UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number000-50735
POTOMAC FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York | 13-3937275 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
c/o Ceres Managed Futures LLC
522 Fifth Avenue
New York, New York 10036
(Address of principal executive offices) (Zip Code)
(855)672-4468
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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.
YesX No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesX No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-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 Rule12b-2 of the Exchange Act).
Yes NoX
As of October 31, 2019, 26,173.5968 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
September 30, 2019 (Unaudited) | December 31, 2018
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Assets: | ||||||||
Equity in trading account: | ||||||||
Unrestricted cash | $ | 28,760,889 | $ | 13,460,371 | ||||
Restricted cash | 9,851,055 | 3,230,953 | ||||||
Net unrealized appreciation on open futures contracts | - | 286,618 | ||||||
Net unrealized appreciation on open forward contracts | 334,452 | 479,523 | ||||||
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Total equity in trading account | 38,946,396 | 17,457,465 | ||||||
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Receivable from General Partner | - | 15,849 | ||||||
Interest receivable | 55,517 | 26,847 | ||||||
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Total assets | $ | 39,001,913 | $ | 17,500,161 | ||||
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Liabilities and Partners’ Capital: | ||||||||
Liabilities: | ||||||||
Net unrealized depreciation on open futures contracts | $ | 39,076 | $ | - | ||||
Accrued expenses: | ||||||||
Ongoing selling agent fees | 64,189 | 28,781 | ||||||
Management fees | 48,273 | 21,661 | ||||||
General Partner fees | 28,964 | 14,441 | ||||||
Professional fees | 280,162 | 142,206 | ||||||
Redemptions payable to Limited Partners | 304,078 | 104,315 | ||||||
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Total liabilities | 764,742 | 311,404 | ||||||
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Partners’ Capital: | ||||||||
General Partner, Class Z, 412.4990 and 246.4190 Redeemable Units outstanding at September 30, 2019 and December 31, 2018, respectively | 422,429 | 213,492 | ||||||
Limited Partners, Class Z, 22.3230 and 0.0000 Redeemable Units outstanding at September 30, 2019 and December 31, 2018, respectively | 22,860 | - | ||||||
Limited Partners, Class A, 26,387.5128 and 13,800.2198 Redeemable Units outstanding at September 30, 2019 and December 31, 2018, respectively | 37,791,882 | 16,975,265 | ||||||
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Total partners’ capital (net asset value) | 38,237,171 | 17,188,757 | ||||||
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Total liabilities and partners’ capital | $ | 39,001,913 | $ | 17,500,161 | ||||
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Net asset value per Redeemable Unit: | ||||||||
Class A | $ | 1,432.19 | $ | 1,230.07 | ||||
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Class Z | $ | 1,024.07 | $ | 866.38 | ||||
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See accompanying notes to financial statements.
1
Potomac Futures Fund L.P.
Condensed Schedule of Investments
September 30, 2019
(Unaudited)
Notional ($)/Number of Contracts | Fair Value | % of Partners’ Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Energy | 15 | $ | (27,320) | (0.07) | % | |||||||
Grains | 39 | 519 | 0.00 | * | ||||||||
Indices | 364 | 161,355 | 0.43 | |||||||||
Interest Rates U.S. | 212 | (105,693) | (0.27) | |||||||||
Interest RatesNon-U.S. | 1,312 | (9,870) | (0.03) | |||||||||
Livestock | 20 | 70,490 | 0.18 | |||||||||
Metals | 31 | (11,603) | (0.03) | |||||||||
Softs | 36 | (6,058) | (0.02) | |||||||||
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Total futures contracts purchased | 71,820 | 0.19 | ||||||||||
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Futures Contracts Sold | ||||||||||||
Energy | 72 | $ | 148,184 | 0.38 | ||||||||
Grains | 134 | (34,058) | (0.09) | |||||||||
Indices | 48 | (20,533) | (0.05) | |||||||||
Interest Rates U.S. | 73 | (11,499) | (0.03) | |||||||||
Interest RatesNon-U.S. | 276 | (105,083) | (0.27) | |||||||||
Livestock | 9 | (42,750) | (0.11) | |||||||||
Softs | 75 | (45,157) | (0.12) | |||||||||
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Total futures contracts sold | (110,896) | (0.29) | ||||||||||
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Net unrealized depreciation on open futures contracts | $ | (39,076) | (0.10) | % | ||||||||
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Unrealized Appreciation on Open Forward Contracts | ||||||||||||
Currencies | $ | 200,667,914 | $ | 1,639,658 | 4.28 | % | ||||||
Metals | 195 | 317,029 | 0.83 | |||||||||
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Total unrealized appreciation on open forward contracts | 1,956,687 | 5.11 | ||||||||||
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Unrealized Depreciation on Open Forward Contracts | ||||||||||||
Currencies | $ | 146,947,707 | (1,318,988) | (3.45) | ||||||||
Metals | 137 | (303,247) | (0.79) | |||||||||
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Total unrealized depreciation on open forward contracts | (1,622,235) | (4.24) | ||||||||||
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Net unrealized appreciation on open forward contracts | $ | 334,452 | 0.87 | % | ||||||||
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* Due to rounding.
See accompanying notes to financial statements.
2
Potomac Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2018
Notional ($)/Number of Contracts | Fair Value | % of Partners’ Capital | ||||||||||
Futures Contracts Purchased | ||||||||||||
Energy | 11 | $ | (82,600) | (0.48) | % | |||||||
Grains | 1 | (80) | (0.00) | * | ||||||||
Indices | 16 | (13,698) | (0.08) | |||||||||
Interest Rates U.S. | 98 | 40,140 | 0.23 | |||||||||
Interest RatesNon-U.S. | 974 | 184,406 | 1.07 | |||||||||
Metals | 8 | 19,310 | 0.11 | |||||||||
Softs | 10 | 10,510 | 0.07 | |||||||||
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Total futures contracts purchased | 157,988 | 0.92 | ||||||||||
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Futures Contracts Sold | ||||||||||||
Energy | 12 | 62,451 | 0.36 | |||||||||
Grains | 167 | 66,221 | 0.39 | |||||||||
Indices | 89 | 13,124 | 0.08 | |||||||||
Interest Rates U.S. | 134 | (112,272) | (0.65) | |||||||||
Interest RatesNon-U.S. | 10 | (482) | (0.00) | * | ||||||||
Livestock | 3 | (1,013) | (0.01) | |||||||||
Metals | 7 | 4,198 | 0.02 | |||||||||
Softs | 77 | 96,403 | 0.56 | |||||||||
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Total futures contracts sold | 128,630 | 0.75 | ||||||||||
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Net unrealized appreciation on open futures contracts | $ | 286,618 | 1.67 | % | ||||||||
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Unrealized Appreciation on Open Forward Contracts | ||||||||||||
Currencies | $ | 74,536,326 | $ | 1,162,260 | 6.76 | % | ||||||
Metals | 60 | 171,195 | 1.00 | |||||||||
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Total unrealized appreciation on open forward contracts | 1,333,455 | 7.76 | ||||||||||
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Unrealized Depreciation on Open Forward Contracts | ||||||||||||
Currencies | $ | 51,277,538 | (727,182) | (4.23) | ||||||||
Metals | 42 | (126,750) | (0.74) | |||||||||
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Total unrealized depreciation on open forward contracts | (853,932) | (4.97) | ||||||||||
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Net unrealized appreciation on open forward contracts | $ | 479,523 | 2.79 | % | ||||||||
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* Due to rounding.
