ITEM 1: BUSINESS
(a)
General Development of Business
Altegris Winton Futures Fund, L.P. (the “Partnership”) is a limited partnership organized under the Colorado Uniform Limited Partnership Act in March 1999. The Partnership’s business is the speculative trading and investment in international futures, options and forward markets (“Commodity Interests”). The Partnership commenced its trading and investment operations in November 1999. Under the Partnership’s First Amended Agreement of Limited Partnership (the “Limited Partnership Agreement”), Altegris Portfolio Management, Inc. (d/b/a Altegris Funds), an Arkansas corporation (“Altegris Funds” or the “General Partner”), serves as general partner of the Partnership and has sole responsibility for management and administration of all aspects of the Partnership’s business. Investors purchasing limited partnership interests (the “Interests”) in the Partnership (“Limited Partners” and together with the General Partner, “Partners”) have no rights to participate in the management of the Partnership.
Altegris Funds is registered with the Commodity Futures Trading Commission (“CFTC”) as a Commodity Pool Operator (“CPO”), and is a member of National Futures Association (“NFA”). Winton Capital Management Limited, a United Kingdom Company, acts as the Partnership’s trading advisor (“Advisor”). The Advisor is registered with the CFTC as a Commodity Trading Advisor and is authorized and regulated by the United Kingdom’s Financial Services Authority. Effective as of December 31, 2010, Altegris Funds became a wholly-owned subsidiary of Genworth Financial, Inc. (“Genworth”). Genworth became a principal of Altegris Funds and Altegris Futures, L.L.C. (“Altegris Futures”), an affiliate of the General Partner, in January 2011. On October 1, 2012, Genworth undertook an internal reorganization whereby Genworth contributed all of the outstanding capital stock of Altegris Funds and Altegris Futures to Altegris Holdings, Inc., a newly-formed indirect holding company subsidiary of Genworth, and contributed all of the outstanding capital stock of Altegris Holdings, Inc. to AssetMark Holdings, Inc., a newly-formed direct subsidiary of Genworth. Altegris Holdings, Inc. and AssetMark Holdings, Inc. each became principals of Altegris Funds and Altegris Futures on October 1, 2012.
Altegris Investments, Inc. (“Altegris”), an affiliate of the General Partner, serves as a selling agent of the Interests and acted as the Partnership’s introducing broker until January 1, 2011, when Altegris Futures replaced Altegris as the Partnership’s introducing broker (“Introducing Broker”). Altegris Futures is registered with the CFTC as an Introducing Broker.
The Partnership’s term will end upon the first to occur of the following: December 31, 2035; receipt by the General Partner of an election to dissolve the Partnership at a specified time by Limited Partners owning more than 50% of the Interests then outstanding, notice of which is sent by registered mail to the General Partner not less than ninety (90) days prior to the effective date of such dissolution; withdrawal (including withdrawal after suspension of trading), admitted or court decreed insolvency or dissolution of the General Partner; termination of the Partnership pursuant to the terms of the Limited Partnership Agreement; or any event that makes it unlawful for the existence of the Partnership to be continued or requiring termination of the Partnership.
The Partnership is not required to be, and is not, registered under the Investment Company Act of 1940, as amended.
As of February 28, 2013, the aggregate net asset value of the Interests in the Partnership before redemptions was $698,797,931. The Partnership operates on a calendar fiscal year and has no subsidiaries.
The Partnership offers three “classes” of Interests: Class A, Class B and Institutional Interests (each, a “Class of Interest”). The Classes of Interests differ from each other only in the fees that they pay and the applicable investment minimums.
(b)
Financial Information About Segments
The Partnership’s business constitutes only one segment for financial reporting purposes - i.e., a speculative “commodity pool.” The Partnership does not engage in sales of goods or services. Financial information regarding the Partnership’s business is set forth in the Partnership’s financial statements, included herewith.
(c)
Narrative Description of Business
The Partnership is designed to produce long-term capital appreciation through growth, and not current income. Altegris Funds has selected the Advisor to trade one of the Advisor’s proprietary trading models, the Winton Diversified Program (the “Program”), on behalf of the Partnership. The Advisor currently has the authority to trade the Program on behalf of the Partnership in all the easily accessible and liquid commodity interests (comprising international futures, options and forward markets) that it practically can, which currently consists mainly of commodity interests that are futures, options and forward contracts and certain OTC products, such as swaps in the following areas: stock indices, bonds, short term interest rates, currencies, precious and base metals, grains, livestock, energy and agricultural products.
