Pacific Rim equity index futures as prices declined amid a global selloff spurred by fears over rising bond yields, slowing global growth, and increased trade tensions. Losses were experienced within the agricultural markets during October from short positions in sugar and coffee futures as prices rose with a strengthening of Brazil’s currency. Smaller losses in this sector were recorded during November from positions in the soybean futures amid heightened volatility and trade negotiations. Additional losses were recorded in the metals markets during November from positions in copper and silver futures. A portion of the Partnership’s losses during the fourth quarter was offset by gains experienced within the currency markets during October from short positions in the euro versus the U.S. dollar as the value of the euro declined after data showed business growth in Europe lost more momentum than expected, as trade tensions and worries regarding Italy overshadowed the European economy. Further gains were achieved in currencies during December. Within the energy markets, gains recorded during November from long positions in natural gas futures as prices advanced as cold temperatures spurred concern that supplies may not be adequate to meet demand over the winter. Additional gains were achieved during December within the global interest rate sector from long positions in Australian, European, and Japanese fixed income futures as investors sought the relative safety of government debt.

The Partnership experienced a net trading gain before fees and expenses for the year ended December 31, 2017 of $1,183,022. Gains were primarily attributable to the Partnership’s/Master’s trading of commodity futures in indices and were partially offset by losses in currencies, energy, grains, U.S. and non-U.S. interest rates, livestock, metals and softs.

During the first quarter, the most notable losses were recorded during January and March within the currency markets from short positions in the Canadian dollar, Japanese yen, Swedish krona, and British pound versus the U.S. dollar as the relative value of the dollar depreciated as investors revised their expectations for further interest rate hikes in 2017. Losses were also recorded during January and March from long positions in crude oil and its related products as prices fell due to growing global stockpiles. Additional energy losses were recorded during January and March from positions in natural gas futures. Within the agricultural and global interest rates markets, losses were recorded during January and March. A portion of the Partnership’s losses during the first quarter was offset by trading gains achieved during February and March from long positions in U.S., European, and Asian equity index futures as prices were buoyed by positive economic sentiment across the globe. Positive sentiment also fueled gains for long positions in U.S. and Asian equity index futures during January. Additional gains were experienced within the metals sector during January and February from long positions in industrial metals futures.

During the second quarter, the most meaningful losses were recorded within the global interest rate sector primarily during the last week of June from long European fixed income futures positions as prices reversed lower following comments by Mario Draghi, President of the European Central Bank (“ECB”), expressing optimism on eurozone inflation. Further losses were recorded during May within the currency market from long positioning in the U.S. dollar against most developed currencies as the dollar weakened amid the debate surrounding the Trump Administration’s alleged ties to Russia. Additional losses were experienced throughout the second quarter from long and short futures positions in oil related futures products, as well as in the metals sector. Within the agricultural markets, losses were recorded during late June from short soybean futures positions as prices rose sharply. The Partnership’s losses for the second quarter were partially offset by gains achieved within the global stock index markets during April and May from long positions in Asian, U.S., and European equity index futures as prices were supported by increased consumer confidence.

During the third quarter, the Partnership posted a gain in the global stock index markets during July and September from long positions in U.S., Asian, and European equity index futures as prices rose amid growing confidence in the strength of the global economy. Additional gains were achieved in the currency markets during July from long positions in the Australian dollar, Canadian dollar, and euro versus the U.S. dollar as the relative value of the U.S. currency decreased amid dovish comments released by Federal Reserve (the “Fed”) officials and diminished confidence in President Trump’s ability to successfully push a pro-growth agenda. The Partnership’s gains for the third quarter were partially offset by losses incurred within the agricultural sector primarily during July from short positions in soybean futures as drought conditions in portions of the U.S. Midwest threatened crops, pushing prices higher. Within the metals complex, losses were recorded during July from short positions in silver futures as prices moved higher. Additional losses in the metals complex were experienced during September.

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 during 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.

 

22


Prior to April 1, 2017, interest income on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account during each month was earned at the monthly average of the 4-week U.S. Treasury bill discount rate. Effective April 1, 2017, 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 the Master’s, prior to the Partnership’s full redemption from the Master effective July 14, 2017) brokerage account at MS&Co. during each month at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. For the avoidance of doubt, the Fund will not receive interest on amounts in the futures brokerage account that are committed to margin. During the reporting periods, any interest earned on the Partnership’s account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership. Interest income earned directly or allocated from the Master for the three and twelve months ended December 31, 2018 increased by $21,512 and $115,424, respectively, as compared to the corresponding periods in 2017. The increase in interest income is primarily due to higher interest 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 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 (prior to the Partnership’s full redemption from the Master effective July 14, 2017) the Master’s accounts, (2) the amount of Treasury bills and/or money market mutual fund securities held by the Partnership and/or (prior to July 14, 2017) the Master, and (3) interest rates over which the Partnership and MS&Co. have, and the Master had, no control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value of Class A Redeemable Units as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and twelve months ended December 31, 2018 decreased by $31,357 and $143,045, respectively, as compared to the corresponding periods in 2017. The decrease in ongoing selling agent fees is due to an decrease in average net assets attributable to Class A Redeemable Units during the three and twelve months ended December 31, 2018, as compared to the corresponding periods in 2017.

Management fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. Management fees for the three and twelve months ended December 31, 2018 decreased by $23,902 and $108,887, respectively, as compared to the corresponding periods in 2017. The decrease in management fees is due to an decrease in average adjusted net assets per Class 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 factors, (i) selecting, appointing and terminating the Partnership’s commodity trading advisor and (ii) monitoring the activities of the commodity trading advisor. These fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. General Partner fees for the three and twelve months ended December 31, 2018 decreased by $15,935 and $72,593, respectively, as compared to the corresponding periods in 2017. The decrease in General Partner fees is due to an decrease in average adjusted net assets per Class during the three and twelve months ended December 31, 2018 as compared to the corresponding periods in 2017.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three and twelve months ended December 31, 2018 and 2017. To the extent the Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until the 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 fees such as legal and accounting expenses related to the offering, certain offering costs and filing, reporting and data processing fees. Professional fees for the years ended 2018 and 2017 were $279,058 and $255,641, respectively.

The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses for the year ended December 31, 2016 of $1,818,407. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy, indices, U.S. interest rates, livestock, metals and softs and were partially offset by gains in grains and non-U.S. interest rates.

