Company Quick10K Filing
Quick10K
Potomac Futures Fund
10-Q 2019-03-31 Quarter: 2019-03-31
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
RACE Ferrari 34,470
ULTA Ulta Beauty 20,450
GPP Green Plains Partners 345
DOVA Dova Pharmaceuticals 290
PETX Aratana Therapeutics 238
BLYQ Bally 0
HDP Hortonworks 0
LTRP Liberty Tripadvisor Holdings 0
IMDZ Immune Design 0
SRGZ Star Gold 0
POTO 2019-03-31
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities. - None.
Item 4. Mine Safety Disclosures. - Not Applicable.
Item 5. Other Information. - None.
Item 6. Exhibits.
EX-31.1 d733371dex311.htm
EX-31.2 d733371dex312.htm
EX-32.1 d733371dex321.htm
EX-32.2 d733371dex322.htm

Potomac Futures Fund Earnings 2019-03-31

POTO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d733371d10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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   (I.R.S. Employer                               
                incorporation or organization)   Identification No.)                            

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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

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

Yes X     No     

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

Yes X     No     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

As of April 30, 2019, 28,441.8268 Limited Partnership Class A Redeemable Units were outstanding and 22.3230 Limited Partnership Class Z Redeemable Units were outstanding.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Potomac Futures Fund L.P.

Statements of Financial Condition

 

     March 31,
2019
      (Unaudited)      
        December 31,      
2018

    

Assets:

    

Equity in trading account:

    

Unrestricted cash

     $ 28,803,362        $ 13,460,371   

Restricted cash

     8,029,250       3,230,953  

Net unrealized appreciation on open futures contracts

     1,653,839       286,618  

Net unrealized appreciation on open forward contracts

     -           479,523  
  

 

 

 

 

 

 

 

Total equity in trading account

     38,486,451       17,457,465  
  

 

 

 

 

 

 

 

Receivable from General Partner

     10,425       15,849  

Interest receivable

     66,148       26,847  
  

 

 

 

 

 

 

 

Total assets

     $ 38,563,024       $ 17,500,161  
  

 

 

 

 

 

 

 

Liabilities and Partners’ Capital:

    

Liabilities:

    

Net unrealized depreciation on open forward contracts

     $ 375,488     $ -      

Accrued expenses:

    

Ongoing selling agent fees

     62,754       28,781  

Management fees

     47,445       21,661  

General Partner fees

     28,467       14,441  

Professional fees

     168,881       142,206  

Redemptions payable to Limited Partners

     667,044       104,315  
  

 

 

 

 

 

 

 

Total liabilities

     1,350,079       311,404  
  

 

 

 

 

 

 

 

Partners’ Capital:

    

General Partner, Class Z, 557.7190 and 246.4190 Redeemable Units outstanding at March 31, 2019 and December 31, 2018, respectively

     501,404       213,492  

Limited Partners, Class Z, 22.3230 and 0.0000 Redeemable Units outstanding at March 31, 2019 and December 31, 2018, respectively

     20,069       -      

Limited Partners, Class A, 28,890.3478 and 13,800.2198 Redeemable Units outstanding at March 31, 2019 and December 31, 2018, respectively

     36,691,472       16,975,265  
  

 

 

 

 

 

 

 

Total partners’ capital (net asset value)

     37,212,945       17,188,757  
  

 

 

 

 

 

 

 

Total liabilities and partners’ capital

     $ 38,563,024       $ 17,500,161  
  

 

 

 

 

 

 

 

Net asset value per Redeemable Unit:

    

Class A

     $ 1,270.03       $ 1,230.07  
  

 

 

 

 

 

 

 

Class Z

     $ 899.03       $ 866.38  
  

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

1


Potomac Futures Fund L.P.

Condensed Schedule of Investments

March 31, 2019

(Unaudited)

 

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

Futures Contracts Purchased

       

Energy

     52        $ 7,824       0.02   % 

Indices

     296        149,556       0.40   

Interest Rates U.S.

     310        231,886       0.62   

Interest Rates Non-U.S.

     1,568        866,985       2.33   

Livestock

     3        (4,980     (0.01)  

Metals

     9        (41,285     (0.11)  
     

 

 

 

 

 

 

 

Total futures contracts purchased

        1,209,986       3.25   
     

 

 

 

 

 

 

 

Futures Contracts Sold

       

Energy

     2        (300     (0.00)  * 

Grains

     425        482,097       1.29   

Indices

     57        3,550       0.01   

Interest Rates U.S.