See accompanying notes to financial statements.
3
Potomac Futures Fund L.P.
Statements of Income and Expenses
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Investment Income: | ||||||||||||||||
Interest income | $ | 185,970 | $ | 79,538 | $ | 572,565 | $ | 231,359 | ||||||||
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Total investment income | 185,970 | 79,538 | 572,565 | 231,359 | ||||||||||||
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Expenses: | ||||||||||||||||
Clearing fees related to direct investments | 57,075 | 18,173 | 177,475 | 57,087 | ||||||||||||
Ongoing selling agent fees | 196,023 | 93,122 | 568,386 | 300,543 | ||||||||||||
Management fees | 147,416 | 70,170 | 428,691 | 226,368 | ||||||||||||
General Partner fees | 88,449 | 46,780 | 257,214 | 150,911 | ||||||||||||
Professional fees | 35,770 | 69,260 | 177,095 | 210,250 | ||||||||||||
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Total expenses | 524,733 | 297,505 | 1,608,861 | 945,159 | ||||||||||||
Expenses borne by the General Partner | (15,391) | (45,830) | (66,547) | (134,327) | ||||||||||||
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Net expenses | 509,342 | 251,675 | 1,542,314 | 810,832 | ||||||||||||
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Net investment loss | (323,372) | (172,137) | (969,749) | (579,473) | ||||||||||||
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Trading Results: | ||||||||||||||||
Net gains (losses) on trading of commodity interests: | ||||||||||||||||
Net realized gains (losses) on closed contracts | 3,415,772 | 138,647 | 7,186,427 | (842,312) | ||||||||||||
Net change in unrealized gains (losses) on open contracts | (584,693) | (179,909) | (471,332) | (76,688) | ||||||||||||
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Total trading results | 2,831,079 | (41,262) | 6,715,095 | (919,000) | ||||||||||||
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Net income (loss) | $ | 2,507,707 | $ | (213,399) | $ | 5,745,346 | (1,498,473) | |||||||||
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Net income (loss) per Redeemable Unit *: | ||||||||||||||||
Class A | $ | 90.17 | $ | (13.80) | $ | 202.12 | $ | (95.55) | ||||||||
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Class Z | $ | 69.29 | $ | (5.18) | $ | 157.69 | $ | (52.70) | ||||||||
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Weighted average Redeemable Units outstanding: | ||||||||||||||||
Class A | 27,000.4485 | 14,683.8965 | 28,425.7895 | 15,338.3711 | ||||||||||||
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Class Z | 434.8220 | 246.4190 | 505.1829 | 252.0029 | ||||||||||||
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* | 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 and Nine Months Ended September 30, 2019 and 2018
(Unaudited)
Class A | Class Z | Total | ||||||||||||||||||||||
Amount | Redeemable Units | Amount | Redeemable Units | Amount | Redeemable Units | |||||||||||||||||||
Partners’ Capital, December 31, 2017 | $ | 21,985,171 | 16,183.6278 | $ | 278,206 | 296.6740 | $ | 22,263,377 | 16,480.3018 | |||||||||||||||
Subscriptions - Limited Partners | 50,000 | 38.2040 | - | - | 50,000 | 38.2040 | ||||||||||||||||||
Redemptions - General Partner | - | - | (50,000) | (50.2550) | (50,000) | (50.2550) | ||||||||||||||||||
Redemptions - Limited Partners | (2,491,132) | (1,925.1750) | - | - | (2,491,132) | (1,925.1750) | ||||||||||||||||||
Net income (loss) | (1,488,360) | - | (10,113) | - | (1,498,473) | - | ||||||||||||||||||
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Partners’ Capital, September 30, 2018 | $ | 18,055,679 | 14,296.6568 | $ | 218,093 | 246.4190 | $ | 18,273,772 | 14,543.0758 | |||||||||||||||
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Partners’ Capital, June 30, 2018 | $ | 19,047,530 | 14,918.9798 | $ | 219,370 | 246.4190 | $ | 19,266,900 | 15,165.3988 | |||||||||||||||
Redemptions - Limited Partners | (779,729) | (622.3230) | - | - | (779,729) | (622.3230) | ||||||||||||||||||
Net income (loss) | (212,122) | - | (1,277) | - | (213,399) | - | ||||||||||||||||||
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Partners’ Capital, September 30, 2018 | $ | 18,055,679 | 14,296.6568 | $ | 218,093 | 246.4190 | $ | 18,273,772 | 14,543.0758 | |||||||||||||||
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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 | 20,370,031 | 16,558.7600 | 19,340 | 22.3230 | 20,389,371 | 16,581.0830 | ||||||||||||||||||
Redemptions - General Partner | - | - | (135,005) | (145.2200) | (135,005) | (145.2200) | ||||||||||||||||||
Redemptions - Limited Partners | (5,221,003) | (3,971.4670) | - | - | (5,221,003) | (3,971.4670) | ||||||||||||||||||
Net income (loss) | 5,667,589 | - | 77,757 | - | 5,745,346 | - | ||||||||||||||||||
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Partners’ Capital, September 30, 2019 | $ | 37,791,882 | 26,387.5128 | $ | 445,289 | 434.8220 | $ | 38,237,171 | 26,822.3348 | |||||||||||||||
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Partners’ Capital, June 30, 2019 | $ | 37,028,781 | 27,591.8508 | $ | 415,157 | 434.8220 | $ | 37,443,938 | 28,026.6728 | |||||||||||||||
Redemptions - Limited Partners | (1,714,474) | (1,204.3380) | - | - | (1,714,474) | (1,204.3380) | ||||||||||||||||||
Net income (loss) | 2,477,575 | - | 30,132 | - | 2,507,707 | - | ||||||||||||||||||
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Partners’ Capital, September 30, 2019 | $ | 37,791,882 | 26,387.5128 | $ | 445,289 | 434.8220 | $ | 38,237,171 | 26,822.3348 | |||||||||||||||
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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. andnon-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 awholly-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 September 30, 2019 and 2018, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. During prior reporting periods included in this report, the Partnership deposited a portion of its cash innon-trading bank accounts at JPMorgan Chase Bank, N.A.