 

23


The most significant losses were incurred within the energy complex during March and May from short positions in crude oil and its related products as prices rallied as U.S. crude production continued to decline. Additional losses in this complex were experienced during April and June from short positions in natural gas futures as prices increased after warmer-than-expected weather in the U.S. spurred speculation of a tightening market. Further losses in the energies were incurred during August and September from short positions in crude oil and its related products. Additional losses in this sector were experienced during November from short natural gas futures positions as prices rose in the latter half of the month. In the agricultural markets, losses were recorded during January from short corn futures positions as prices rose after a strong U.S. export sales report and adverse weather conditions in Brazil. Additional losses in this sector were incurred during March from short wheat and soybean futures positions. Further losses in these markets were incurred during the first half of the April from long sugar futures positions and during May from long futures positions in cocoa. During October, losses were experienced from short corn futures positions as prices rose amid strong U.S. export sales, speculation of increased Chinese demand, and investors covering short positions. During November, losses were incurred from long coffee futures positions as prices decreased after forecasts of South American supplies increased and the weakening relative value of the Brazilian real dampened the market’s outlook. Additional losses in the agricultural markets were recorded during December from short lean hog futures positions as prices rallied amid solid export activity and a lowered U.S. production projection from the United States Department of Agriculture. Within the metals complex, losses were incurred during January and February from short precious metals positions as prices increased as uncertainty in Chinese financial markets, plunging oil prices, and signs of softening U.S. economic growth all bolstered the safe haven appeal of the metals. Additional losses in this sector were recorded during February and March from short base metals futures positions as prices rose due to a decrease in the value of the U.S. dollar and optimism that demand would improve after the Chinese government signaled increased support for economic stimulus. Further losses within the metals were incurred during May and August from long positions in precious metals futures positions as prices declined. Additional losses were recorded in metals during September, October, and December from short and long copper futures positions. In the currency sector, losses were recorded during February from short positions in the Canadian dollar, New Zealand dollar, and Japanese yen as the relative value of the U.S. dollar weakened amid concern of growing vulnerability of the U.S. economy. During April, losses in currencies were recorded from short positions in the British pound versus the U.S. dollar after the pound strengthened as fears the United Kingdom might vote to exit the E.U. began to prematurely subside. During May, losses were incurred from short U.S. dollar positions against a variety of currencies after the dollar steadily strengthened. During August, losses in this sector were experienced from short positions in the euro versus the U.S. dollar. A portion of the Partnership’s losses for the year was partially offset by gains achieved within the global interest rates sector during January and February primarily from long European bond futures positions as prices increased following dovish comments released by the ECB and a flight-to-quality due to global growth concerns. Further gains from long European bond futures positions were recorded during May. In June, additional gains were achieved within this sector from long positions in European and U.S. fixed income futures as prices advanced as uncertainty surrounding the economic and political fallout following the U.K.’s vote to leave the E.U. increased demand for the relative “safety” of government debt. Within the global stock index sector, gains were achieved during July as prices rose after investors looked past geopolitical concerns and focused on better-than-expected economic fundamental data. In December, further gains achieved in this sector from long positions in European and U.S. equity index futures as prices rose after the ECB extended its quantitative easing program and amid expectations for strong growth during 2017.

In the General Partner’s opinion, the Advisor continues to employ its trading methods in a consistent and disciplined manner and its results are consistent with the objectives of the Partnership and expectations for the Advisor’s programs. The General Partner continues to monitor the Advisor’s performance on a daily, weekly, monthly and annual basis to assure these objectives are met.

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

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

(d) Off-Balance Sheet Arrangements. None.

(e) Contractual Obligations. None.

 

24


(f) Operational Risk.

The Partnership is directly 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 is subject to increased risks with respect to its 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 ability to gather, process, and communicate information efficiently and securely, without interruption, to customers, among Redeemable Units within the Partnership, and in the markets where the Partnership 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 management’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 generally accepted accounting principles. (“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, and those differences could be material. 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.”

Prior to its full redemption from the Master effective July 14, 2017, the Partnership’s most significant accounting policy was the valuation of its investments in the Master. The fair value of the investment in the Master was determined based on the Master’s net asset value per Redeemable Unit as calculated by the Master.

The Partnership’s and the Master’s (prior to its termination of operations effective July 31, 2017) investments in futures, option and forward contracts and U.S. Treasury bills, as applicable, are or were carried at fair value. 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.

 

25


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

Introduction

All or substantially all of the Partnership’s assets are subject to the risk of trading loss either directly or indirectly through the Partnership’s investment in the Master prior to its full redemption from the Master effective July 14, 2017. The Partnership is, and the Master was, a speculative commodity pool. The market sensitive instruments held by the Partnership are, and by the Master were, acquired for speculative trading purposes. Unlike an operating company, the risk of market sensitive instruments is for the Partnership, and was for the Master, integral, not incidental, to the Partnership’s and the Master’s main lines of business.

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

The Partnership rapidly acquires and liquidates, and the Master rapidly acquired and liquidated, 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/Master’s past performance is not necessarily indicative of the Partnership’s future results.

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

Quantifying the Partnership’s/Master’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership/Master’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (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/Master’s risk exposure in the various market sectors traded by the Advisor is quantified below in terms of Value at Risk. Please note that the Value at Risk model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either the General Partner or the Advisor in their daily risk management activities.

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

In the case of market sensitive instruments which are not exchange-traded, 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/Master’s futures and forward positions does not have any optionality component. However, the Advisor may 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

 

26


underlying instrument, whereas, in fact, the fair values of the options traded by the Partnership in almost all cases fluctuate to a lesser extent than those of the underlying instruments.

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

The Partnership’s and the Master’s 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 following tables indicate the trading Value at Risk associated with the open positions by market category as of December 31, 2018 for the Partnership and December 31, 2017 for the Partnership/Master, and the highest, lowest and average value at any point during the twelve months ended December 31, 2018 for the Partnership and during the twelve months ended December 31, 2017 for the Partnership/Master. All open position trading risk exposures of the Partnership/Master have been included in calculating the figures set forth below.

As of December 31, 2018, the Partnership’s total capitalization was $17,188,757. The Partnership’s Value at Risk as of December 31, 2018 was as follows:

December 31, 2018

                Twelve Months Ended December 31, 2018  
          % of Total     High     Low     Average

Market Sector

      Value at Risk            Capitalization             Value at Risk             Value at Risk             Value at Risk *    

Currencies

    $ 1,489,373        8.66      $ 2,307,169        $ 396,599        $ 1,356,392  

Energy

    107,299        0.62        249,205        60,926        153,032  

Grains

    181,721        1.06        256,905        33,535        151,369  

Indices

    380,758        2.22        1,522,694        208,902        656,476  

Interest Rates U.S.

    158,080        0.92        295,779        68,958        202,281  

Interest Rates Non-U.S.

    530,523        3.09        756,446        116,507        450,067  

Livestock

    6,050        0.04        80,520        3,300        26,124  

Metals

    190,036        1.11        525,880        89,741        266,212  

Softs

    142,901        0.83        199,734        32,960        116,021  
 

 

 

   

 

 

       

Total

    $       3,186,741        18.55       
 

 

 

   

 

 

       

 

  *

Annual average of month-end Values at Risk.

As of December 31, 2017, the Partnership’s total capitalization was $22,263,377. The Partnership’s Value at Risk as of

December 31, 2017 was as follows:

December 31, 2017

              Twelve Months Ended December 31, 2017
        % of Total     High   Low   Average

Market Sector

      Value at Risk           Capitalization             Value at Risk           Value at Risk           Value at Risk *    

Currencies

    $ 1,340,873        6.02      $ 4,461,014       $ 1,281,809       $ 2,392,820  

Energy

    249,205        1.12        560,175       70,446       232,419  

Grains

    175,395        0.79        542,823       43,995       217,620  

Indices

    1,374,629        6.17        16,898,618       1,159,471       1,792,039  

Interest Rates U.S.