     27        (4,124     (0.01)  

Interest Rates Non-U.S.

     95        (72,212     (0.20)  

Livestock

     1        (5,470     (0.01)  

Metals

     64        32,750       0.09   

Softs

     116        7,562       0.02   
     

 

 

 

 

 

 

 

Total futures contracts sold

        443,853       1.19   
     

 

 

 

 

 

 

 

Net unrealized appreciation on open futures contracts

        $     1,653,839       4.44   % 
     

 

 

 

 

 

 

 

Unrealized Appreciation on Open Forward Contracts

       

Currencies

   $ 159,295,609        $ 1,242,878       3.34   % 

Metals

     125        340,590       0.92   
     

 

 

 

 

 

 

 

Total unrealized appreciation on open forward contracts

        1,583,468       4.26   
     

 

 

 

 

 

 

 

Unrealized Depreciation on Open Forward Contracts

       

Currencies

   $ 196,814,805        (1,587,852     (4.27)  

Metals

     179        (371,104     (1.00)  
     

 

 

 

 

 

 

 

Total unrealized depreciation on open forward contracts

        (1,958,956     (5.27)  
     

 

 

 

 

 

 

 

Net unrealized depreciation on open forward contracts

        $ (375,488     (1.01)  % 
     

 

 

 

 

 

 

 

*      Due to rounding.

See accompanying notes to financial statements.

 

2


Potomac Futures Fund L.P.

Condensed Schedule of Investments

December 31, 2018

 

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

 

3


Potomac Futures Fund L.P.

Statements of Income and Expenses

(Unaudited)

 

     Three Months Ended March 31,
     2019   2018

Investment Income:

    

Interest income

     $ 187,504     $ 73,590  
  

 

 

 

 

 

 

 

Total investment income

     187,504       73,590  
  

 

 

 

 

 

 

 

Expenses:

    

Clearing fees related to direct investments

     57,939       19,707  

Ongoing selling agent fees

     184,827       108,331  

Management fees

     139,729       81,647  

General Partner fees

     83,838       54,431  

Professional fees

     76,836       71,190  
  

 

 

 

 

 

 

 

Total expenses

     543,169       335,306  

Expenses borne by the General Partner

     (30,842     (43,708
  

 

 

 

 

 

 

 

Net expenses

     512,327       291,598  
  

 

 

 

 

 

 

 

Net investment loss

     (324,823     (218,008
  

 

 

 

 

 

 

 

Trading Results:

    

Net gains (losses) on trading of commodity interests:

    

Net realized gains (losses) on closed contracts

     988,787       (320,870

Net change in unrealized gains (losses) on open contracts

     510,198       (234,626
  

 

 

 

 

 

 

 

Total trading results

     1,498,985       (555,496
  

 

 

 

 

 

 

 

Net income (loss)

     $ 1,174,162     $ (773,504
  

 

 

 

 

 

 

 

Net income (loss) per Redeemable Unit *:

    

Class A

     $ 39.96     $ (49.73
  

 

 

 

 

 

 

 

Class Z

     $ 32.65     $ (29.78
  

 

 

 

 

 

 

 

Weighted average Redeemable Units outstanding:

    

Class A

         29,825.4568           15,937.3321  
  

 

 

 

 

 

 

 

Class Z

     580.0420       263.1707  
  

 

 

 

 

 

 

 

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

See accompanying notes to financial statements.

 

4


Potomac Futures Fund L.P.

Statements of Changes in Partners’ Capital

For the Three Months Ended March 31, 2019 and 2018

(Unaudited)

 

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

Partners’ Capital, December 31, 2018

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

Subscriptions - General Partner

     -           -           269,705       311.3000       269,705       311.3000  

Subscriptions - Limited Partners

     20,335,031       16,531.6050       19,340       22.3230       20,354,371       16,553.9280  

Redemptions - Limited Partners

     (1,774,050     (1,441.4770     -           -           (1,774,050     (1,441.4770

Net income (loss)

     1,155,226       -           18,936       -           1,174,162       -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, March 31, 2019

     $ 36,691,472       28,890.3478     $ 521,473       580.0420     $ 37,212,945       29,470.3898  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, December 31, 2017

     $ 21,985,171       16,183.6278     $ 278,206       296.6740     $ 22,263,377       16,480.3018  

Redemptions - General Partner

     -           -           (50,000     (50.2550     (50,000     (50.2550

Redemptions - Limited Partners

     (810,998     (592.2910     -           -           (810,998     (592.2910

Net income (loss)

     (769,040     -           (4,464     -           (773,504     -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital, March 31, 2018

     $ 20,405,133       15,591.3368     $       223,742       246.4190     $ 20,628,875       15,837.7558  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

5


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

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 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. The General Partner is 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. All trading decisions for the Partnership are made by Campbell & Company, LP (the “Advisor”).

