Company Quick10K Filing
Potomac Futures Fund
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-26
10-Q 2019-09-30 Filed 2019-11-07
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-26
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-28
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-28
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-28
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-30
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-28
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-03-27
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-07-01 Enter Agreement, Exhibits
8-K 2019-08-23
8-K 2019-03-26
8-K 2019-03-06
8-K 2019-01-01
8-K 2018-09-15

POTO 10Q Quarterly Report

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.
Item 6. Exhibits.
EX-31.1 d802892dex311.htm
EX-31.2 d802892dex312.htm
EX-32.1 d802892dex321.htm
EX-32.2 d802892dex322.htm

Potomac Futures Fund Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 d802892d10q.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, 2020

OR (   ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-50735

POTOMAC FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York   13-3937275

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address 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:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which  registered
N/A   N/A   N/A

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

Yes X    No     

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

Yes X    No     

Indicate by check mark 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, 2020, 21,571.7288 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,
2020
(Unaudited)
     December 31,
2019

 

 

Assets:

     

Equity in trading account:

     

Unrestricted cash

     $ 33,143,277          $ 25,418,567    

Restricted cash

     757,609          10,484,390    

Net unrealized appreciation on open forward contracts

     2,293,668          -        
  

 

 

    

 

 

 

Total equity in trading account

     36,194,554          35,902,957    
  

 

 

    

 

 

 

Interest receivable

     11,702          38,067    
  

 

 

    

 

 

 

Total assets

     $       36,206,256          $       35,941,024    
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Net unrealized depreciation on open futures contracts

     $ 158,387          $ 446,009    

Net unrealized depreciation on open forward contracts

     -              681,111    

Accrued expenses:

     

Ongoing selling agent fees

     59,344          57,335    

Management fees

     44,738          43,144    

General Partner fees

     26,843          25,886    

Professional fees

     198,178          241,545    

Redemptions payable to Limited Partners

     1,039,079          267,526    
  

 

 

    

 

 

 

Total liabilities

     1,526,569          1,762,556    
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, Class Z, 412.4990 outstanding at March 31, 2020 and December 31, 2019

     415,480          388,047    

Limited Partners, Class Z, 22.3230 outstanding at March 31, 2020 and December 31, 2019

     22,484          21,000    

Limited Partners, Class A, 24,554.6788 and 25,797.7368 Redeemable Units outstanding at March 31, 2020 and December 31, 2019, respectively

     34,241,723          33,769,421    
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     34,679,687          34,178,468    
  

 

 

    

 

 

 

Total liabilities and partners’ capital

     $ 36,206,256          $ 35,941,024    
  

 

 

    

 

 

 

Net asset value per Redeemable Unit:

     

Class A

     $ 1,394.51          $ 1,309.01    
  

 

 

    

 

 

 

Class Z

     $ 1,007.23          $ 940.72    
  

 

 

    

 

 

 

 

See accompanying notes to financial statements.

 

1


Potomac Futures Fund L.P.

Condensed Schedule of Investments

March 31, 2020

(Unaudited)

 

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

Futures Contracts Purchased

        

Energy

     1        $ 84         0.00  %* 

Grains

     20        32,716         0.09   

Indices

     14        (46,784)        (0.13)  

Interest Rates U.S.

     39        35,977         0.10   

Interest Rates Non-U.S.

     459        (8,888)        (0.03)  

Metals

     1        (27,611)        (0.08)  

Softs

     19        (39,530)        (0.11)  
     

 

 

    

 

 

 

Total futures contracts purchased

        (54,036)        (0.16)  
     

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     40        79,153         0.23   

Grains

     24        (5,795)        (0.02)  

Indices

     33        (105,364)        (0.30)  

Interest Rates U.S.

     49        (24,374)        (0.07)  

Interest Rates Non-U.S.