    130,842        0.59        326,612       16,689       109,966  

Interest Rates Non-U.S.

    392,746        1.76        1,115,652       214,037       611,244  

Livestock

    13,860        0.06        102,658       1,320       47,921  

Metals

    231,230        1.04        881,515       85,750       484,587  

Softs

    63,202        0.28        268,675       63,202       135,464  
 

 

 

 

 

 

 

       

Total

    $       3,971,982        17.83       
 

 

 

 

 

 

 

       

 

  *

Annual average of month-end Values at Risk.

 

27


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

The face value of the market sector instruments held by the Partnership is typically many times the applicable 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. The magnitude of the Partnership’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk tables — as well as the past performance of the Partnership — give no indication of this “risk of ruin.”

Non-Trading Risk

The Partnership has, and the Master had (prior to its termination of operations effective July 31, 2017), a non-trading market risk on the Partnership’s/Master’s foreign cash balances not needed for margin. These balances and any market risk they may or may have represented are immaterial.

A decline in short-term interest rates would or would have resulted in a decline in the Partnership’s/Master’s cash management income. This cash flow risk is not and was 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/Master’s market-sensitive instruments, in relation to the Partnership’s/Master’s net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

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

The following were the primary trading risk exposures of the Partnership 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 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 currency sector will change significantly in the future.

Equities. The Partnership’s primary equity exposure is to equity price risk in the G8 countries. The stock index futures traded by the Partnership are limited to futures on broadly based indices. As of December 31, 2018, the Partnership’s primary exposures were in the Dow Jones Euro STOXX 50 (European Union), S&P/TSX 60 (Canada), FTSE 100 (United Kingdom), SPI 200 (Australia), Hang Seng (Honk Kong) and OMS Stockholm 30 (Sweden) stock indices. The Partnership is 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 emerging markets. (Static markets would not cause major market changes but would make it difficult for the Partnership 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 and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially affect the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G8 countries. However, the Partnership may also take futures positions on the government debt of smaller nations — e.g., Australia.

 

28


Commodities:

Metals. The Partnership’s primary metal market exposure as of December 31, 2018 was to fluctuations in the price of aluminum, copper, zinc, nickel and palladium.

Grains. The Partnership’s 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 grain exposure as of December 31, 2018.

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

Energy. The Partnership’s 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.

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

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The General Partner monitors and attempts for the Partnership, and monitored and attempted for the Master, to control the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems and accordingly, believes that it has or had effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be, and Master may have been, subject.

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

The Advisor applies its own risk management policies to its trading. The Advisor often follows diversification guidelines, margin limits and stop loss points to exit a position. The Advisor’s research of risk management often suggests ongoing modifications to its trading programs.

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

 

29


Item 8. Financial Statements and Supplementary Data.

Potomac Futures Fund 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; 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.

 

30


To the Limited Partners of

Potomac Futures Fund 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,

 

Potomac Futures Fund L.P.

Ceres Managed Futures LLC

522 Fifth Avenue

New York, NY 10036

(855) 672-4468

 

31


Management’s Report on Internal Control Over

Financial Reporting

The management of Potomac Futures Fund 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 Potomac Futures Fund 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,

Potomac Futures Fund L.P.

    

Potomac Futures Fund L.P.

 

32


Report of Independent Registered Public Accounting Firm

To the Partners of Potomac Futures Fund L.P.,

Opinion on the Financial Statements

We have audited the accompanying statements of financial condition of Potomac Futures Fund 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 the 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

 

33


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Potomac Futures Fund L.P.:

We have audited the accompanying statements of income and expenses and changes in partners’ capital of Potomac 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 Potomac Futures Fund 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

 

34


Potomac Futures Fund L.P.

Statements of Financial Condition

December 31, 2018 and 2017

 

         December 31,              December 31,      
     2018      2017  

Assets:

     

Equity in trading account:

     

Unrestricted cash (Note 3c)

       $ 13,460,371           $ 18,417,831   

Restricted cash (Note 3c)

     3,230,953         4,063,802   

Net unrealized appreciation on open futures contracts

     286,618         267,186   

Net unrealized appreciation on open forward contracts

     479,523         205,060   
  

 

 

    

 

 

 

Total equity in trading account

     17,457,465         22,953,879   
  

 

 

    

 

 

 

Receivable from General Partner (Note 3a)

     15,849         4,123   

Interest receivable

     26,847         21,906   

Cash at bank (Note 1)

     -            436   
  

 

 

    

 

 

 

Total assets

       $     17,500,161           $     22,980,344   
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Ongoing selling agent fees (Note 3d)

       $ 28,781           $ 37,827   

Management fees (Note 3b)

     21,661         28,563   

General Partner fees (Note 3a)

     14,441         19,042   

Professional fees

     142,206         92,491   

Redemptions payable to Limited Partners (Note 6)

     104,315         539,044   
  

 

 

    

 

 

 

Total liabilities

     311,404         716,967   
  

 

 

    

 

 

 

Partners’ Capital (Notes 1 and 6):

     

General Partner, Class Z, 246.4190 and 296.6740 Redeemable Units outstanding at December 31, 2018 and 2017, respectively

     213,492         278,206   

Limited Partners, Class A, 13,800.2198 and 16,183.6278 Redeemable Units outstanding at December 31, 2018 and 2017, respectively

     16,975,265         21,985,171   
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     17,188,757         22,263,377   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

       $ 17,500,161           $ 22,980,344   
  

 

 

    

 

 

 

Net asset value per Redeemable Unit:

     

Class A

       $ 1,230.07           $ 1,358.48   
  

 

 

    

 

 

 

Class Z

       $ 866.38           $ 937.75   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

35


Potomac Futures Fund L.P.

Condensed Schedule of Investments

December 31, 2018

 

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

Futures Contracts Purchased

        

Energy

     11            $ (82,600)            (0.48)  % 

Grains

     1          (80)        (0.00)  *  

Indices

     16          (13,698)        (0.08)  

Interest Rates U.S.

     98          40,140         0.23   

Interest Rates Non-U.S.

     974          184,406         1.07   

Metals

     8          19,310         0.11   

Softs

     10          10,510         0.07   
     

 

 

    

 

 

 

Total futures contracts purchased

        157,988         0.92   
     

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     12            $ 62,451         0.36   

Grains

     167          66,221         0.39   

Indices

     89          13,124         0.08   

Interest Rates U.S.

     134          (112,272)        (0.65)  

Interest Rates Non-U.S.

     10          (482)        (0.00) *  

Livestock

     3          (1,013)        (0.01)  

Metals

     7          4,198         0.02   

Softs

     77          96,403         0.56   
     

 

 

    

 

 

 

Total futures contracts sold

        128,630         0.75   
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

          $ 286,618                         1.67 
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

       $         74,536,326            $         1,162,260         6.76 

Metals

     60          171,195         1.00   
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        1,333,455         7.76   
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

       $ 51,277,538          (727,182)        (4.23)  

Metals

     42          (126,750)        (0.74)  
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (853,932)        (4.97)  
     

 

 

    

 

 

 

Net unrealized appreciation on open forward contracts

          $ 479,523         2.79 
     

 

 

    

 

 

 

 

  * 

Due to rounding.