During the reporting periods ended March 31, 2019 and 2018, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During prior reporting periods included in this report, the Partnership deposited a portion of its cash in non-trading bank accounts at JPMorgan Chase Bank, N.A.

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.

As of July 17, 2017, the Advisor commenced trading the Partnership’s assets directly pursuant to the Campbell Managed Futures Portfolio, a proprietary, systematic trading program.

The General Partner is not aware of any material changes to the trading program other than as discussed above during the fiscal quarter ended March 31, 2019.

The Partnership’s trading of futures, forward, swap and option contracts, if applicable, on commodities are done primarily on U.S. and foreign commodity exchanges. The Partnership engages in such trading through commodity brokerage accounts maintained with MS&Co.

The Partnership has entered into a foreign exchange brokerage account agreement and a futures brokerage account agreement with MS&Co. The Partnership pays MS&Co. (or will reimburse MS&Co., if previously paid) its allocable share of all trading fees for the clearing and, where applicable, execution of transactions as well as exchange, user, give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”).

 

 

6


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

The Partnership has also entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives 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. The ongoing selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisors of Morgan Stanley Wealth Management who sell Class A Redeemable Units in the Partnership.

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.

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.

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:

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at March 31, 2019, the results of its operations and the changes in partners’ capital for the three months ended March 31, 2019 and 2018. These financial statements present the results for interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2018. The December 31, 2018 information has been derived from the audited financial statements as of and for the year ended December 31, 2018.

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

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

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.

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 periods ended March 31, 2019 and 2018, the Partnership carried no debt and substantially all of the Partnership’s investments were carried at fair value and classified as Level 1 and Level 2 measurements.

Partnership’s Investments. The valuation of the Partnership’s investments, including the classification within the fair value hierarchy of the investments held by the Partnership, are described in Note 5, “Fair Value Measurements.”

 

7


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

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

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

Partnership’s Cash. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At March 31, 2019 and December 31, 2018, the amount of cash held for margin requirements was $8,029,250 and $3,230,953, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. The Partnership’s restricted and unrestricted cash includes cash denominated in foreign currencies of $8,464 (cost of $9,933) at March 31, 2019 and $380,451 (cost of $379,908) at December 31, 2018.

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 period 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.

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.

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 3, “Financial Highlights.”

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

8


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

3.

Financial Highlights:

Financial highlights for the limited partner classes as a whole for the three months ended March 31, 2019 and 2018 were as follows:

 

     Three Months Ended
March 31,
 
     2019     2018  
     Class A     Class Z     Class A  
Per Redeemable Unit Performance (for a unit oustanding throughout the period): *       

Net realized and unrealized gains (losses)

     $ 50.79       $ 35.92         $ (36.13)   

Net investment loss

     (10.83)        (3.27)        (13.60)   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     39.96         32.65         (49.73)   

Net asset value per Redeemable Unit, beginning of period

     1,230.07         866.38         1,358.48    
  

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of period

     $       1,270.03       $       899.03         $       1,308.75    
  

 

 

   

 

 

   

 

 

 
     Three Months Ended
March 31,
 
     2019     2018  
     Class A     Class Z     Class A  

Ratios to Average Limited Partners’ Capital: **

      

Net investment loss ***

     (3.6)  %      (1.5)  %      (4.1)  % 
  

 

 

   

 

 

   

 

 

 
Operating expenses before expenses borne by the General Partner and incentive fees      6.0   %      3.9   %      6.3   % 

Expenses borne by the General Partner

     (0.3)  %      (0.3)  %      (0.8)  % 

Incentive fees

     -       %      -       %      -       % 
  

 

 

   

 

 

   

 

 

 
Operating expenses after expenses borne by the General Partner and incentive fees      5.7   %      3.6   %      5.5   % 
  

 

 

   

 

 

   

 

 

 

Total return:

      

Total return before incentive fees

     3.2   %      3.8   %      (3.7)  % 

Incentive fees

     -       %      -       %      -       % 
  

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     3.2   %      3.8   %      (3.7)  % 
  

 

 

   

 

 

   

 

 

 

 

*

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

 

**

Annualized (other than incentive fees).