     33        (46,609)        (0.13)  

Livestock

     1        4,975         0.01   

Metals

     5        1,198         0.00 

Softs

     3        (7,535)        (0.02)  
     

 

 

    

 

 

 

Total futures contracts sold

        (104,351)        (0.30)  
     

 

 

    

 

 

 

Net unrealized depreciation on open futures contracts

        $ (158,387)        (0.46)
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

   $ 102,252,396        $ 5,112,602         14.74 

Metals

     204         1,478,902         4.26   
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        6,591,504         19.00   
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

   $ 88,253,534        $ (3,476,236)        (10.02)  

Metals

     159        (821,600)        (2.37)  
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (4,297,836)        (12.39)  
     

 

 

    

 

 

 

Net unrealized appreciation on open forward contracts

        $ 2,293,668         6.61 
     

 

 

    

 

 

 

 

*

Due to rounding.

 

See accompanying notes to financial statements.

 

2


Potomac Futures Fund L.P.

Condensed Schedule of Investments

December 31, 2019

 

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

Futures Contracts Purchased

        

Energy

     126        $ 132,267         0.39 

Grains

     97        11,742         0.03   

Indices

     302        33,970         0.10   

Interest Rates U.S.

     326        (8,797)        (0.03)  

Interest Rates Non-U.S.

     1,593        (640,186)        (1.87)  

Metals

     34        136,400         0.40   

Softs

     7        700         0.00 
     

 

 

    

 

 

 

Total futures contracts purchased

        (333,904)        (0.98)  
     

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     124        66,510         0.19   

Grains

     100        (184,878)        (0.53)  

Indices

     37        8,643         0.03   

Interest Rates U.S.

     77        27,782         0.08   

Interest Rates Non-U.S.

     245        110,563         0.32   

Livestock

     40        (12,430)        (0.04)  

Metals

     14        1,063         0.00 

Softs

     103        (129,358)        (0.37)  
     

 

 

    

 

 

 

Total futures contracts sold

        (112,105)        (0.32)  
     

 

 

    

 

 

 

Net unrealized depreciation on open futures contracts

        $ (446,009)        (1.30)
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

   $ 172,288,041        $ 2,642,228         7.74 

Metals

     137        442,448         1.29   
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        3,084,676         9.03   
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

   $ 185,693,020        $ (2,938,180)        (8.60)  

Metals

     235        (827,607)        (2.42)  
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (3,765,787)        (11.02)  
     

 

 

    

 

 

 

Net unrealized depreciation on open forward contracts

        $ (681,111)        (1.99)
     

 

 

    

 

 

 

 

*

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,
 
     2020      2019  

Investment Income:

     

Interest income

     $ 94,104         $ 187,504   
  

 

 

    

 

 

 

Total investment income

     94,104         187,504   
  

 

 

    

 

 

 

Expenses:

     

Clearing fees related to direct investments

     61,107         57,939   

Ongoing selling agent fees

     179,765         184,827   

Management fees

     135,486         139,729   

General Partner fees

     81,292         83,838   

Professional fees

     -             76,836   
  

 

 

    

 

 

 

Total expenses

     457,650         543,169   

Expenses borne by the General Partner

     -             (30,842)  
  

 

 

    

 

 

 

Net expenses

     457,650         512,327   
  

 

 

    

 

 

 

Net investment loss

     (363,546)        (324,823)  
  

 

 

    

 

 

 

Trading Results:

     

Net gains (losses) on trading of commodity interests:

     

Net realized gains (losses) on closed contracts

     (660,045)        988,787   

Net change in unrealized gains (losses) on open contracts

     3,258,096         510,198   
  

 

 

    

 

 

 

Total trading results

     2,598,051         1,498,985   
  

 

 

    

 

 

 

Net income (loss)

     $ 2,234,505         $ 1,174,162   
  

 

 

    

 

 

 

Net income (loss) per Redeemable Unit*

     

Class A

     $ 85.50         $ 39.96   
  

 

 

    

 

 

 

Class Z

     $ 66.51         $ 32.65   
  

 

 

    

 

 

 

Weighted average Redeemable Units outstanding:

     

Class A

     25,550.9841         29,825.4568   
  

 

 

    

 

 

 