See accompanying notes to financial statements.

 

36


Potomac Futures Fund L.P.

Condensed Schedule of Investments

December 31, 2017

 

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

Futures Contracts Purchased

     

Energy

    61           $ 175,212        0.79 

Grains

    2         (2,840)       (0.01)  

Indices

    347         173,442        0.78   

Interest Rates U.S.

    14         7,062        0.03   

Interest Rates Non-U.S.

    204         (226,963)       (1.02)  

Livestock

    8         3,750        0.02   

Metals

    20         59,445        0.27   

Softs

    14         36,280        0.15   
   

 

 

 

 

 

 

 

Total futures contracts purchased

      225,388        1.01   
   

 

 

 

 

 

 

 

Futures Contracts Sold

     

Energy

    32         (82,350)       (0.37)  

Grains

    204         97,044        0.44   

Indices

    21         (4,735)       (0.02)  

Interest Rates U.S.

    213         27,605        0.12   

Interest Rates Non-U.S.

    240         446        0.00 

Livestock

    2         (1,540)       (0.01)  

Metals

    4         (3,000)       (0.01)  

Softs

    22         8,328        0.04   
   

 

 

 

 

 

 

 

Total futures contracts sold

      41,798        0.19   
   

 

 

 

 

 

 

 

Net unrealized appreciation on open futures contracts

      $ 267,186        1.20 
   

 

 

 

 

 

 

 

Unrealized Appreciation on Open Forward Contracts

     

Currencies

    $     48,393,022         $ 652,474        2.93 

Metals

    39         167,165        0.75   
   

 

 

 

 

 

 

 

Total unrealized appreciation on open forward contracts

      819,639        3.68   
   

 

 

 

 

 

 

 

Unrealized Depreciation on Open Forward Contracts

     

Currencies

    $     35,002,762         (539,534)       (2.42)  

Metals

    14         (75,045)       (0.34)  
   

 

 

 

 

 

 

 

Total unrealized depreciation on open forward contracts

      (614,579)       (2.76)  
   

 

 

 

 

 

 

 

Net unrealized appreciation on open forward contracts

      $             205,060        0.92 
   

 

 

 

 

 

 

 

 

  *

Due to rounding.

See accompanying notes to financial statements.

 

37


Potomac Futures Fund L.P.

Statements of Income and Expenses

For the Years Ended December 31, 2018, 2017 and 2016

 

    2018     2017     2016  

Investment Income:

     

Interest income (Note 3c)

    $ 317,438      $ 109,109        $ -      

Interest income allocated from the Master (Note 3c)

    -           92,905        45,442   
 

 

 

   

 

 

   

 

 

 

    Total investment income

    317,438        202,014        45,442   
 

 

 

   

 

 

   

 

 

 

Expenses:

     

Expenses allocated from the Master

    -           125,277        192,598   

Clearing fees related to direct investments (Note 3c)

    79,838        41,970        -      

Ongoing selling agent fees (Note 3d)

    386,831        529,876        461,501   

Management fees (Note 3b)

    291,342        400,229        346,035   

General Partner fees (Note 3a)

    194,227        266,820        230,690   

Professional fees

    279,058        255,641        331,230   
 

 

 

   

 

 

   

 

 

 

Total expenses

    1,231,296        1,619,813        1,562,054   

Expenses borne by the General Partner (Note 3a)

    (181,320)       (181,311)       -      
 

 

 

   

 

 

   

 

 

 

Net expenses

    1,049,976        1,438,502        1,562,054   
 

 

 

   

 

 

   

 

 

 

Net investment loss

    (732,538)       (1,236,488)       (1,516,612)  
 

 

 

   

 

 

   

 

 

 

Trading Results:

     

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

     

Net realized gains (losses) on closed contracts

    (1,544,244)       1,863,780        -      

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

    -           (903,323)       (2,413,231)  

Net change in unrealized gains (losses) on open contracts

    291,473        475,211        -      

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

    -           (252,646)       594,824   
 

 

 

   

 

 

   

 

 

 

Total trading results

    (1,252,771)       1,183,022        (1,818,407)  
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    $ (1,985,309)     $ (53,466)       $ (3,335,019)  
 

 

 

   

 

 

   

 

 

 

Net income (loss) per Redeemable Unit* (Note 7):

     

Class A

    $ (128.41)     $ 9.76        $ (222.31)  
 

 

 

   

 

 

   

 

 

 

Class Z

    $ (71.37)     $ 25.25        $ (87.50)  
 

 

 

   

 

 

   

 

 

 

Weighted average Redeemable Units outstanding:

     

Class A

        15,031.7262            19,944.6721            15,454.5329   
 

 

 

   

 

 

   

 

 

 

Class Z

    250.6069        357.2938        246.1860   
 

 

 

   

 

 

   

 

 

 

 

  *

Represents the change in net asset value per Redeemable Unit.

See accompanying notes to financial statements.

 

38


Potomac Futures Fund 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

 

    $     26,761,029        17,034.0864        $ -           -           $ 26,761,029        17,034.0864   
Subscriptions - General Partner

 

    -           -           264,508        264.5080        264,508        264.5080   
Subscriptions - Limited Partners

 

    218,400        145.6740        -           -           218,400        145.6740   
Redemptions - General Partner

 

    (289,508)       (192.5786)       (35,000)       (36.6440)       (324,508)       (229.2226)  
Redemptions - Limited Partners

 

    (5,889,865)       (4,021.8240)       -           -           (5,889,865)       (4,021.8240)  
Net income (loss)       (3,313,437)       -           (21,582)       -           (3,335,019)       -      
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2016

 

    17,486,619        12,965.3578        207,926        227.8640        17,694,545        13,193.2218   
Subscriptions - General Partner

 

    -           -           181,777        199.2080        181,777        199.2080   
Subscriptions - Limited Partners

 

    15,266,995        11,319.9380        -           -           15,266,995        11,319.9380   
Redemptions -General Partner

 

    -           -           (115,002)       (130.3980)       (115,002)       (130.3980)  
Redemptions - Limited Partners

 

    (10,711,472)       (8,101.6680)       -           -           (10,711,472)       (8,101.6680)  
Net income (loss)       (56,971)       -           3,505        -           (53,466)       -      
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2017

 

    21,985,171        16,183.6278        278,206        296.6740        22,263,377        16,480.3018   
Subscriptions - Limited Partners

 

    60,000        46.5100        -           -           60,000        46.5100   
Redemptions - General Partner

 

    -           -           (50,000)       (50.2550)       (50,000)       (50.2550)  
Redemptions - Limited Partners

 

    (3,099,311)       (2,429.9180)       -           -           (3,099,311)       (2,429.9180)  
Net income (loss)       (1,970,595)       -           (14,714)       -           (1,985,309)       -      
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2018

 

    $       16,975,265                13,800.2198        $         213,492                  246.4190        $       17,188,757                  14,046.6388   
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value per Redeemable Unit:

 

 
        Class A            Class Z      
  2016:       $ 1,348.72              $     912.50      
   

 

 

      

 

 

   
  2017:       $ 1,358.48              $     937.75      
   

 

 

      

 

 

   
  2018:       $ 1,230.07              $     866.38      
   

 

 

      

 

 

   

See accompanying notes to financial statements.