As of March 22, 2016, the Partnership began offering two classes of limited partnership interests, Class A Redeemable Units and Class Z Redeemable Units. All Redeemable Units issued prior to February 29, 2016 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in Class A Redeemable Units were not changed. Class A Redeemable Units and Class Z Redeemable Units will each be referred to as a “Class” and collectively referred to as the “Classes.” Class A Redeemable Units are available to taxable U.S. individuals and institutions, U.S. tax exempt individuals and institutions, andnon-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 September 30, 2019.
The Partnership’s trading of futures, forward, swap and option contracts, if applicable, on commodities are done primarily on U.S. and foreign commodity exchanges. The Partnership engages in such trading through commodity brokerage accounts maintained with MS&Co.
The Partnership has entered into a foreign exchange brokerage account agreement and a futures brokerage account agreement with MS&Co. The Partnership pays MS&Co. (or will reimburse MS&Co., if previously paid) its allocable share of all trading fees for the clearing and, where applicable, execution of transactions as well as exchange, user,give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”).
6
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
The Partnership has also entered into a selling agent agreement with Morgan Stanley Wealth Management (as amended, the “Selling Agreement”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives a monthly ongoing selling agent fee equal to 2.0% per year of the Partnership’s adjustedmonth-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) ofmonth-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.
In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a Master Services Agreement, the Administrator furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.
2. | Basis of Presentation and Summary of Significant Accounting Policies: |
The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at September 30, 2019, the results of its operations and the changes in partners’ capital for the three and nine months ended September 30, 2019 and 2018. 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 Form10-K (the “Form10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2018. The December 31, 2018 information has been derived from the audited financial statements as of and for the year ended December 31, 2018.
Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.
Use of Estimates. The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates, and those differences could be material.
Profit Allocation. The General Partner and each limited partner of the Partnership share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each except that no limited partner is liable for obligations of the Partnership in excess of its capital contributions and profits, if any, net of distributions, redemptions and losses, if any.
Statement of Cash Flows. The Partnership has not provided a Statement of Cash Flows, as permitted by Accounting Standards Codification (“ASC”) 230,“Statement of Cash Flows.” The Statements of Changes in Partners’ Capital is included herein, and as of and for the periods ended September 30, 2019 and 2018, the Partnership carried no debt and substantially all of the Partnership’s investments were carried at fair value and classified as Level 1 and Level 2 measurements.
Partnership’s Investments. The valuation of the Partnership’s investments, including the classification within the fair value hierarchy of the investments held by the Partnership, are described in Note 5, “Fair Value Measurements.”
7
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
All commodity interests of the Partnership, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests for the Partnership are recorded on the trade date and open contracts are recorded at fair value (as described in Note 5, “Fair Value Measurements”) at the measurement date. The Partnership’s investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses for the Partnership are realized when contracts are liquidated and are determined using thefirst-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 September 30, 2019 and December 31, 2018, the amount of cash held for margin requirements was $9,851,055 and $3,230,953, respectively. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. The Partnership’s restricted and unrestricted cash includes cash denominated in foreign currencies of $170,530 (cost of $170,554) at September 30, 2019 and $380,451 (cost of $379,908) at December 31, 2018.
Income Taxes. Income taxes have not been recorded as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The Partnership follows the guidance of ASC 740,“Income Taxes,” which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are“more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions determined not to meet themore-likely-than-not threshold would be recorded as a tax benefit or liability in the Partnership’s Statements of Financial Condition for the current year. If a tax position does not meet the minimum statutory threshold to avoid the incurring of penalties, an expense for the amount of the statutory penalty and interest, if applicable, shall be recognized in the Statements of Income and Expenses in the period in which the position is claimed or expected to be claimed. The General Partner has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2015 through 2018 tax years remain subject to examination by U.S. federal and most state tax authorities.
Investment Company Status. Effective January 1, 2014, the Partnership adopted Accounting Standards Update2013-08,“Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses.
Net Income (Loss) per Redeemable Unit. Net income (loss) per Redeemable Unit for each Class is calculated in accordance with ASC 946,“Financial Services – Investment Companies.” See Note 3, “Financial Highlights.”
There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form10-K for the year ended December 31, 2018.