Class Z

     434.8220         580.0420   
  

 

 

    

 

 

 

 

*

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, 2020 and 2019

(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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Partners’ Capital, December 31, 2019

   $ 33,769,421         25,797.7368       $ 409,047         434.8220       $ 34,178,468         26,232.5588   

Redemptions - Limited Partners

     (1,733,286)        (1,243.0580)        -              -              (1,733,286)        (1,243.0580)  

Net income (loss)

     2,205,588         -              28,917         -              2,234,505         -        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, March 31, 2020

   $ 34,241,723         24,554.6788       $ 437,964         434.8220       $ 34,679,687         24,989.5008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

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, 2020 and 2019, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant.

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, 2020.

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.

Effective January 1, 2017, the General Partner instituted a cap on the Partnership’s operating expenses such that the General Partner will be responsible for any such expenses to the extent they exceed 0.50% of the Partnership’s net assets in any calendar year.

The General Partner has 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, 2020, the results of its operations and the changes in partners’ capital for the three months ended March 31, 2020 and 2019. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2019. The December 31, 2019 information has been derived from the audited financial statements as of and for the year ended December 31, 2019.

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, 2020 and 2019, 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, 2020 and December 31, 2019, the amount of cash held for margin requirements was $757,609 and $10,484,390, 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 $(480,535) (proceeds of $476,426) at March 31, 2020 and $308,671 (cost of $308,475) at December 31, 2019.

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 Partnership’s 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 2016 through 2019 tax years remain subject to examination by U.S. federal and most state tax authorities.

Investment Company Status. The Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Accounting Standards Update 2013-08 “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” 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, 2019.

 

8


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

3.

Financial Highlights:

Financial highlights for the limited partner class as a whole for the three months ended March 31, 2020 and 2019 were as follows:

 

     Three Months Ended
March 31, 2020
    Three Months Ended
March 31, 2019
 
           Class A                 Class Z                 Class A               Class Z        

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

        

Net realized and unrealized
gains (losses)

     $ 99.64        $ 71.64        $ 50.79        $ 35.92   

Net investment loss

     (14.14)       (5.13)       (10.83)       (3.27)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     85.50        66.51        39.96        32.65   

Net asset value per Redeemable Unit,
beginning of period

     1,309.01        940.72        1,230.07        866.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit,
end of period

     $   1,394.51        $   1,007.23        $   1,270.03        $   899.03   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
March 31, 2020
    Three Months Ended
March 31, 2019
 
     Class A     Class Z     Class A     Class Z  

Ratios to Average

        

 Limited Partners’ Capital:**

        

Net investment loss***

     (4.2)     (2.1)     (3.6)     (1.5)
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     5.3      3.1      6.0      3.9 %  

Expenses borne by the General Partner

     -        -        (0.3)     (0.3)

Incentive fees

     -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5.3      3.1      5.7      3.6 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

Total return before incentive fees

     6.5      7.1      3.2      3.8 

Incentive fees

     -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     6.5      7.1      3.2      3.8 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

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.

 

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 and foreign exchange brokerage account agreement 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.

 

9


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

Trading and transaction fees are based on the number of trades executed by the Advisor. All clearing fees paid to MS&Co. for direct trading 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, 2020 and 2019 were 2,170 and 3,388, respectively. The monthly average number of metals forward contracts traded by the Partnership during the three months ended March 31, 2020 and 2019 were 576 and 361, respectively. The monthly average notional values of currency forward contracts traded by the Partnership during the three months ended March 31, 2020 and 2019 were $523,817,619 and $578,070,342, 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, 2020 and December 31, 2019, respectively.