 

39


Potomac Futures Fund L.P.

Notes to Financial Statements

 

1.

Organization:

Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership organized on March 14, 1997 under the partnership laws of the State of New York to engage, directly and 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, indices, U.S. and non-U.S. interest rates, livestock, metals and softs. The Partnership commenced trading operations on October 1, 1997. The commodity interests traded directly by the Partnership, and which were previously traded indirectly through its investment in CMF Campbell Master Fund L.P. (the “Master”), prior to the Partnership’s full redemption from the Master effective July 14, 2017, are volatile and involve a high degree of market risk. The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership is authorized to sell an unlimited number of redeemable units of limited partnership interest (“Redeemable Units”). The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. 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. All trading decisions for the Partnership are made by Campbell & Company, LP (the “Advisor”).

During the periods covered by this report, the Partnership’s and the Master’s (prior to its termination effective July 31, 2017) commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During the prior reporting periods covered by this report, the Partnership and the Master deposited a portion of their cash in non-trading bank accounts at JPMorgan Chase Bank, N.A.

On January 1, 2005, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the State of New York. Effective at the close of business on July 14, 2017, the Partnership fully redeemed its investment in the Master. As of July 17, 2017, all positions from the Master were transferred to the Partnership and the Advisor commenced trading the Partnership’s assets directly pursuant to the Campbell Managed Futures Portfolio, a proprietary, systematic trading program. Consequently, the General Partner liquidated the Master, effective July 31, 2017. The units of the Master were used solely for accounting purposes and did not represent legally distinct units. Prior to the Master’s termination of operations on July 31, 2017, the Master permitted accounts managed by the Advisor using the Campbell Managed Futures Portfolio to invest together in one trading vehicle. The General Partner was also the general partner of the Master. Expenses to investors as a result of the investment in the Master, prior to the Partnership’s full redemption from the Master effective July 14, 2017, were approximately the same as expenses to investors as a result of the Partnership trading directly, and redemption rights were not affected.

 

40


Potomac Futures Fund L.P.

Notes to Financial Statements

 

As of March 22, 2016, the Partnership began offering two classes of limited partnership interests, Class A Redeemable Units and Class Z Redeemable Units. All Redeemable Units issued prior to February 29, 2016 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” 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 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 may also be offered to certain employees of Morgan Stanley and/or its subsidiaries (and their family members). Class A Redeemable Units and Class Z Redeemable Units are identical, except that Class Z Redeemable Units are not subject to monthly ongoing selling agent fees.

Prior to the Partnership’s full redemption from the Master effective July 14, 2017 and as of December 31, 2016, the Partnership owned 100% of the Master. The performance of the Partnership was directly affected by the performance of the Master. The Partnership’s/Master’s trading of futures, forward, swap and option contracts, if applicable, on commodities are or were done primarily on U.S. and foreign commodity exchanges. The Partnership engages, and the Master engaged, in such trading through commodity brokerage accounts maintained with MS&Co.

The Partnership will be liquidated upon the first to occur of the following: December 31, 2057; the net asset value per Redeemable Unit of any Class decreases to less than $400 per Redeemable Unit as of a close of any business day; or under certain other circumstances as defined in the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).

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 contributions and profits, if any, net of distributions, redemptions and losses, if any.

 

41


Potomac Futures Fund L.P.

Notes to Financial Statements

 

  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 substantially all of the Partnership’s and the Master’s investments, as applicable, were carried at fair value and classified as Level 1 or Level 2 measurements.

 

  d.

Partnership’s/Master’s Investments. The Partnership carried its investment in the Master, prior to its full redemption effective July 14, 2017, at fair value based on the Master’s net asset value per Redeemable Unit as calculated by the Master.

 

   

All commodity interests of the Partnership, including derivative financial instruments and derivative commodity instruments, are held, and those of the Master were held, for trading purposes. The commodity interests for the Partnership/Master are or were recorded on the trade date and open contracts are or were recorded at fair value (as described in Note 5, “Fair Value Measurements”) at the measurement date. The Partnership’s/Master’s investments in commodity interests denominated in foreign currencies are or were translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses for the Partnership/Master are or were realized when contracts are or were liquidated and are or were 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/Master’s Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Partnership’s/Master’s Statements of Income and Expenses.

 

   

Partnership’s/Master’s Cash. The Partnership’s restricted and unrestricted cash includes cash denominated in foreign currencies of $380,451 (cost of $379,908) and $149,600 (cost of $146,635) as of December 31, 2018 and 2017, respectively.

 

  e.

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 year 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.

 

42


Potomac Futures Fund L.P.

Notes to Financial Statements

 

  f.

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.

 

  g.

Net Income (Loss) per Redeemable Unit. Net income (loss) per Redeemable Unit for each Class is calculated in accordance with ASC 946, “Financial Services – Investment Companies.” See Note 7, “Financial Highlights.”

 

3.

Agreements:

 

  a.

Limited Partnership Agreement:

 

   

The General Partner administers the business and affairs of the Partnership. The Partnership pays the General Partner a monthly General Partner fee in return for its services to the Partnership equal to 1/12 of 1% (1% per year) of month-end adjusted Net Assets per Class, for each outstanding Class. Month-end adjusted Net Assets per Class, 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 fee, the General Partner fee and any redemptions or distributions as of the end of such month. Effective January 1, 2017, the General Partner instituted a cap on the Partnership’s operating expenses such that the General Partner will be responsible for any such expenses to the extent they exceed 0.50% of the Partnership’s net assets in any calendar year.

 

  b.

Management Agreement:

 

   

The General Partner, on behalf of the Partnership, has entered into a management agreement (the “Management Agreement”) with the Advisor, a registered commodity trading advisor. The Management Agreement provides that the Advisor has discretion in determining the investment of the assets of the Partnership allocated to the Advisor by the General Partner. The Partnership will pay a monthly management fee equal to 1/12 of 1.5% (1.5% per year) of month-end Net Assets per Class, for each outstanding Class allocated to the Advisor as of the end of each month. Month-end Net Assets per Class, for each outstanding Class, 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 accrual, the monthly management fee, the General Partner fee and any redemptions or distributions as of the end of such month. The Management Agreement may be terminated upon notice by either party.

 

   

The Partnership is obligated to pay the Advisor an incentive fee, payable quarterly, equal to 20% of the new trading profits, as defined in the Management Agreement, earned by the Advisor for the Partnership during each calendar quarter. The Advisor’s incentive fee will be allocated proportionally to each Class based on the net asset value of the respective Class. 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.

 

   

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

 

43


Potomac Futures Fund L.P.

Notes to Financial Statements

 

  c.