The Advisor’s investment technique in trading the Program consists of trading a portfolio of approximately 120 diversified, highly liquid financial instruments traded across numerous futures markets, and may also include certain OTC instruments and government securities, employing a computerized, technical, principally trend-following trading system. This system tracks the daily price movements and other data from these markets around the world, and carries out certain computations to determine each day how long or short the portfolio should be to maximize profit within a certain range of risk. If rising prices are anticipated, a long position will be established; a short position will be established if prices are expected to fall.
The trading methods applied by the Advisor to trade the Program on behalf of the Partnership are proprietary, complex and confidential. As a result, the following explanation is of necessity general in nature and not intended to be exhaustive. The Advisor plans to continue the research and development of its trading methodology and, therefore, retains the right to revise any methods or strategy, including the technical trading factors used, the commodity interests traded and/or the money management principles applied.
The Program traded by the Advisor pursues a technical trend-following system. Technical analysis refers to analysis based on data intrinsic to a market, such as price and volume. This is to be contrasted with fundamental analysis which relies on factors external to a market, such as supply and demand. The Program uses no fundamental factors.
A trend-following system is one that attempts to take advantage of the observable tendency of the markets to trend (that is, to move from one price point to another, either higher or lower over a period of time), and to tend to make exaggerated movements in both upward and downward directions as a result of such trends. These exaggerated movements are largely explained as a result of the influence of crowd psychology or the herd instinct, amongst market participants.
The Advisor developed the Program by relating the probability of the size and direction of future price movements with certain indicators derived from past price movements which characterize the degree of trending of each market at any time.
The Program follows a primarily non-discretionary system. This means that trading signals are automatically generated by its models and, except in extreme situations, are followed to the letter. The Advisor has found that the absence of discretion promotes greater consistency in performance and lessens the opportunity for less reliable anecdotal evidence and personal judgment to influence decision-making. In unusual market situations, the Advisor reserves the right to deviate from its automatic system.
The Advisor will select the type of order to be used in executing each trade on behalf of the Partnership and may use any type of order permitted by the exchange on which the order is placed. The Advisor may place individual orders for each account it trades, or a block order for all accounts it trades, in which the same commodity interest is being cleared through the same clearing broker. In the latter instance, the Advisor will allocate trades to individual accounts using a proprietary algorithm. The aim of this algorithm is to achieve an average price for transactions as close as mathematically possible for each account. This takes the form of an optimization process where the objective is to minimize the variation in the average traded price for each account. On occasion, it may direct the clearing broker for the accounts to employ a neutral order allocation system to assign trades. Partial fills will be allocated in proportion to account size.
The trading strategy and account management principles of the Program described above are factors upon which the Advisor will base its trading decisions. Such principles may be revised from time to time by the Advisor as it deems advisable or necessary. Accordingly, no assurance is given that all of these factors will be considered with respect to every trade or recommendation made on behalf of the Partnership or that consideration of any of these factors in a particular situation will lessen the risk of loss or increase the potential for profits.
It is expected that between 5% and 50% of the Partnership’s assets generally will be held as initial margin or option premiums (in cash or United States (“U.S.”) Treasury Department (“Treasury”) securities) in the Partnership’s brokerage accounts at its clearing broker, Newedge USA, LLC (“Newedge USA”), a futures commission merchant (“FCM”), and/or Newedge Alternative Strategies, Inc. (“NAST”) (which until November 2012 executed spot and other over-the-counter foreign exchange transactions as a counterparty to the Partnership from time to time), and available for trading by the Advisor in Commodity Interests on behalf of the Partnership. Interest on Partnership assets held at Newedge USA in cash or Treasury securities will be credited to the Partnership as described under “Charges.” Depending on market factors, the amount of margin or option premiums held at Newedge USA could change significantly, and all of the Partnership’s assets are available for use as margin. The Partnership may also retain other brokers and/or dealers from time to time to clear or execute a portion of Partnership trades made by the Advisor.