 

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

March 31, 2020

   Gross Amounts
Recognized
     Financial
Instruments
     Cash Collateral
Received/ Pledged*
     Net Amount  

Assets

                 

Futures

    $ 242,170        $ (242,170)       $ -            $ -           $ -           $ -      

Forwards

     6,591,504         (4,297,836)        2,293,668         -            -            2,293,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

    $ 6,833,674        $ (4,540,006)       $ 2,293,668        $ -           $ -           $ 2,293,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Futures

    $ (400,557)       $ 242,170        $ (158,387)       $ -           $ 158,387        $ -      

Forwards

     (4,297,836)        4,297,836         -             -            -            -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

    $ (4,698,393)       $ 4,540,006        $ (158,387)       $ -           $ 158,387        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

                   $ 2,293,668 
                 

 

 

 
            Gross Amounts
Offset in the
Statements of
Financial
Condition
     Amounts
Presented in the

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

December 31, 2019

   Gross Amounts
Recognized
     Financial
Instruments
     Cash Collateral
Received/ Pledged*
     Net Amount  

Assets

                 

Futures

    $ 757,718        $ (757,718)       $ -            $ -           $ -           $ -      

Forwards

     3,084,676         (3,084,676)        -             -            -            -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

    $ 3,842,394        $ (3,842,394)       $ -            $ -           $ -           $ -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Futures

    $ (1,203,727)       $ 757,718        $ (446,009)       $ -           $ 446,009        $ -      

Forwards

     (3,765,787)        3,084,676         (681,111)        -            681,111         -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

    $ (4,969,514)       $ 3,842,394        $ (1,127,120)       $ -           $ 1,127,120        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net fair value

                   $ -    
                 

 

 

 

 

*

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. In some instances, the actual collateral received and/or pledged may be more than the amount shown due to overcollateralization.

 

10


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, 2020 and December 31, 2019, respectively.

 

                           
     March 31, 2020  

Assets

  

Futures Contracts

  

Energy

   $ 79,237   

Grains

     40,685   

Indices

     6,499   

Interest Rates U.S.

     40,540   

Interest Rates Non-U.S.

     61,007   

Livestock

     4,975   

Metals

     8,637   

Softs

     590   
  

 

 

 

Total unrealized appreciation on open futures contracts

     242,170   
  

 

 

 

Liabilities

  

Futures Contracts

  

Grains

     (13,764)  

Indices

     (158,647)  

Interest Rates U.S.

     (28,937)  

Interest Rates Non-U.S.

     (116,504)  

Metals

     (35,050)  

Softs

     (47,655)  
  

 

 

 

Total unrealized depreciation on open futures contracts

     (400,557)  
  

 

 

 

Net unrealized depreciation on open futures contracts

   $ (158,387)
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 5,112,602   

Metals

     1,478,902   
  

 

 

 

Total unrealized appreciation on open forward contracts

     6,591,504   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (3,476,236)  

Metals

     (821,600)  
  

 

 

 

Total unrealized depreciation on open forward contracts

     (4,297,836)  
  

 

 

 

Net unrealized appreciation on open forward contracts

   $ 2,293,668  ** 
  

 

 

 

 

*

This amount is in “Net unrealized depreciation 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.

 

11


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

     December 31, 2019  

Assets

  

Futures Contracts

  

Energy

   $ 222,120   

Grains

     15,267   

Indices

     167,959   

Interest Rates U.S.

     54,968   

Interest Rates Non-U.S.

     150,708   

Livestock

     2,320   

Metals

     142,058   

Softs

     2,318   
  

 

 

 

Total unrealized appreciation on open futures contracts

     757,718   
  

 

 

 

Liabilities

  

Futures Contracts

  

Energy

     (23,343)  

Grains

     (188,403)  

Indices

     (125,346)  

Interest Rates U.S.

     (35,983)  

Interest Rates Non-U.S.

     (680,331)  

Livestock

     (14,750)  

Metals

     (4,595)  

Softs

     (130,976)  
  

 

 

 

Total unrealized depreciation on open futures contracts

     (1,203,727)  
  

 

 

 

Net unrealized depreciation on open futures contracts

   $ (446,009)
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

   $ 2,642,228   

Metals

     442,448   
  

 

 

 

Total unrealized appreciation on open forward contracts

     3,084,676   
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     (2,938,180)  

Metals

     (827,607)  
  

 

 

 

Total unrealized depreciation on open forward contracts

     (3,765,787)  
  

 

 

 

Net unrealized depreciation on open forward contracts

   $ (681,111) ** 
  

 

 

 

 

*

This amount is in “Net unrealized depreciation 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)

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three months ended March 31, 2020 and 2019, respectively.