 

***

Interest income less total expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period.

 

9


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

4.

Trading Activities:

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

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

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.

All of the commodity interests owned by the Partnership are held for trading purposes. The monthly average number of futures contracts traded by the Partnership during the three months ended March 31, 2019 and 2018 were 3,388 and 1,350, respectively. The monthly average number of metals forward contracts traded by the Partnership during the three months ended March 31, 2019 and 2018 were 361 and 129, respectively. The monthly average notional values of currency forward contracts traded by the Partnership during the three months ended March 31, 2019 and 2018 were   $578,070,342 and   $150,199,615, 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 March 31, 2019 and December 31, 2018, respectively.

 

             Gross Amounts    
Offset in the
  Amounts
    Presented in the    
  Gross Amounts Not Offset in the
    Statements of Financial Condition    
      

March 31, 2019

       Gross Amounts    
Recognized
  Statements of
Financial

Condition
  Statements of
Financial

Condition
  Financial
Instruments
   Cash Collateral
Received/

Pledged *
   Net Amount  

Assets

              

Futures

     $ 1,893,979       $ (240,140       $ 1,653,839       $ -            $ -            $ 1,653,839    

Forwards

     1,583,468       (1,583,468     -           -            -            -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Total assets

     $ 3,477,447       $ (1,823,608       $ 1,653,839       $ -            $ -            $ 1,653,839    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Liabilities

              

Futures

     $ (240,140     $ 240,140       $ -           $ -            $ -            $ -      

Forwards

     (1,958,956     1,583,468       (375,488     -            375,488        -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Total liabilities

     $ (2,199,096     $ 1,823,608       $ (375,488     $ -            $       375,488        $ -      
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

  

 

 

 

Net fair value

                 $         1,653,839  
              

 

 

 

 

10


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

             Gross Amounts    
Offset in the
  Amounts
    Presented in the    

Statements of
Financial Condition
   Gross Amounts Not Offset in the
Statements of Financial Condition
      

December 31, 2018

       Gross Amounts    
Recognized
  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 
               

 

 

 

 

*

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’s non-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. In certain instances, MS&Co. may not post collateral and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Partnership’s 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.

 

11


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

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 March 31, 2019 and December 31, 2018, respectively.

 

Assets         March 31, 2019            

Futures Contracts

   

Energy

    $ 19,234    

Grains

    483,962    

Indices

    184,983    

Interest Rates U.S.

    246,490    

Interest Rates Non-U.S.

    883,704    

Metals

    37,100    

Softs

    38,506    

Total unrealized appreciation on open futures contracts

    1,893,979    

Liabilities

   

Futures Contracts

   

Energy

    (11,710  

Grains

    (1,865  

Indices

    (31,877  

Interest Rates U.S.

    (18,728  

Interest Rates Non-U.S.

    (88,931  

Livestock

    (10,450  

Metals

    (45,635  

Softs

    (30,944  

Total unrealized depreciation on open futures contracts

    (240,140  

Net unrealized appreciation on open futures contracts

    $ 1,653,839     *
         

Assets

   

Forward Contracts

   

Currencies

    $ 1,242,878    

Metals

    340,590    

Total unrealized appreciation on open forward contracts

    1,583,468    

Liabilities

   

Forward Contracts

   

Currencies

    (1,587,852  

Metals

    (371,104  

Total unrealized depreciation on open forward contracts

    (1,958,956  

Net unrealized depreciation on open forward contracts

    $ (375,488   **
         

 

*

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 depreciation on open forward contracts” in the Partnership’s Statements of Financial Condition.

 

12


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

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.

 

13


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three months ended March 31, 2019 and 2018, respectively.

 

     Three Months Ended March 31,  

Sector

   2019     2018  

Currencies

     $ (415,202)     $ 176,130   

Energy

     (487,897)       102,833   

Grains

     374,606        (388,895)  

Indices

     798,253        (996,192)  

Interest Rates U.S.