With respect to Partnership assets not held at Newedge USA or NAST as described above, but deposited with JPMorgan Chase Bank, N.A. (the “Custodian”), the portion not held in checking, money market or other bank accounts (and used to pay Partnership operating expenses) will be invested in liquid, high-quality short-term securities at the direction of the Custodian or its affiliate J.P. Morgan Investment Management Inc. (“JPMIM”). The Partnership’s custody and investment management agreement with the Custodian permits the Custodian to invest in U.S. government and agency securities, other securities or instruments guaranteed by the U.S. government or its agencies, CDs, time deposits, banker’s acceptances and commercial paper - subject in each case to specific diversification, credit quality and maturity limitations. The Custodian may use sub-advisers to attempt to increase yield enhancement. The General Partner may direct that a portion of Partnership assets be deposited with other custodians and retain other sub-advisers for the purpose of attempting to increase yield enhancement via other cash management arrangements.
The percentage of the Partnership’s assets deposited with these firms is also subject to change in the General Partner’s sole discretion. The Partnership’s assets will not be commingled with the assets of any other person. Depositing the Partnership’s assets with banks or Newedge USA, or other clearing brokers, as segregated funds is not commingling for these purposes.
The Partnership pays all of its ongoing liabilities, expenses and costs. Altegris Funds receives a management fee of 0.104% of the prior month-end net asset value, before deduction for any accrued incentive fees related to the current quarter (the “management fee net asset value”), of all Class A Interests (1.25% per annum), 0.104% of the prior month-end management fee net asset value of all Class B Interests (1.25% per annum) and 0.0625% of the prior month-end management fee net asset value of all Institutional Interests (0.75% per annum). The Advisor receives a management fee of 0.083% of the management fee net asset value of the month-end capital account balances of all Interests (1.0% per annum) and 20% of quarterly trading profits applicable to each Class of Interest.
Each selling agent selling Class A Interests receives 0.166% of the month-end net asset value of the Partnership apportioned to each Class A Interest sold by such selling agent (2% per annum) and may elect to receive 0.0417% of the month-end net asset value apportioned to any Institutional Interest sold by such selling (0.50% per annum).
Newedge USA and/or NAST paid during 2012 and will pay from and after January 1, 2013 to Altegris Futures a portion of the brokerage commissions and transaction fees received from the Partnership as well as a portion of the interest income received on the Partnership’s assets. Monthly brokerage charges equal to the greater of (A) actual commissions of $9.75 per round-turn (higher for certain exchanges or commodities) multiplied by number of round-turn trades, which amount includes other transaction costs; or (B) an amount equal to 0.125% of the management fee net asset value of all Interest holders’ month-end capital account balances (1.50% annually). If actual monthly commissions and transaction costs in (A) above are less than the amount in (B) above, the Partnership will pay the difference to the Introducing Broker as payment for brokerage-related services. In any
month when the amount in (A) is greater than the amount in (B) above, the Partnership pays only the amount described in (A) above.
The Partnership generally pays its operating expenses as they are incurred. A fixed administrative fee is charged to Class A and Class B Interests and paid to Altegris Funds equal to 0.0275% of the management fee net asset value of the month-end capital account balance of all such Class A and Class B Interests (0.333% per annum).
(d)
Regulation
The CFTC has delegated to NFA responsibility for the registration of “commodity trading advisors,” “commodity pool operators,” “futures commission merchants,” “introducing brokers,” “swap dealers”, “major swap participants” and, in most cases, their respective associated persons, as well as “floor brokers” and “floor traders.” The Commodity Exchange Act requires commodity pool operators such as Altegris Funds, commodity trading advisors such as the Advisor and commodity brokers or FCMs such as Newedge USA and introducing brokers such as Altegris Futures to be registered and to comply with various reporting and record keeping requirements. CFTC regulations also require FCMs and certain introducing brokers to maintain a minimum level of net capital. In addition, the CFTC and certain commodities exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short speculative positions that any person may hold or control in any particular futures or options contracts traded on U.S. commodities exchanges. Similar position limits may in the future be put in place with respect to swaps that are exchange-traded or are economically equivalent to exchange-traded swaps or futures contracts. All accounts owned or managed by the Advisor will be combined for position limit purposes. The Advisor could be required to liquidate positions held for the Partnership in order to comply with such limits. Any such liquidation could result in substantial costs to the Partnership. In addition, many futures exchanges impose limits beyond which the price of a futures contract may not trade during the course of a trading day, and there is a potential for a futures contract to hit its daily price limit for several days in a row, making it impossible for the Advisor to liquidate a position and thereby experiencing a dramatic loss. Certain deliverable currency forward contracts are subject to limited regulation in the United States, including reporting and recordkeeping requirements.