 

                                                       
     Three Months Ended
March 31,
 

Sector

   2020     2019  

Currencies

   $ 2,456,638      $ (415,202)  

Energy

     1,028,374        (487,897)  

Grains

     42,657        374,606   

Indices

     (4,192,851)       798,253   

Interest Rates U.S.

     273,515        428,301   

Interest Rates Non-U.S.

     1,635,396        1,286,284   

Livestock

     499,355        (47,483)  

Metals

     1,054,981        (230,465)  

Softs

     (200,014)       (207,412)  
  

 

 

   

 

 

 

Total

   $ 2,598,051  ***    $ 1,498,985  *** 
  

 

 

   

 

 

 

 

***

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, 2020 and as of December 31, 2019, 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).

 

13


Potomac Futures Fund L.P.

Notes to Financial Statements

(Unaudited)

 

                                                                                                               

March 31, 2020

   Total      Level 1      Level 2      Level 3  

 

Assets

           

Futures

     $ 242,170        $ 242,170        $ -            $ -      

Forwards

     6,591,504        -            6,591,504        -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 6,833,674        $ 242,170        $ 6,591,504        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Liabilities

           

Futures

     $ 400,557        $ 400,557        $ -            $ -      

Forwards

     4,297,836        -            4,297,836        -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 4,698,393        $ 400,557        $ 4,297,836        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2019

   Total      Level 1      Level 2      Level 3  

 

Assets

           

Futures

     $ 757,718        $ 757,718        $ -            $ -      

Forwards

     3,084,676        -            3,084,676        -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 3,842,394        $ 757,718        $ 3,084,676        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Liabilities

           

Futures

     $ 1,203,727        $ 1,203,727        $ -            $ -      

Forwards

     3,765,787        -            3,765,787        -      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 4,969,514        $ 1,203,727        $ 3,765,787        $ -      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 0.0% to 55.8% 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.

 

14


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 Metal Exchange Forward Contracts. Metal contracts traded on the London Metal Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin, zinc or other metals. 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 General Partner considers the risk of any future obligation relating to these indemnifications to be remote.

 

15


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.

 

16


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 accounts, 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 futures 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 2020.

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 forwards 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, 2020, the Partnership’s capital increased 1.5% from $34,178,468 to $34,679,687. This increase was attributable to net income of $2,234,505, which were partially offset by the redemptions of 1,243.0580 Class A Redeemable Units totaling $1,733,286. 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.

 

17


Results of Operations

During the Partnership’s first quarter of 2020, the net asset value per Class A Redeemable Unit increased 6.5% from $1,309.01 to $1,394.51, as compared to an increase of 3.2% in the first quarter of 2019. During the Partnership’s first quarter of 2020, the net asset value per Class Z Redeemable Unit increased 7.1% from $940.72 to $1,007.23, as compared to an increase of 3.8% in the first quarter of 2019. The Partnership experienced a net trading gain before fees and expenses in the first quarter of 2020 of $2,598,051. Gains were primarily attributable to the Partnership’s trading of commodity futures in currencies, energy, grains, U.S. & non-U.S. interest rates, livestock and metals, and were partially offset by losses in indices and softs. 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 most notable gains were recorded in the currency sector throughout the quarter from short positions in the Australian dollar and Norwegian krone versus the U.S. dollar as concerns from the COVID-19 virus caused investors to shift from commodity-linked currencies to safe-haven currencies. Smaller gains in currencies were recorded from positions in the Brazilian real and Colombian peso. In global interest rates, gains were achieved during January and February from long positions in U.S. and non-U.S. fixed income futures as prices advanced amid speculation that a worsening coronavirus outbreak would perpetuate looser central bank policies. Gains were also experienced in the metals complex throughout the quarter from short futures positions in industrial metals as prices weakened due to the coronavirus raising concerns about global economic growth and weakening demand. Within the energy complex, gains were experienced during January and February from short natural gas futures positions as prices declined as milder weather across the U.S. weighed on demand prospects. Additional gains in the energy complex were achieved throughout the quarter from short oil distillates positions. Additionally, gains were experienced within the agriculturals during March from short positions in livestock futures as prices fell on the expectations of limited demand for beef exports. The Partnership’s overall trading gains for the quarter were partially offset by trading losses in the global stock index sector throughout the quarter from long positions in Asian, European, and U.S. equity index futures as prices entered into a historic correction as the coronavirus outbreak intensified.