8
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
3. | Financial Highlights: |
Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2019 and 2018 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Class A | Class Z | Class A | Class A | Class Z | Class A | |||||||||||||||||||
Per Redeemable Unit Performance (for a unit oustanding throughout the period): * | ||||||||||||||||||||||||
Net realized and unrealized gains (losses) | $ | 102.09 | $ | 72.62 | $ | (2.14) | $ | 236.06 | $ | 167.57 | $ | (57.98) | ||||||||||||
Net investment loss | (11.92) | (3.33) | (11.66) | (33.94) | (9.88) | (37.57) | ||||||||||||||||||
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| |||||||||||||
Increase (decrease) for the period | 90.17 | 69.29 | (13.80) | 202.12 | 157.69 | (95.55) | ||||||||||||||||||
Net asset value per Redeemable Unit, beginning of period | 1,342.02 | 954.78 | 1,276.73 | 1,230.07 | 866.38 | 1,358.48 | ||||||||||||||||||
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| |||||||||||||
Net asset value per Redeemable Unit, end of period | $ | 1,432.19 | $ | 1,024.07 | $ | 1,262.93 | $ | 1,432.19 | $ | 1,024.07 | $ | 1,262.93 | ||||||||||||
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| |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
Class A | Class Z | Class A | Class A | Class Z | Class A | |||||||||||||||||||
Ratios to Average Limited Partners’ Capital: ** | ||||||||||||||||||||||||
Net investment loss *** | (3.4) | % | (1.3) | % | (3.7) | % | (3.5) | (1.4) | % | (3.9) | % | |||||||||||||
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| |||||||||||||
Operating expenses before expenses borne by the General | ||||||||||||||||||||||||
Partner and incentive fees | 5.3 | % | 3.2 | % | 6.4 | % | 5.5 | 3.4 | % | 6.3 | % | |||||||||||||
Expenses borne by the General Partner | (0.2) | % | (0.2) | % | (1.0) | % | (0.2) | (0.2) | % | (0.9) | % | |||||||||||||
Incentive fees | - | % | - | % | - | % | - | - | % | - | % | |||||||||||||
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Operating expenses after expenses borne by the General Partner and incentive fees | 5.1 | % | 3.0 | % | 5.4 | % | 5.3 | 3.2 | % | 5.4 | % | |||||||||||||
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Total return: | ||||||||||||||||||||||||
Total return before incentive fees | 6.7 | % | 7.3 | % | (1.1) | % | 16.4 | 18.2 | % | (7.0) | % | |||||||||||||
Incentive fees | - | % | - | % | - | % | - | - | % | - | % | |||||||||||||
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Total return after incentive fees | 6.7 | % | 7.3 | % | (1.1) | % | 16.4 | 18.2 | % | (7.0) | % | |||||||||||||
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* | Net investment loss per Redeemable Unit is calculated by dividing the interest income less total expenses by the average number of Redeemable Units outstanding during the period. The net realized and unrealized gains (losses) per Redeemable Unit is a balancing amount necessary to reconcile the change in net asset value per Redeemable Unit with the other per unit information. |
** | Annualized (other than incentive fees). |
*** | Interest income less total expenses. |
The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period.
9
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
4. | Trading Activities: |
The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity interests. The Partnership’s results of trading activities are shown on the Statements of Income and Expenses.
The futures brokerage account agreements with MS&Co. give the Partnership the legal right to net unrealized gains and losses on open futures and forward contracts. The Partnership nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in the Statements of Financial Condition as the criteria under ASC 210-20,“Balance Sheet,”have been met.
Trading and transaction fees are based on the number of trades executed by the Advisor. All clearing fees paid to MS&Co. are directly charged to the Partnership.
All of the commodity interests owned by the Partnership are held for trading purposes. The monthly average number of futures contracts traded by the Partnership during the three months ended September 30, 2019 and 2018 were 2,885 and 1,286, respectively. The monthly average number of futures contracts traded by the Partnership during the nine months ended September 30, 2019 and 2018 were 3,305 and 1,327, respectively. The monthly average number of metals forward contracts traded by the Partnership during the three months ended September 30, 2019 and 2018 were 567 and 145, respectively. The monthly average number of metals forward contracts traded by the Partnership during the nine months ended September 30, 2019 and 2018 were 475 and 152, respectively. The monthly average notional values of currency forward contracts traded by the Partnership during the three months ended September 30, 2019 and 2018 were $642,832,216 and $154,752,785, respectively. The monthly average notional values of currency forward contracts traded by the Partnership during the nine months ended September 30, 2019 and 2018 were $660,522,968 and $159,450,559, 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 September 30, 2019 and December 31, 2018, respectively.
September 30, 2019 | Gross Amounts Recognized | Gross Amounts Offset in the Statements of Financial Condition | Amounts Presented in the Statements of Financial Condition | Gross Amounts Not Offset in the Statements of Financial Condition | Net Amount | |||||||||||||||||||
Financial Instruments | Cash Collateral Received/ Pledged * | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Futures | $ | 852,080 | $ | (852,080) | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Forwards | 1,956,687 | (1,622,235) | 334,452 | - | - | 334,452 | ||||||||||||||||||
|
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|
|
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|
|
|
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|
|
| |||||||||||||
Total assets | $ | 2,808,767 | $ | (2,474,315) | $ | 334,452 | $ | - | $ | - | $ | 334,452 | ||||||||||||
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| |||||||||||||
Liabilities | ||||||||||||||||||||||||
Futures | $ | (891,156) | $ | 852,080 | $ | (39,076) | $ | - | $ | - | $ | (39,076) | ||||||||||||
Forwards | (1,622,235) | 1,622,235 | - | - | - | - | ||||||||||||||||||
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|
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|
| |||||||||||||
Total liabilities | $ | (2,513,391) | $ | 2,474,315 | $ | (39,076) | $ | - | $ | - | $ | (39,076) | ||||||||||||
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| |||||||||||||
Net fair value | $ | 295,376 | * | |||||||||||||||||||||
|
|
10
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
December 31, 2018 | Gross Amounts Recognized | Gross Amounts Offset in the Statements of Financial Condition | Amounts Presented in the Statements of Financial Condition | Gross Amounts Not Offset in the Statements of Financial Condition | Net Amount | |||||||||||||||||||
Financial Instruments | Cash Collateral Received/ Pledged * | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Futures | $ | 561,881 | $ | (275,263) | $ | 286,618 | $ | - | $ | - | $ | 286,618 | ||||||||||||
Forwards | 1,333,455 | (853,932) | 479,523 | - | - | 479,523 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 1,895,336 | $ | (1,129,195) | $ | 766,141 | $ | - | $ | - | $ | 766,141 | ||||||||||||
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|
|
|
|
|
| |||||||||||||
Liabilities | ||||||||||||||||||||||||
Futures | $ | (275,263) | $ | 275,263 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Forwards | (853,932) | 853,932 | - | - | - | - | ||||||||||||||||||
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| |||||||||||||
Total liabilities | $ | (1,129,195) | $ | 1,129,195 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
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| |||||||||||||
Net fair value | $ | 766,141 | * | |||||||||||||||||||||
|
|
* | In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’snon-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. In certain instances, MS&Co. may not post collateral and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Partnership’s Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee funds may be available in the event of a default. |
11
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities for the Partnership as of September 30, 2019 and December 31, 2018, respectively.