     428,301        277,682   

Interest Rates Non-U.S.

     1,286,284        86,932   

Livestock

     (47,483)       37,617   

Metals

     (230,465)       (37,232)  

Softs

     (207,412)       185,629  
  

 

 

   

 

 

 

Total

     $             1,498,985    $             (555,496) 
  

 

 

   

 

 

 

 

*

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

 

5.

Fair Value Measurements:

Partnership’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 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 priced by pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the period ended March 31, 2019 and as of December 31, 2018, the Partnership 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).

 

14


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

March 31, 2019

            Total                       Level 1                       Level 2                       Level 3          

Assets

       

Futures

      $ 1,893,979       $ 1,893,979       $ -           $ -      

Forwards

    1,583,468       -           1,583,468       -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

      $         3,477,447       $         1,893,979       $         1,583,468       $ -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

       

Futures

      $ 240,140       $ 240,140       $ -           $                 -      

Forwards

    1,958,956       -           1,958,956       -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

      $ 2,199,096       $ 240,140       $ 1,958,956       $ -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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       $ -      
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.

Financial Instrument Risks:

In the normal course of business, the Partnership is party to financial instruments with off-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those 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 46.7% to 62.3% of the Partnership’s contracts are traded OTC.

Futures Contracts. The Partnership trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or 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, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership as unrealized gains or losses. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, 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 Statements of Income and Expenses.

 

15


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Partnership agrees 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 the Partnership’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 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 Statements of Income and Expenses.

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 cash settled based on prompt dates published by the LME. Variation margin may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership 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 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 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 directly impacted by the volatility and liquidity in the markets in which the related underlying assets are or were traded. The Partnership is 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 typically limited to the amounts recognized in the Statements of Financial Condition and is not, for the Partnership, represented by the contract or notional amounts of the instruments. The risk of loss for the Partnership is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership has credit risk and concentration risk, as MS&Co. or an MS&Co. affiliate is the sole counterparty or broker with respect to the Partnership’s assets. Credit risk with respect to exchange-traded instruments for the Partnership is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s counterparty is an exchange or clearing organization.

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

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.

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.

In the ordinary course of business, the Partnership enters into contracts and agreements that contain various representations and warranties and which provide 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 the risk of any future obligation relating to these indemnifications to be remote.

 

16


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

7.

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 there were no subsequent events requiring adjustment to or disclosure in the financial statements.

 

17


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

Liquidity and Capital Resources

The Partnership does not have, nor does it expect to have, any capital assets. The Partnership does not engage in sales of goods or services. The Partnership’s only assets are its (i) equity in trading account, consisting of unrestricted cash, 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 and (iii) interest receivable. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the first quarter of 2019.

The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or option contract has increased or decreased by an amount equal to the daily limit, positions in that futures or option contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or option contracts and result in restrictions on redemptions.

There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

Other than the risks inherent in commodity futures, forwards, options, swaps and other derivatives trading and U.S. Treasury bills and money market mutual fund securities, the Partnership knows of no trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

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

For the three months ended March 31, 2019, the Partnership’s capital increased 116.5% from $17,188,757 to $37,212,945. This increase was attributable to net income of $1,174,162, subscriptions of 16,531.6050 Class A Redeemable Units totaling $20,335,031, 311.3000 Class Z General Partner Redeemable Units totaling $269,705 and 22.3230 Class Z Limited Partner Redeemable Units totaling $19,340, which were partially offset by the redemptions of 1,441.4770 Class A Redeemable Units totaling $1,774,050. Future redemptions can impact the amount of funds available for investments in commodity contract positions in subsequent periods.

Other than as discussed above, there are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.

Off-Balance Sheet Arrangements and Contractual Obligations

The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. As a result, actual results could differ from these estimates. The Partnership’s significant accounting policies are described in detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of the financial statements.

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

 

18


Results of Operations

During the Partnership’s first quarter of 2019, the net asset value per Class A Redeemable Unit increased 3.2% from $1,230.07 to $1,270.03, as compared to a decrease of 3.7% in the first quarter of 2018. During the Partnership’s first quarter of 2019, the net asset value per Class Z Redeemable Unit increased 3.8% from $866.38 to $899.03, as compared to a decrease of 3.2% in the first quarter of 2018. The Partnership experienced a net trading gain before fees and expenses in the first quarter of 2019 of $1,498,985. Gains were primarily attributable to the Partnership’s trading of commodity futures in grains, indices and U.S. & non-U.S. interest rates and were partially offset by losses in currencies, energy, livestock, metals and softs. The Partnership experienced a net trading loss before fees and expenses in the first quarter of 2018 of $555,496. Losses were primarily attributable to the Partnership’s trading of commodity futures in grains, indices and metals and were partially offset by gains in currencies, energy, U.S. and non-U.S. interest rates, livestock and softs.