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, public health epidemics, 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 directly on U.S. Treasury bills and money market mutual fund securities owned by the Partnership will be retained by the Partnership. Interest income earned directly for the three months ended March 31, 2020 decreased by $93,400 as compared to the corresponding period in 2019. The decrease in interest income is primarily due to lower interest rates during the three months ended March 31, 2020 as compared to the corresponding period in 2019. 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.

 

18


Certain clearing fees are based on the number of trades executed by the Advisor for the Partnership. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees related to direct investments for the three months ended March 31, 2020 increased by $3,168 as compared to the corresponding period in 2019. The increase in clearing fees is primarily due to an increase in the number of direct trades made by the Partnership during the three months ended March 31, 2020 as compared to the corresponding period in 2019.

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, 2020 decreased by $5,062 as compared to the corresponding period in 2019. The decrease in ongoing selling agent fees is due to a decrease in average net assets attributable to Class A Redeemable Units during the three months ended March 31, 2020 as compared to the corresponding period in 2019.

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, 2020 decreased by $4,243 as compared to the corresponding period in 2019. The decrease in management fees is due to a decrease in average net assets per Class during the three months ended March 31, 2020 as compared to the corresponding period in 2019.

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, 2020 decreased by $2,546 as compared to the corresponding period in 2019. The decrease in General Partner fees is due to an decrease in average net assets per Class during the three months ended March 31, 2020 as compared to the corresponding period in 2019.

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, 2020 and 2019. 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.

For additional disclosures about operational and financial risk related to COVID-19 outbreak, refer to Part II, Item 5. “Other Information.” in the Form 10-Q.

 

19


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, 2020 and December 31, 2019, and the highest, lowest and average value at any point during the three months ended March 31, 2020 and during the twelve months ended December 31, 2019. 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, 2019.

 

20


As of March 31, 2020, the Partnership’s total capitalization was $34,679,687. The Partnership’s Value at Risk as of March 31, 2020 was as follows:

 

                                                                                                                                           
     March 31, 2020                
                  Three Months Ended March 31, 2020  

Market Sector

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

Energy

     $ 109,342         0.32    $ 900,297      $ 80,176      $ 286,524  

Grains

     35,740         0.10        247,478        33,830        138,078  

Indices

     337,617         0.97        1,605,106        337,617        1,067,562  

Interest Rates U.S.

     64,397         0.19        311,590        39,804        151,044  

Interest Rates Non-U.S.

     477,217         1.38        1,784,908        451,402        1,164,635  

Livestock

     4,455         0.01        123,008        4,455        80,081  

Metals

     178,960         0.52        1,126,649        164,028        528,233  

Softs

     43,738         0.13        247,735        34,767        144,318  
  

 

 

    

 

 

         

Total

     $ 1,251,466         3.62         
  

 

 

    

 

 

         

 

*

Average of daily Values at Risk.

As of December 31, 2019, the Partnership’s total capitalization was $34,178,468. The Partnership’s Value at Risk as of December 31, 2019 was as follows:

 

                                                                                                                                           
     December 31, 2019                
                  Twelve Months Ended December 31, 2019  

Market Sector

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

Currencies

     $ 5,093,911         14.90    $ 7,988,094      $ 1,489,334      $ 5,447,951  

Energy

     900,297         2.63        933,299        47,104        272,565  

Grains

     148,635         0.43        508,024        111,576        301,168  

Indices

     1,605,106         4.70        2,310,917        380,758        1,448,106  

Interest Rates U.S.