Customer Agreement:

 

   

The Partnership has entered into a customer agreement with MS&Co. (the “Customer Agreement”). Under the Customer Agreement and foreign exchange brokerage account agreement (described in Note 4, “Trading Activities”), the Partnership pays trading fees for the clearing and, where applicable, the execution of transactions as well as exchange, user, give-up, floor brokerage and National Futures Association fees (collectively the “clearing fees”) directly and indirectly through its investment in the Master (prior to the Master’s termination effective July 31, 2017). Clearing fees will be paid for the life of the Partnership, although the rate at which such fees are paid may be changed. The Partnership’s cash deposited with MS&Co. is held in segregated bank accounts to the extent required by Commodity Futures Trading Commission regulations. Restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange counterparty, and required by MS&Co. At December 31, 2018 and 2017, the amount of the Partnership’s cash held for restricted cash requirements was $3,230,953 and $4,063,802, respectively. Prior to the Partnership’s full redemption from the Master effective July 14, 2017, all of the Partnership’s assets not held in the Master’s accounts at MS&Co. were deposited in the Partnership’s account at MS&Co. MS&Co. has agreed to pay the Partnership interest on 100% of the average daily equity maintained in cash in the Partnership’s (or prior to the Partnership’s full redemption from the Master effective July 14, 2017, the Partnership’s allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. Prior to April 1, 2017, MS&Co. paid the Partnership interest on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account at the rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. The Customer Agreement may generally be terminated upon notice by either party.

 

  d.

Selling Agent Agreement:

 

   

The Partnership has entered into a selling agent agreement with Morgan Stanley Wealth Management (the “Selling Agreement”). Under the Selling Agreement, the Partnership pays Morgan Stanley Wealth Management a monthly ongoing selling agent fee equal to 2.0% per year of the Partnership’s adjusted month-end net assets for Class A Redeemable Units. Class Z Redeemable Units are not subject to the ongoing selling agent fee. Morgan Stanley Wealth Management will pay a portion of its ongoing selling agent fees to properly registered or exempted financial advisors who have sold Class A Redeemable Units. Month-end Net Assets, for the purpose of calculating ongoing selling agent fees are Net Assets, as defined in the Limited Partnership Agreement, prior to the reduction of the current month’s ongoing selling agent fee, management fee, the incentive fee accrued, the General Partner fee and other expenses and any redemptions or distributions as of the end of such month.

 

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 interests. Prior to its full redemption from the Master effective July 14, 2017, the Partnership invested substantially all of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Master’s trading activities is shown in the Statements of Income and Expenses.

The futures brokerage account agreements with MS&Co. give the Partnership, and gave the Master, respectively, the legal right to net unrealized gains and losses on open futures and forward contracts. The Partnership nets, and the Master netted, 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.

 

44


Potomac Futures Fund L.P.

Notes to Financial Statements

 

Trading and transaction fees are based on the number of trades executed by the Advisor. All clearing fees paid to MS&Co. are directly charged to the Partnership and prior to the Partnership’s full redemption from the Master effective July 14, 2017, were borne by the Master and allocated to the Partnership.

All of the commodity interests owned by the Partnership are, and by the Master were, held for trading purposes. The monthly average number of futures contracts traded by the Partnership/Master during the years ended December 31, 2018 and 2017 were 1,363 and 1,712, respectively. The monthly average number of metals forward contracts traded by the Partnership/Master during the years ended December 31, 2018 and 2017 were 157 and 236, respectively. The monthly average notional values of currency forward contracts traded by the Partnership/Master during the years ended December 31, 2018 and 2017 were $158,517,260 and $175,388,882, respectively.

The following tables summarize the gross and net amounts relating to assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of December 31, 2018 and 2017, respectively.

 

         

Gross Amounts

Offset in the

  

Amounts

Presented in the

   Gross Amounts Not Offset in the
Statements of Financial Condition
      

December 31, 2018        

   Gross Amounts
Recognized
   Statements of
Financial

Condition
   Statements of
Financial

Condition
   Financial
Instruments
   Cash Collateral
Received/
Pledged*
   Net Amount  

Assets

                 

Futures

     $ 561,881         $ (275,263)        $           286,618         $                     -            $                     -            $             286,618   

Forwards

               1,333,455         (853,932)        479,523         -            -            479,523   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $ 1,895,336         $ (1,129,195)        $ 766,141         $ -            $ -            $ 766,141   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities

                 

Futures

     $ (275,263)        $ 275,263         $ -            $ -            $ -            $ -      

Forwards

     (853,932)        853,932         -            -            -            -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total liabilities

     $ (1,129,195)        $           1,129,195         $ -            $ -            $ -            $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net fair value

                    $ 766,141  * 
                 

 

 

 
         

Gross Amounts

Offset in the

  

Amounts

Presented in the

   Gross Amounts Not Offset in the
Statements of Financial Condition
      

December 31, 2017        

   Gross Amounts
Recognized
   Statements of
Financial

Condition
   Statements of
Financial

Condition
   Financial
Instruments
   Cash Collateral
Received/
Pledged*
   Net Amount  

Assets

                 

Futures

     $ 722,562         $ (455,376)        $ 267,186        $ -            $ -            $ 267,186   

Forwards

     819,639         (614,579)        205,060        -            -            205,060   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $ 1,542,201         $ (1,069,955)        $ 472,246        $ -            $ -            $ 472,246   
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities

                 

Futures

     $ (455,376)        $ 455,376         $ -            $ -            $ -            $ -      

Forwards

     (614,579)        614,579         -            -            -            -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total liabilities

     $ (1,069,955)        $ 1,069,955         $ -            $ -            $ -            $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net fair value

                    $ 472,246 
                 

 

 

 

 

  *

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures brokers 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.

 

45


Potomac Futures Fund L.P.

Notes to Financial Statements

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities for the Partnership as of December 31, 2018 and 2017, respectively.

 

Assets      December 31, 2018    

Futures Contracts

  

Energy

     $ 63,201   

Grains

     67,071   

Indices

     67,303   

Interest Rates U.S.

     40,484   

Interest Rates Non-U.S.

     191,985   

Livestock

     30   

Metals

     23,908   

Softs

     107,899   
  

 

 

 

Total unrealized appreciation on open futures contracts

     561,881   
  

 

 

 

Liabilities

  

Futures Contracts

  

Energy

     (83,350)  

Grains

     (930)  

Indices

     (67,877)  

Interest Rates U.S.

     (112,616)  

Interest Rates Non-U.S.

     (8,061)  

Livestock

     (1,043)  

Metals

     (400)  

Softs

     (986)  
  

 

 

 

Total unrealized depreciation on open futures contracts

     (275,263)  
  

 

 

 

Net unrealized appreciation on open futures contracts

     $             286,618 
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

     $ 1,162,260   

Metals

     171,195   
  

 

 

 

Total unrealized appreciation on open forward contracts

     1,333,455   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (727,182)  

Metals

     (126,750)  
  

 

 

 

Total unrealized depreciation on open forward contracts

     (853,932)  
  

 

 

 

Net unrealized appreciation on open forward contracts

     $ 479,523  ** 
  

 

 

 
  

 

 

 

 

  *

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

 

  **

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

 

46


Potomac Futures Fund L.P.

Notes to Financial Statements

 

Assets        December 31, 2017    

Futures Contracts

  

Energy

     $ 175,224   

Grains

     102,158   

Indices

     279,491   

Interest Rates U.S.

     45,321   

Interest Rates Non-U.S.