Assets | September 30, 2019 | |||
Futures Contracts | ||||
Energy | $ | 151,258 | ||
Grains | 30,658 | |||
Indices | 228,839 | |||
Interest Rates U.S. | 13,548 | |||
Interest RatesNon-U.S. | 279,976 | |||
Livestock | 70,490 | |||
Metals | 63,540 | |||
Softs | 13,771 | |||
|
| |||
Total unrealized appreciation on open futures contracts | 852,080 | |||
|
| |||
Liabilities | ||||
Futures Contracts | ||||
Energy | (30,394) | |||
Grains | (64,197) | |||
Indices | (88,017) | |||
Interest Rates U.S. | (130,740) | |||
Interest RatesNon-U.S. | (394,929) | |||
Livestock | (42,750) | |||
Metals | (75,143) | |||
Softs | (64,986) | |||
|
| |||
Total unrealized depreciation on open futures contracts | (891,156) | |||
|
| |||
Net unrealized depreciation on open futures contracts | $ | (39,076) | * | |
|
| |||
Assets | ||||
Forward Contracts | ||||
Currencies | $ | 1,639,658 | ||
Metals | 317,029 | |||
|
| |||
Total unrealized appreciation on open forward contracts | 1,956,687 | |||
|
| |||
Liabilities | ||||
Forward Contracts | ||||
Currencies | (1,318,988) | |||
Metals | (303,247) | |||
|
| |||
Total unrealized depreciation on open forward contracts | (1,622,235) | |||
|
| |||
Net unrealized appreciation on open forward contracts | $ | 334,452 | ** | |
|
|
* | 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. |
12
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
Assets | December 31, 2018 | |||||
Futures Contracts | ||||||
Energy | $ | 63,201 | ||||
Grains | 67,071 | |||||
Indices | 67,303 | |||||
Interest Rates U.S. | 40,484 | |||||
Interest RatesNon-U.S. | 191,985 | |||||
Livestock | 30 | |||||
Metals | 23,908 | |||||
Softs | 107,899 | |||||
Total unrealized appreciation on open futures contracts | 561,881 | |||||
Liabilities | ||||||
Futures Contracts | ||||||
Energy | (83,350 | ) | ||||
Grains | (930 | ) | ||||
Indices | (67,877 | ) | ||||
Interest Rates U.S. | (112,616 | ) | ||||
Interest RatesNon-U.S. | (8,061 | ) | ||||
Livestock | (1,043 | ) | ||||
Metals | (400 | ) | ||||
Softs | (986 | ) | ||||
Total unrealized depreciation on open futures contracts | (275,263 | ) | ||||
Net unrealized appreciation on open futures contracts | $ | 286,618 | * | |||
Assets | ||||||
Forward Contracts | ||||||
Currencies | $ | 1,162,260 | ||||
Metals | 171,195 | |||||
Total unrealized appreciation on open forward contracts | 1,333,455 | |||||
Liabilities | ||||||
Forward Contracts | ||||||
Currencies | (727,182 | ) | ||||
Metals | (126,750 | ) | ||||
Total unrealized depreciation on open forward contracts | (853,932 | ) | ||||
Net unrealized appreciation on open forward contracts | $ | 479,523 | ** | |||
* | This amount is in “Net unrealized appreciation on open futures contracts” in the Partnership’s Statements of Financial Condition. |
** | This amount is in “Net unrealized appreciation on open forward contracts” in the Partnership’s Statements of Financial Condition. |
13
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2019 and 2018, respectively.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Sector | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Currencies | $ | 571,646 | $ | 108,024 | $ | (199,808) | $ | 158,726 | ||||||||
Energy | (359,241) | (51,507) | (806,982) | 497,103 | ||||||||||||
Grains | 275,381 | (78,802) | (146,016) | (392,429) | ||||||||||||
Indices | 574,526 | 151,656 | 2,499,518 | (908,695) | ||||||||||||
Interest Rates U.S. | (103,624) | 88,921 | 818,595 | 459,146 | ||||||||||||
Interest RatesNon-U.S. | 1,658,146 | (286,967) | 4,942,050 | (289,000) | ||||||||||||
Livestock | 40,638 | (46,175) | 151,390 | (130,268) | ||||||||||||
Metals | 62,463 | (64,712) | (509,993) | (523,795) | ||||||||||||
Softs | 111,144 | 138,300 | (33,659) | 210,212 | ||||||||||||
|
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|
|
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|
| |||||||||
Total | $ | 2,831,079 | * | $ | (41,262) | * | $ | 6,715,095 | * | $ | (919,000) | * | ||||
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|
|
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|
* | 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 ofnon-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 September 30, 2019 and as of December 31, 2018, the Partnership did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3).
14
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
September 30, 2019 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Futures | $ | 852,080 | $ | 852,080 | $ | - | $ | - | ||||||||
Forwards | 1,956,687 | - | 1,956,687 | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 2,808,767 | $ | 852,080 | $ | 1,956,687 | $ | - | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Futures | $ | 891,156 | $ | 891,156 | $ | - | $ | - | ||||||||
Forwards | 1,622,235 | - | 1,622,235 | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 2,513,391 | $ | 891,156 | $ | 1,622,235 | $ | - | ||||||||
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|
|
|
|
| |||||||||
December 31, 2018 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets | ||||||||||||||||
Futures | $ | 561,881 | $ | 561,881 | $ | - | $ | - | ||||||||
Forwards | 1,333,455 | - | 1,333,455 | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 1,895,336 | $ | 561,881 | $ | 1,333,455 | $ | - | ||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Futures | $ | 275,263 | $ | 275,263 | $ | - | $ | - | ||||||||
Forwards | 853,932 | - | 853,932 | - | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 1,129,195 | $ | 275,263 | $ | 853,932 | $ | - | ||||||||
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|
|
|
|
|
|
6. | Financial Instrument Risks: |
In the normal course of business, the Partnership is party to financial instruments withoff-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 orover-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 49.1% to 64.7% of the Partnership’s contracts are traded OTC.
Futures Contracts. The Partnership trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Partnership, each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership as unrealized gains or losses. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, with the exchange on which the contracts are traded. Net realized gains (losses) and net change in unrealized gains (losses) on futures contracts are included in the Partnership’s Statements of Income and Expenses.
15
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
Forward Foreign Currency Contracts. Forward foreign currency contracts are those contracts where the Partnership agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Forward foreign currency contracts are valued daily by the Partnership, and the Partnership’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Partnership’s Statements of Financial Condition. Net realized gains (losses) and net change in unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Partnership’s Statements of Income and Expenses.