During the first quarter, the most notable gains were recorded during January and March from long positions in global interest rate futures as prices increased following weak economic data and dovish monetary policy. In global stock indices, gains were achieved throughout the quarter from long positions in Asian, European, and North American equity index futures positions as prices benefited from dovish central bank actions and optimism surrounding U.S.-China trade negotiations. Gains were also experienced in the agricultural sector during February and March from short positions in corn futures as prices trended lower amid a bearish outlook in demand and production. The Partnership’s overall trading gains for the quarter were partially offset by trading losses in the energy complex primarily during January from short crude oil futures positions as sanctions on Venezuelan oil exports and OPEC’s announcement of new production cuts pushed prices higher. Additionally, losses were experienced within the energies during March from futures positioning in gasoil. During January, losses were recorded within the currency sector from short positions in the Australian and Canadian dollar versus the U.S. dollar as the prolonged partial shutdown of the U.S. Federal government pulled the U.S. dollar lower. During March, losses were again recorded from positions in the Canadian dollar versus the U.S. dollar as the relative value of the Canadian currency fell after the Bank of Canada signaled a more dovish monetary policy. Within in the metals complex, losses were incurred throughout the quarter from futures positions in industrial metals futures as prices fluctuated amid speculation of global growth and U.S.-China trade negotiations.

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 increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other factors, 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.

Effective April 1, 2017, interest income is earned on 100% of the average daily equity maintained in cash in the Partnership’s 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 Partnership will not receive interest on amounts in the futures brokerage account that are committed to margin. During the reporting period, 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 for the three months ended March 31, 2019 increased by $113,914 as compared to the corresponding period in 2018. The increase in interest income is primarily due to higher interest rates during the three months ended March 31, 2019 as compared to the corresponding period in 2018. 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 accounts, (2) the amount of Treasury bills and/or money market mutual fund securities held by the Partnership, and (3) interest rates over which the Partnership and MS&Co. have 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 months ended March 31, 2019 increased by $76,496 as compared to the corresponding period in 2018. The increase in ongoing selling agent fees is due to an increase in average net assets attributable to Class A Redeemable Units during the three months ended March 31, 2019 as compared to the corresponding period in 2018.

 

19


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 months ended March 31, 2019 increased by $58,082 as compared to the corresponding period in 2018. The increase in management fees is due to an increase in average net assets per Class during the three months ended March 31, 2019 as compared to the corresponding period in 2018.

General Partner 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 months ended March 31, 2019 increased by $29,407 as compared to the corresponding period in 2018. The increase in General Partner fees is due to a increase in average net assets per Class during the three months ended March 31, 2019 as compared to the corresponding period in 2018.

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 months ended March 31, 2019 and 2018. 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.

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.

 

20


Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

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

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

Quantifying the Partnership’s Trading Value at Risk

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

The Partnership accounts for open positions on the basis of fair value accounting principles. Any loss in the market value of the Partnership’s open positions is directly reflected in the Partnership’s earnings and cash flow.

The Partnership’s risk exposure in the market sectors traded by the Advisor is estimated 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.

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

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

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 for the Partnership as of March 31, 2019 and December 31, 2018, and the highest, lowest and average value at any point during the three months ended March 31, 2019 and during the twelve months ended December 31, 2018. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

21


As of March 31, 2019, the Partnership’s total capitalization was $37,212,945. The Partnership’s Value at Risk as of March 31, 2019 was as follows:

 

March 31, 2019  
                Three Months Ended March 31, 2019  

Market Sector

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

Currencies

    $  4,121,964         11.08    %      $  5,826,182         $ 1,489,334         $ 4,529,880    

Energy

    217,946         0.59         372,840         47,104         203,397    

Grains

    459,987         1.24         459,987         181,721         338,016    

Indices

    1,435,834         3.86         1,435,834         380,758         987,484    

Interest Rates U.S.