     9,980   

Livestock

     3,770   

Metals

     59,445   

Softs

     47,173   
  

 

 

 

Total unrealized appreciation on open futures contracts

     722,562   
  

 

 

 

Liabilities

  

Futures Contracts

  

Energy

     (82,362)  

Grains

     (7,954)  

Indices

     (110,784)  

Interest Rates U.S.

     (10,654)  

Interest Rates Non-U.S.

     (236,497)  

Livestock

     (1,560)  

Metals

     (3,000)  

Softs

     (2,565)  
  

 

 

 

Total unrealized depreciation on open futures contracts

     (455,376)  
  

 

 

 

Net unrealized appreciation on open futures contracts

     $               267,186 
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

     $ 652,474   

Metals

     167,165   
  

 

 

 

Total unrealized appreciation on open forward contracts

     819,639   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (539,534)  

Metals

     (75,045)  
  

 

 

 

Total unrealized depreciation on open forward contracts

     (614,579)  
  

 

 

 

Net unrealized appreciation on open forward contracts

     $ 205,060  ** 
  

 

 

 

 

  *

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

 

  **

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

 

47


Potomac Futures Fund L.P.

Notes to Financial Statements

 

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

 

Sector

   2018        2017**        2016    

Currencies

     $             636,438          $ (1,586,994        $ (232,835  

Energy

     528,757          (595,331        (1,339,102  

Grains

     (401,562        (759,369        254,390    

Indices

     (1,764,964                    5,597,239          (453,676  

Interest Rates U.S.

     159,139          (366,474        (135,278  

Interest Rates Non-U.S.

     232,657          (879,489                    1,121,232    

Livestock

     (150,735        (90,330        (295,814  

Metals

     (579,734        (28,141        (299,841  

Softs

     87,233          (108,089        (437,483  
  

 

 

 

    

 

 

 

    

 

 

 

 

Total

     $ (1,252,771     *        $ 1,183,022       *        $ (1,818,407     *  
  

 

 

 

    

 

 

 

    

 

 

 

 
  

 

 

 

    

 

 

 

    

 

 

 

 

 

  *

This amount is in “Total trading results” in the Partnership’s/Master’s Statements of Income and Expenses.

  **

Prior to July 17, 2017, trading gains and losses were allocated to the Partnership through its investment in the Master, of which the Partnership owned 100%.

 

5.

Fair Value Measurements:

Partnership’s/Master’s 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 considers, and the Master considered, prices for commodity futures, exchange-traded 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 or were not readily available are or were 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/Master 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). Effective July 17, 2017, all positions from the Master have been transferred to the Partnership and thus the Master did not hold any of the Partnership’s investments subsequent to July 17, 2017.

 

48


Potomac Futures Fund L.P.

Notes to Financial Statements

 

December 31, 2018                                    

   Total    Level 1    Level 2    Level 3

Assets

           

Futures

     $ 561,881        $ 561,881        $ -          $                 -      

Forwards

             1,333,455        -                    1,333,455        -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $ 1,895,336        $ 561,881        $ 1,333,455        $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities

           

Futures

     $ 275,263        $ 275,263        $ -          $ -      

Forwards

     853,932        -            853,932        -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total liabilities

     $ 1,129,195        $ 275,263        $ 853,932        $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

December 31, 2017                                    

   Total    Level 1    Level 2    Level 3

Assets

           

Futures

     $ 722,562        $         722,562        $ -            $ -      

Forwards

     819,639        -            819,639        -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $ 1,542,201        $ 722,562        $ 819,639        $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities

           

Futures

     $ 455,376        $ 455,376        $ -            $ -      

Forwards

     614,579        -            614,579        -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total liabilities

     $ 1,069,955        $ 455,376        $ 614,579        $ -      
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

6.

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.

 

49


Potomac Futures Fund L.P.

Notes to Financial Statements

 

7.

Financial Highlights:

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

Class A

 

     2018        2017          2016      

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

              

Net realized and unrealized gains (losses)

     $ (79.94        $ 71.32          $ (124.48  

Net investment loss

     (48.47        (61.56        (97.83  
  

 

 

 

    

 

 

 

    

 

 

 

 

Increase (decrease) for the year

     (128.41        9.76          (222.31  

Net asset value per Redeemable Unit, beginning of year

     1,358.48          1,348.72          1,571.03    
  

 

 

 

    

 

 

 

    

 

 

 

 

Net asset value per Redeemable Unit, end of year

     $     1,230.07          $     1,358.48          $     1,348.72    
  

 

 

 

    

 

 

 

    

 

 

 

 
     2018        2017          2016      

Ratios to Average Limited Partners’ Capital:

              

Net investment loss **

     (3.8     %        (5.0     %        (6.7     %  
  

 

 

 

    

 

 

 

    

 

 

 

 

Operating expenses before expenses borne by the General Partner and incentive fees

     6.4       %        6.5       %        6.9       %  

Expenses borne by the General Partner

     (0.9     %        (0.7     %        -           %  

Incentive fees

     -           %        -           %        -           %  
  

 

 

 

    

 

 

 

    

 

 

 

 

Operating expenses after expenses borne by the General Partner and incentive fees

     5.5       %        5.8       %        6.9       %  
  

 

 

 

    

 

 

 

    

 

 

 

 

Total return:

              

Total return before incentive fees

     (9.5     %        0.7       %        (14.2     %  

Incentive fees

     -           %        -           %        -           %  
  

 

 

 

    

 

 

 

    

 

 

 

 

Total return after incentive fees

     (9.5     %        0.7       %        (14.2     %  
  

 

 

 

    

 

 

 

    

 

 

 

 

*       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 year. 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, including interest income allocated from the Master prior to the Partnership’s full redemption from the Master effective July 14, 2017, less total expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the year. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average partners’ capital of the Partnership and include the income and expenses allocated from the Master prior to the Partnership’s full redemption from the Master effective July 14, 2017.

 

50


Potomac Futures Fund L.P.

Notes to Financial Statements

 

8.

Financial Instrument Risks:

In the normal course of business, the Partnership is and through its investment in the Master prior to its full redemption effective July 14, 2017, was party to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include or may have included forwards, futures, options and swaps, whose values are or were based upon an underlying asset, index, or reference rate, and generally represent or represented 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 or may have been 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 related to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 17.6% to 60.8% of the Partnership’s contracts are traded OTC.

Futures Contracts. The Partnership trades, and the Master traded, 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 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 may have been made or received by the Master, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership, or were recorded by the Master, as unrealized gains or losses. When the contract is closed, the Partnership records, and the Master recorded, 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/Master’s Statements of Income and Expense.

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Partnership agrees, and the Master agreed, 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 by the Partnership and were valued daily by the Master, and the Partnership’s/Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Partnership’s/Master’s Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Partnership’s/Master’s Statements of Income and Expenses.

 

51


Potomac Futures Fund L.P.

Notes to Financial Statements

 

London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership are, and by the Master were, cash settled based on prompt dates published by the LME. Variation margin may be made or received by the Partnership, and may have been made or received by the Master, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership or were recorded by the Master, as unrealized gains or losses. 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 records, and the Master recorded, 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/Master’s Statements of Income and Expenses.

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

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

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

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

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.

 

52


Potomac Futures Fund L.P.

Notes to Financial Statements

 

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

 

9.

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.