London Metals Exchange Forward Contracts. Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Partnership are cash settled based on prompt dates published by the LME. Variation margin may be made or received by the Partnership each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded by the Partnership as unrealized gains or losses. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Partnership records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, with the LME. Net realized gains (losses) and net change in unrealized gains (losses) on metal contracts are included in the Partnership’s Statements of Income and Expenses.
Market risk is the potential for changes in the value of the financial instruments that are traded by the Partnership due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. The Partnership’s market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are or were traded. The Partnership is exposed to market risk equal to the value of the futures and forward contracts purchased and unlimited liability on such contracts sold short.
Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The risk of loss in the event of a counterparty default for the Partnership is typically limited to the amounts recognized in the Statements of Financial Condition and is not, for the Partnership, represented by the contract or notional amounts of the instruments. The risk of loss for the Partnership is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership has credit risk and concentration risk, as MS&Co. or an MS&Co. affiliate is the sole counterparty or broker with respect to the Partnership’s assets. Credit risk with respect to exchange-traded instruments for the Partnership is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s counterparty is an exchange or clearing organization.
The General Partner monitors and attempts to mitigate the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results withrisk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.
The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.
The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s business, these instruments may not be held to maturity.
In the ordinary course of business, the Partnership enters into contracts and agreements that contain various representations and warranties and which provide general indemnifications. The Partnership’s maximum exposure under these arrangements cannot be determined, as this could include future claims that have not yet been made against the Partnership. The Partnership considers the risk of any future obligation relating to these indemnifications to be remote.
16
Potomac Futures Fund L.P.
Notes to Financial Statements
(Unaudited)
7. | Subsequent Events: |
The General Partner evaluates events that occur after the balance sheet date but before and up until financial statements are available to be issued. The General Partner has assessed the subsequent events through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment to or disclosure in the financial statements.
17
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not have, nor does it expect to have, any capital assets. The Partnership does not engage in sales of goods or services. The Partnership’s only assets are its (i) equity in trading account, consisting of unrestricted cash, restricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts and investment in U.S. Treasury bills at fair value, if applicable, (ii) receivable from the General Partner and (iii) interest receivable. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the third quarter of 2019.
The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or option contract has increased or decreased by an amount equal to the daily limit, positions in that futures or option contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Partnership from promptly liquidating its futures or option contracts and result in restrictions on redemptions.
There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.
Other than the risks inherent in commodity futures, forwards, options, swaps and other derivatives trading and U.S. Treasury bills and money market mutual fund securities, the Partnership knows of no trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.
The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by net realized and/or unrealized gains or losses on trading and by expenses, interest income, subscriptions, redemptions of Redeemable Units and distributions of profits, if any.
For the nine months ended September 30, 2019, the Partnership’s capital increased 122.5% from $17,188,757 to $38,237,171. This increase was attributable to net income of $5,745,346, subscriptions of 16,558.7600 Class A Redeemable Units totaling $20,370,031, 311.3000 Class Z General Partner Redeemable Units totaling $269,705 and 22.3230 Class Z Limited Partner Redeemable Units totaling $19,340, which were partially offset by the redemptions of 3,971.4670 Class A Redeemable Units totaling $5,221,003 and 145.2200 Class Z General Partner Redeemable Units totaling $135,005. 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 anyoff-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. As a result, actual results could differ from these estimates. The Partnership’s significant accounting policies are described in detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of the financial statements.
The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and net changes in unrealized gains (losses) in the Statements of Income and Expenses.
18
Results of Operations
During the Partnership’s third quarter of 2019, the net asset value per Class A Redeemable Unit increased 6.7% from $1,342.02 to $1,432.19, as compared to a decrease of 1.1% in the third quarter of 2018. During the Partnership’s third quarter of 2019, the net asset value per Class Z Redeemable Unit increased 7.3% from $954.78 to $1,024.07, as compared to a decrease of 0.6% in the third quarter of 2018. The Partnership experienced a net trading gain before fees and expenses in the third quarter of 2019 of $2,831,079. Gains were primarily attributable to the Partnership’s trading of commodity futures in currencies, grains, indices,non-U.S. interest rates, livestock, metals and softs and were partially offset by losses in energy and U.S. interest rates. The Partnership experienced a net trading loss before fees and expenses in the third quarter of 2018 of $41,262. Losses were primarily attributable to the Partnership’s trading of commodity futures in energy, grains,non-U.S. interest rates, livestock and metals and were partially offset by gains in currencies, indices, U.S. interest rates and softs.
The most significant gains were achieved within the global interest rate sector during July and August from long positions innon-U.S. and U.S. fixed income futures as prices benefited from mounting global growth concerns, escalating fears over a “hard” United Kingdom departure from the European Union, and ongoing uncertainty over theUS-Chinese trade war. Within the currencies, gains were recorded during July from short positions in the euro, Swedish krona, British pound, and Norwegian krone versus the U.S. dollar as the relative value of dollar appreciated as the U.S. economy outperformed economies of other regions. Within the global stock indices, gains were recorded during July and September from long European, U.S., and Asian equity index futures positions as prices rose after major central banks became increasingly dovish. Further gains during the quarter were experienced within the agricultural sector during July and August from short positions in grains and soft commodity futures as abundant global inventories and favorable regional growing conditions pushed prices lower. Gains were also recorded within the metals complex during August from short industrial metals futures positions as prices decreased amid renewed trade hostilities between the U.S. and China. The Partnership’s overall trading gains for the quarter were partially offset by trading losses in the energy complex from crude oil and oil distillates positions as prices whipsawed amid geopolitical tensions, supportive fundamentals, and concerns for slowing global growth.
During the Partnership’s nine months ended September 30, 2019, the net asset value per Class A Redeemable Unit increased 16.4% from $1,230.07 to $1,432.19, as compared to a decrease of 7.0% in the nine months ended September 30, 2018. During the Partnership’s nine months ended September 30, 2019, the net asset value per Class Z Redeemable Unit increased 18.2% from $866.38 to $1,024.07, as compared to a decrease of 5.6% in the nine months ended September 30, 2018. The Partnership experienced a net trading gain before fees and expenses in the nine months ended September 30, 2019 of $6,715,095. Gains were primarily attributable to the Partnership’s trading of commodity futures in indices, U.S. &non-U.S. interest rates and livestock and were partially offset by losses in currencies, energy, grains, metals and softs. The Partnership experienced a net trading loss before fees and expenses in the nine months ended September 30, 2018 of $919,000. Losses were primarily attributable to the Partnership’s trading of commodity futures in grains, indices,non-U.S. interest rates, livestock and metals and were partially offset by gains in currencies, energy, U.S. interest rates and softs.