    116,367         0.31         446,141         116,367         234,952    

Interest Rates Non-U.S.

    870,631         2.34         1,530,150         530,523         1,058,293    

Livestock

    7,150         0.02         40,262         6,050         27,041    

Metals

    495,635         1.33         541,834         190,036         377,865    

Softs

    185,962         0.50         328,739         142,901         230,826    
 

 

 

   

 

 

       

Total

    $ 7,911,476         21.27    %       
 

 

 

   

 

 

       

 

*

Average of daily Values at Risk.

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:

 

                Twelve Months Ended December 31, 2018  

Market Sector

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

Currencies

    $  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.

 

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Item 4. Controls and Procedures.

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

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2019 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

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

 

   

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

 

   

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

 

   

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

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

23


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.

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

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

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

 

24


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 July 12, 2016 and June 28, 2016, respectively, without any findings of fraud. Pursuant to the settlements, MS&Co. was required to pay a $750,000 penalty to the CBOE (for which MS&Co. and an individual were jointly and severally liable) and a $400,000 penalty to the CFE (for which MS&Co. and an individual were jointly and severally liable) and $152,664 in disgorgement.

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 Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, MS&Co. accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

 

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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 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, MS&Co. 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. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. Based on currently available information, MS&Co. believes it could incur a loss in this action 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

 

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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 certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $65 million. At March 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $36 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 $36 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 March 25, 2019, 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.

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 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.

 

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Beginning on March 25, 2019, MS&Co. was named as a defendant in a series of putative class action complaints filed in the Southern District of New York, the first of which is styled Alaska Electrical Pension Fund v. BofA Secs., Inc., et al. Each complaint alleges a conspiracy to fix prices and restrain competition in the market for unsecured bonds issued by the following Government-Sponsored Enterprises: the Federal National Mortgage Associate; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. The purported class period for each suit is from January 1, 2012 to June 1, 2018. Each complaint raises a claim under Section 1 of the Sherman Act and seeks, among other things, injunctive relief and treble compensatory damages.

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 allege that defendants made untrue statements and

 

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material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. and/or its affiliates or sold to plaintiff’s affiliates’ clients by MS&Co. and/or its affiliates in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

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

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, and 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 sought, 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, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey, styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $1.073 billion. The amended complaint 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 RICO statute, and included a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

 

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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 (“FDIC”), as receiver for Franklin Bank S.S.B, filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation as Receiver for Franklin Bank, S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to 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 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

 

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amended complaint was filed on June 29, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint 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 alleged causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and sought, among other things, compensatory and punitive damages. On June 26, 2018, the parties entered into an agreement to settle the litigation.

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 alleged that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserted violations of the California False Claims Act and other state laws and sought treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached 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.

 

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Item 1A. Risk Factors.

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors.” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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

For the three months ended March 31, 2019, there were 16,531.6050 additional subscriptions of Class A Redeemable Units totaling $20,335,031 and a subscription of 22.3230 Class Z Redeemable Units totaling $19,340. Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder. Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that Redeemable Units were purchased by accredited investors in a private offering.

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

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

 

Period   

Class A

(a) Total Number

of Redeemable

Units Purchased *  

  

Class A

(b) Average

Price Paid per
Redeemable
Unit **  

    

(c) Total Number of  

Redeemable Units  

Purchased as Part of  

Publicly Announced  

Plans or Programs  

  

(d) Maximum Number (or  

Approximate Dollar Value)  

of Redeemable Units  

that May Yet Be Purchased  

Under the Plans or Programs  

January 1, 2019 - January 31, 2019

   602.8460      $ 1,203.55        N/A    N/A

February 1, 2019 - February 28, 2019

   313.4120      $ 1,217.09        N/A    N/A

March 1, 2019 - March 31, 2019

   525.2190      $ 1,270.03        N/A    N/A
     1,441.4770      $ 1,230.72              

 

  *

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.

Item 3.  Defaults Upon Senior Securities. — None.

Item 4.  Mine Safety Disclosures. — Not Applicable.

Item 5.  Other Information. — None.

 

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Item 6. Exhibits.

 

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 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: May 9, 2019
By:  

/s/ Steven Ross

  Steven Ross
  Chief Financial Officer and Director
  (Principal Accounting Officer)
Date: May 9, 2019

The General Partner which signed the above is the only party authorized to act for the registrant. The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.

 

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