Effective January 1, 2019, the General Partner fee paid by the Partnership to the General Partner was reduced to 1/12 of 0.90% (0.90% per year) of month-end Net Assets per Class, for each outstanding Class of the Partnership.

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

 

53


Selected unaudited quarterly financial data for the Partnership 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
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Interest income

     $ 86,079        $ 79,538        $ 78,231        $ 73,590  

Total expenses

     (286,137      (297,505      (312,348      (335,306

Expenses borne by the General Partner

     46,993        45,830        44,789        43,708  

Total trading results

     (333,771      (41,262      (322,242      (555,496
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss)

     $ (486,836      $ (213,399      $ (511,570      $ (773,504
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss) per Redeemable Unit:

           

Class A

     $ (32.86      $ (13.80      $ (32.02      $ (49.73
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     $ (18.67      $ (5.18      $ (17.74      $ (29.78
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

     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
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Interest income

     $ 64,567        $ 65,188        $ 40,951        $ 31,308  

Total expenses

     (376,155      (373,734      (422,406      (447,518

Expenses borne by the General Partner

     59,069        49,074        52,947        20,221  

Total trading results

     1,779,044        520,856        (966,653      (150,225
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss)

     $ 1,526,525        $ 261,384        $ (1,295,161      $ (546,214
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net income (loss) per Redeemable Unit:

           

Class A

     $ 85.28        $ 12.53        $ (65.83      $ (22.22
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Class Z

     $ 63.27        $ 12.94        $ (40.44      $ (10.52
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

54


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 (the “CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rule 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 process 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.

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

 

55


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 Advisor.

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 NFA. Patrick T. Egan, Steven Ross and Feta Zabeli serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions (or supervising those responsible).

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 known as Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley AI GP LLC, formerly known as 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 the day-to-day operations and management 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

 

56


sponsored by JPMorgan 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 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 the 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.

 

57


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.

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 the administration of the business affairs of the Partnership. The Partnership pays the General Partner a monthly General Partner fee equal to 1/12 of 0.90% (0.90% per year) of month –end adjusted net assets per Class for each outstanding Class. Prior to January 1, 2019, the Partnership paid the General Partner a monthly General Partner fee equal to 1/12 of 1% (1% per year) of month-end adjusted net assets per Class for each outstanding Class.

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 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 the General Partner 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    246.4190    100%

(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 will receive, if any, from the Partnership are set forth under “Item 1. Business.” 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 year ended December 31, 2018 and 2017, respectively, for the audits of the Partnership’s annual financial statements, reviews 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: $60,000

2017: $103,000

(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.

 

58


(4) All Other Fees. None.

(5) Not applicable.

(6) Not applicable.

 

59


PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1)   Financial Statements: Statements of Financial Condition 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      Certificate of Limited Partnership of the Partnership as filed in the Office of the Secretary of State of the State of New York, dated March  13, 1997 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (a)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated February 26, 1999 (filed as Exhibit 3.4 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (b)    Certificate of Change of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.3 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (c)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated April 1, 2001 (filed as Exhibit 3.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (d)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.5 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (e)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(e) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
  (f)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(f) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
  (g)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
  (h)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated June 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).
  (i)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).
  (j)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated August 7, 2013 (filed as Exhibit 3.1(j) to the Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).
  (k)    Certificate of Amendment of the Certificate of Limited Partnership as filed in the Office of the Secretary of State of the State of New York, dated March 22, 2016 (filed as Exhibit 3.1(k) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

 

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3.2      (a) Third Amended and Restated Limited Partnership Agreement, dated February  22, 2010 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on February 25, 2010 and incorporated herein by reference).
  (b)    Amendment No.2 to the Third Amended and Restated Limited Partnership Agreement, dated as of December 30, 2015 and effective 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)    Fourth Amended and Restated Limited Partnership Agreement, effective February  29, 2016 (filed as Exhibit 3.2(c) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).
  (d)    Amendment No. 1 to the Fourth Amended and Restated Limited Partnership Agreement, effective 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).
10.1      Form of Subscription Agreement (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
10.2   (a)    Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August  2, 2013 (filed as Exhibit 10.2(b) to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).
  (b)    Supplement to the Commodity Futures Customer Agreement between the Partnership and MS&Co., dated July  25, 2017 (filed as Exhibit 10.2(b) to the Current Report on Form 8-K filed on July 28, 2017 and incorporated herein by reference).
  (c)    U.S. Treasury Securities Purchase Authorization Agreement, between the Partnership and MS&Co., effective June  1, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 4, 2015 and incorporated herein by reference).
10.3      Amended and Restated Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, dated 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).
10.5      Management Agreement among the Partnership, Smith Barney Futures Management Inc. and Campbell & Company, Inc., dated April  1, 1997 (filed as Exhibit 10.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (a)    Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management Inc., Campbell  & Company, Inc. and SFG Global Investments, Inc., dated March 1, 1999 (filed as Exhibit 10.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (b)    Second Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management LLC and Campbell  & Company, Inc., dated April 1, 2001 (filed as Exhibit 10.1(b) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).
  (c)    Third Amendment to the Management Agreement among the Partnership, the General Partner and Campbell  & Company, Inc., dated May 27, 2014 (filed as Exhibit 10.5(d) to the Quarterly Report on Form 10-Q filed on August 12, 2015 and incorporated herein by reference).
  (d)    Letter extending Management Agreement among the Partnership, the General Partner and Campbell & Company, LP for 2018, dated June 1, 2018 (filed herewith).
10.6      Amended and Restated Master Services Agreement by and among the Partnership, the General Partner and SS&C Technologies, Inc., dated March 31, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 6, 2015 and incorporated herein by reference).

 

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The exhibits required to be filed by Item 601 of regulations S-K are incorporated herein by reference

 

31.1    Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed herewith).
31.2    Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer and Director) (filed herewith).
32.1    Section 1350 Certification (Certification of President and Director) (filed herewith).
32.2    Section 1350 Certification (Certification of Chief Financial Officer and Director) (filed herewith).
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

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SIGNATURES

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

 

Potomac Futures Fund L.P.

By:

 

Ceres Managed Futures LLC (General Partner)

By:

 

/s/ Patrick T. Egan                

 

Patrick T. Egan

 

President and Director

 

Date: March 26, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

 

/s/ Patrick T. Egan

   

/s/ Feta Zabeli

Patrick T. Egan

   

Feta Zabeli

President and Director

   

Director

Ceres Managed Futures LLC

   

Ceres Managed Futures LLC

Date: March 26, 2019

   

Date: March 26, 2019

/s/ Steven Ross

   

/s/ Matthew R. Graver

Steven Ross

   

Matthew R. Graver

Chief Financial Officer and Director

(Principal Accounting Officer)

Ceres Managed Futures LLC

Date: March 26, 2019

   

Director

Ceres Managed Futures LLC

Date: March 26, 2019

/s/ Etsuko Jennings

   

Etusko Jennings

   

Director

   

Ceres Managed Futures LLC

   

Date: March 26, 2019

   

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Exchange Act by Registrants Which Have Not Registered Securities Pursuant To Section 12 of the Exchange Act.

Annual Report to Limited Partners

No proxy material has been sent to limited partners.

 

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