The most significant gains were achieve within the global interest rates during January, March, and the period of May through August from long positions innon-U.S. and U.S. fixed income futures as prices rose as economic concerns pushed central banks to looser monetary policies globally. Within the global stock index markets, gains were primarily recorded from January through April, as well as during June, July, and September, from long positions in U.S., European, and Asian equity index futures as positive consumer sentiment and dovish monetary policies pushed stock prices higher. A portion of the Partnership’s gains for the first nine months of the year was offset by trading losses within the energy complex recorded during January from short crude oil futures positions as sanctions on Venezuelan oil exports and OPEC’s announcement of new production cuts pushed prices higher. Additionally, losses were experienced within the energies during March, May, and the third quarter from long and short futures positions in crude oil and oil distillates as prices whipsawed amid geopolitical tensions, supportive fundamentals, and concerns for slowing global growth. Within in the metals complex, losses were incurred throughout the majority of the first nine months of the year from futures positions in industrial metals as prices fluctuated amid speculation of global growth and U.S.-China trade negotiations. Losses were experienced in the currency sector during January from short positions in the Australian and Canadian dollars versus the U.S. dollar as the prolonged partial shutdown of the U.S. Federal government pulled the U.S. dollar lower. Additional losses were incurred in currencies during June from short positions in the Norwegian krone versus the U.S. dollar as the relative value of Norwegian currency appreciated after the country’s central bank increased interest rates. Further losses in this sector were experienced during March and April from positions in the British pound and Canadian dollar. Within the agricultural complex, losses were incurred during January from short positions in sugar, coffee, and wheat futures as a weaker U.S. dollar and tightening global commodity supplies buoyed prices. Additional losses were incurred in the agriculturals during May and June from short futures positions in the grain markets as prices rose after excessive rains in the U.S. Midwest reduced yield projections.
19
Commodity futures markets are highly volatile. The potential for broad and rapid price fluctuations and rapid inflation increases the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other factors, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership expects to increase capital through operations.
Effective April 1, 2017, interest income is earned on 100% of the average daily equity maintained in cash in the Partnership’s brokerage account at MS&Co. during each month at a rate equal to the monthly average of the4-week U.S. Treasury bill discount rate. For the avoidance of doubt, the Partnership will not receive interest on amounts in the futures brokerage account that are committed to margin. During the reporting period, any interest earned on the Partnership’s account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership. Interest income earned directly for the three and nine months ended September 30, 2019 increased by $106,432 and $341,206, respectively, as compared to the corresponding periods in 2018. The increase in interest income is primarily due to higher interest rates during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership’s accounts, (2) the amount of Treasury bills and/or money market mutual fund securities held by the Partnership, and (3) interest rates over which the Partnership and MS&Co. have no control.
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 and nine months ended September 30, 2019 increased by $38,902 and $120,388, respectively, as compared to the corresponding periods in 2018. The increase in clearing fees is primarily due to an increase in the number of direct trades made by the Partnership during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value of Class A Redeemable Units as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and nine months ended September 30, 2019 increased by $102,901 and $267,843, respectively, as compared to the corresponding periods in 2018. The increase in ongoing selling agent fees is due to an increase in average net assets attributable to Class A Redeemable Units during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
Management fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. Management fees for the three and nine months ended September 30, 2019 increased by $77,246 and $202,323, respectively, as compared to the corresponding periods in 2018. The increase in management fees is due to an increase in average net assets per Class during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership including, among other factors, (i) selecting, appointing and terminating the Partnership’s commodity trading advisor and (ii) monitoring the activities of the commodity trading advisor. These fees are calculated as a percentage of the Partnership’s adjusted net assets per Class as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in monthly net asset values. General Partner fees for the three and nine months ended September 30, 2019 increased by $41,669 and $106,303, respectively, as compared to the corresponding periods in 2018. The increase in General Partner fees is due to an increase in average net assets per Class during the three and nine months ended September 30, 2019 as compared to the corresponding periods in 2018.
Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. There were no incentive fees earned for the three and nine months ended September 30, 2019 and 2018. The Advisor will not be paid incentive fees until the Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.
In allocating substantially all of the assets of the Partnership to the Advisor, the General Partner considers, among other factors, the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.
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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 ornon-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 in95%-99% of anyone-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-termone-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 September 30, 2019 and December 31, 2018, and the highest, lowest and average value at any point during the three months ended September 30, 2019 and during the twelve months ended December 31, 2018. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form10-K for the year ended December 31, 2018.
21
As of September 30, 2019, the Partnership’s total capitalization was $38,237,171. The Partnership’s Value at Risk as of September 30, 2019 was as follows:
September 30, 2019 | ||||||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk * | |||||||||||||||
Currencies | $ | 5,921,449 | 15.49 | % | $ | 6,649,446 | $ | 3,989,903 | $ | 5,450,299 | ||||||||||
Energy | 339,151 | 0.89 | 347,589 | 55,987 | 160,720 | |||||||||||||||
Grains | 183,058 | 0.48 | 358,199 | 149,530 | 250,584 | |||||||||||||||
Indices | 1,711,285 | 4.48 | 1,804,452 | 1,089,559 | 1,513,048 | |||||||||||||||
Interest Rates U.S. | 110,417 | 0.29 | 392,683 | 80,372 | 178,241 | |||||||||||||||
Interest RatesNon-U.S. | 785,131 | 2.05 | 1,684,556 | 689,097 | 1,182,950 | |||||||||||||||
Livestock | 55,277 | 0.14 | 58,520 | 24,005 | 44,714 | |||||||||||||||
Metals | 545,578 | 1.43 | 577,207 | 229,927 | 379,509 | |||||||||||||||
Softs | 185,979 | 0.49 | 262,222 | 161,108 | 223,612 | |||||||||||||||
|
|
|
| |||||||||||||||||
Total | $ | 9,837,325 | 25.74 | % | ||||||||||||||||
|
|
|
|
* | Average of daily Values at Risk. |
As of December 31, 2018, the Partnership’s total capitalization was $17,188,757. The Partnership’s Value at Risk as of December 31, 2018 was as follows:
December 31, 2018 | ||||||||||||||||||||
Twelve Months Ended December 31, 2018 | ||||||||||||||||||||
Market Sector | Value at Risk | % of Total Capitalization | High Value at Risk | Low Value at Risk | Average Value at Risk * | |||||||||||||||
Currencies | $ | 1,489,373 | 8.66 | % | $ | 2,307,169 | $ | 396,599 | $ | 1,356,392 | ||||||||||
Energy | 107,299 | 0.62 | 249,205 | 60,926 | 153,032 | |||||||||||||||
Grains | 181,721 | 1.06 | 256,905 | 33,535 | 151,369 | |||||||||||||||
Indices | 380,758 | 2.22 | 1,522,694 | 208,902 | 656,476 | |||||||||||||||
Interest Rates U.S. | 158,080 | 0.92 | 295,779 | 68,958 | 202,281 | |||||||||||||||
Interest RatesNon-U.S. | 530,523 | 3.09 | 756,446 | 116,507 | 450,067 | |||||||||||||||
Livestock | 6,050 | 0.04 | 80,520 | 3,300 | 26,124 | |||||||||||||||
Metals | 190,036 | 1.11 | 525,880 | 89,741 | 266,212 | |||||||||||||||
Softs | 142,901 | 0.83 | 199,734 | 32,960 | 116,021 | |||||||||||||||
|
|
|
| |||||||||||||||||
Total | $ | 3,186,741 | 18.55 | % | ||||||||||||||||
|
|
|
|
* | Annual average ofmonth-end Values at Risk. |
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Item 4. Controls and Procedures.