     122,237         0.36        446,141        80,372        199,928  

Interest Rates Non-U.S.

     1,526,800         4.47        1,736,370        530,523        1,115,595  

Livestock

     79,200         0.23        128,480        3,850        50,285  

Metals

     462,502         1.35        778,685        190,036        469,676  

Softs

     161,845         0.47        363,893        96,281        231,531  
  

 

 

    

 

 

         

Total

     $ 10,100,533         29.54         
  

 

 

    

 

 

         

 

*

Annual average of month-end Values at Risk.

 

21


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, 2020 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, 2020 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

22


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 Securities Exchange Act of 1934, as amended (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, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2019, 2018, 2017, 2016, 2015, 2014 and 2013. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at www.morganstanley.com. We refer you to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2019 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.

During the preceding five years, the following administrative, civil, or criminal actions pending, on appeal or concluded against MS&Co. or any of its principals are material within the meaning of CFTC Rule 4.24(l)(2) or 4.34(k)(2):

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.

 

23


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

On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it 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, 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.

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

 

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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 CFTC 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 (“CDS”) 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 the 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 CDS 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 December 21, 2018, the court denied MS&Co.’s motion for summary judgment and granted in part MS&Co.’s motion for sanctions relating to spoliation of evidence. 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. 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. On December 5, 2019, the Appellate Division, First Department (“First Department”) heard the parties’ cross-appeals. 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

 

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Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011, which alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by MS&Co. at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. On January 18, 2017, the court entered an order dismissing all claims related to an additional securitization at issue. After those dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $65 million. At December 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $35 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 $35 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 First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At December 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $22 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 $22 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

 

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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.

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 was 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 Association; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. Each complaint raises a claim under Section 1 of the Sherman Act and seeks, among other things, injunctive relief and treble compensatory damages. On May 23, 2019, plaintiffs filed a consolidated amended class action complaint, now styled In re GSE Bonds Antitrust Litigation. The purported class period in the consolidated amended complaint is now from January 1, 2009 to January 1, 2016. On June 13, 2019, the defendants filed a joint motion to dismiss the consolidated amended complaint. On August 29, 2019, the court in In re GSE Bonds Antitrust Litigation denied MS&Co.’s motion to dismiss. The case is set for trial in May 2020.

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, alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and sought, 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. Deutsche Bank Securities Inc. 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 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 sought, 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 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

 

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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 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 raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

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

 

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was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

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

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 29, 2012 and alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raised claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. On July 13, 2018, the parties reached an agreement in principle to settle the litigation.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $634 million. The complaint 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.

 

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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, 2019.

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

For the three months ended March 31, 2020, there were no additional subscriptions of Class A Redeemable Units. 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, 2020 - January 31, 2020

  242.3210 $         1,384.88   N/A   N/A
         

February 1, 2020 - February 29,  2020

  255.6160 $ 1,402.97   N/A   N/A
         

March 1, 2020 - March 31, 2020

  745.1210 $ 1,394.51   N/A   N/A
         
          1,243.0580 $ 1,394.37

 

*

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.

Certain impacts to public health conditions particular to the coronavirus (COVID-19) outbreak that occurred subsequent to March 31, 2020 could impact the operations and financial performance of the Partnership investments. The extent of the impact to the financial performance of the Partnership investments will depend on future developments, including (i) the duration and spread of the outbreak, (ii) the restrictions and advisories, (iii) the effects on the financial markets, and (iv) the effects on the economy overall, all of which are highly uncertain and cannot be predicted. If the financial performance of the Partnership investments is impacted because of these factors for an extended period, the Partnership performance may be adversely affected.

 

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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 11, 2020

By:

 

/s/ Steven Ross

 

Steven Ross

 

Chief Financial Officer and Director

 

(Principal Accounting Officer)

Date: May 11, 2020

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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