The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.
The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.
The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2019 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.
The Partnership’sinternal 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’sinternal control over financial reporting process during the fiscal quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.
On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC (“MS&Co.”).
MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the 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 SEC10-K filings for 2018, 2017, 2016, 2015 and 2014. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website atwww.morganstanley.com. We refer you to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2018 Audited Financial Statement.
In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.
MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.
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.
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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 Rule10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on July 12, 2016 and June 28, 2016, respectively, without any findings of fraud. Pursuant to the settlements, MS&Co. was required to pay a $750,000 penalty to the CBOE (for which MS&Co. and an individual were jointly and severally liable) and a $400,000 penalty to the CFE (for which MS&Co. and an individual were jointly and severally liable) and $152,664 in disgorgement.
On June 18, 2015, MS&Co. entered into a settlement with the SEC and paid a fine of $500,000 as part of the Municipalities Continuing Disclosure 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 Rule15c2-12 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,
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the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.
On December 20, 2016, MS&Co. consented to and became the subject of an order by the SEC in connection with allegations that MS&Co. willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules15c3-3(e),17a-5(a), and17a-5(d) thereunder, by inaccurately calculating its Reserve Account requirement under Rule15c3-3 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. fornon-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., styledChinaDevelopment Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK2006-1 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 STACK2006-1 CDO to CDIB, and that MS&Co, knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. On June 27, 2018, MS&Co. filed a motion for summary judgment and spoliation sanctions against CDIB. On December 21, 2018, the court denied MS&Co.’s motion for summary judgment and granted in part MS&Co.’s motion for sanctions relating to the spoliation of evidence. On January 18, 2019, CDIB filed a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, MS&Co. filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. Based on currently available information, MS&Co. believes it could incur a loss in this action of up to approximately $240 million pluspre- 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, styledFederal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended
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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 September 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., pluspre- 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 inIKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $133 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At September 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, pluspre- 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 styledIowa Public Employees’ Retirement System et al. v. Bank of America Corporation et al. Plaintiffs allege, inter alia, that MS&Co., together with a number of other financial institution defendants, violated U.S. antitrust laws and New York state law in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for securities lending. The class action complaint was filed on behalf of a purported class of borrowers and lenders who entered into stock loan transactions with the defendants. The class action complaint seeks, among other relief, certification of the class of plaintiffs and treble
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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 styledAlaska 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 styledIn 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, styledFederal 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 raised 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 styledFederal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against MS&Co.
On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styledFederal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raised claims under both the federal securities laws and California law and sought, among other
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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”), styledGe Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, filed a second amended complaint, which asserted common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement to settle the litigation, which received final court approval on July 2, 2015.
On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the Supreme Court of NY, styledAllstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, and alleged that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to the plaintiffs by MS&Co. was approximately $104 million. The complaint raised common law claims of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation and sought, among other things, compensatory and/or recessionary damages associated with the plaintiffs’ purchases of such certificates. On January 16, 2015, the parties reached an agreement to settle the litigation.
On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styledWestern 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, styledThe Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $1.073 billion. The amended complaint raised claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.
In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage
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pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.
On November 4, 2011, the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Franklin Bank S.S.B, filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styledFederal 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, styledBank 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 inNational Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al.filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.
On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styledCommonwealth 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 styledFederal 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
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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 inDeutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $634 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and 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 styledCalifornia 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 seeks treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached an agreement to settle the litigation.
Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.
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Item 1A.Risk Factors.
There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors.” in the Partnership’s Annual Report on Form10-K for the fiscal year ended December 31, 2018 and under Part II, Item 1A. “Risk Factors.” in the Partnership’s Quarterly Report of Form10-Q for the quarters ended March 31 and June 30, 2019.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
For the three months ended September 30, 2019, 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 | Class A (b) Average | (c) Total Number of Redeemable Units Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or that May Yet Be Purchased | ||||||||
July 1, 2019 - July 31, 2019 | 782.1860 | $ | 1,409.05 | N/A | N/A | |||||||
August 1, 2019 - August 31, 2019 | 209.8350 | $ | 1,469.04 | N/A | N/A | |||||||
September 1, 2019 - September 30, 2019 | 212.3170 | $ | 1,432.19 | N/A | N/A | |||||||
1,204.3380 | $ | 1,423.58 |
* | Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners. |
** | Redemptions of Redeemable Units are effected as of the end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions. |
Item 3. Defaults Upon Senior Securities. —None.
Item 4. Mine Safety Disclosures. —Not Applicable.
Item 5. Other Information. —None.
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Item 6.Exhibits.
31.1 | Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed herewith). | |
31.2 | Rule13a-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: November 7, 2019 | ||
By: | /s/ Steven Ross | |
Steven Ross | ||
Chief Financial Officer and Director | ||
(Principal Accounting Officer) | ||
Date: November 7, 2019 |
The General Partner which signed the above is the only party authorized to act for the registrant. The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.
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