In addition to the registration requirements described above, the CFTC and certain commodity exchanges have established limits on the maximum net long or net short position which any person may hold or control in particular commodities. Most exchanges also limit the changes in futures contract prices that may occur during a single trading day. The CFTC may in the future also implement position limits for certain exempt commodity contracts, including metals and energy contracts, with respect to futures, options on futures, and economically equivalent swaps. Position limits in spot months are proposed to be 25% of the official estimated deliverable supply of the underlying commodity and in a non-spot month a percentage of the average aggregate 12-month rolling open interest in all months (swaps and futures) for each contract. If such position limits are adopted, they could materially affect the Partnership’s trading strategy.
Deliverable currency forward contracts are currently subject to only limited regulation in the United States. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) was enacted in July 2010. The Reform Act includes provisions that comprehensively regulate the over-the-counter derivatives markets for the first time. The Reform Act mandates that a substantial portion of over-the-counter derivatives must be executed in regulated markets and submitted for clearing to regulated clearinghouses. The mandates imposed by the Reform Act may result in the Partnership bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees with respect to any swaps entered into by the Partnership.
The Partnership has no employees.
Financial Information About Geographic Areas
The Partnership has no operations in foreign countries although it trades on foreign exchanges and other non-U.S. markets. The Partnership does not engage in sales of goods or services.
ITEM 1A:
ITEM 1A: RISK FACTORS
Set forth below are the principal risks associated with an investment in the Partnership.
Recent Unprecedented Disruption and Stress in Global Markets May Affect Partnership Returns
The global financial markets are currently undergoing a period of unprecedented disruption and stress. Markets previously thought to be uncorrelated have been shown to be correlated, credit markets have in some cases ceased functioning, many markets have experienced record levels of volatility and governments have intervened in extraordinary and unpredictable ways, at times on an emergency basis, to the detriment of certain market participants. It is impossible to predict what ongoing impact these events will have on the Partnership and the Advisor. There can be no assurance that the Partnership will be profitable in this market environment, or that it will avoid substantial (or total) losses.
Partnership Performance is Dependant on General Economic Conditions, which the Advisor has no Ability to Control
The success of any investment activity is affected by general economic conditions that affect the level and volatility of prices as well as the liquidity of the markets. From time to time, the economic viability of an entire strategy may deteriorate, due to general economic events that disrupt the source of profits that the strategy seeks to exploit. There may be certain general market conditions in which the investment program pursued by the Advisor is unlikely to be profitable, and the Advisor has no ability to control or predict such market conditions.
Commodity Interests Trading Is Speculative and May Affect Partnership Performance
Commodity Interest prices are highly volatile. Price movements for futures contracts, for example, which may fluctuate substantially during a short period of time, are influenced by numerous factors that affect the commodities markets, including, but not limited to: changing supply and demand relationships; government programs and policies; national and international political and economic events and changes in interest rates.
Commodity Interests Trading Is Highly Leveraged and May Affect Partnership Performance
The low margin deposits normally required in trading Commodity Interests permit an extremely high degree of leverage. Accordingly, a relatively small price movement in a Commodity Interest may result in an immediate and substantial loss to the investor. Like other leveraged investments, any Commodity Interest trade may result in losses in excess of the amount invested. Although the Partnership may lose more than its initial margin on a trade, the Partnership, and not you personally, will be subject to margin calls.
Commodity Interests Trading May Be Illiquid and May Affect Partnership Liquidity
Most U.S. commodity futures exchanges impose daily limits regulating the maximum amount above or below the previous day’s settlement price which a futures contract price may fluctuate during a single day. During a single trading day no trades may be executed at prices beyond the daily limit. Once the price of a particular futures contract has increased or decreased to the limit point, it may be difficult, costly or impossible to liquidate a position. Futures prices in particular contracts have occasionally moved the daily limit for several consecutive days with little or no trading. If this occurs, the Partnership might be prevented from promptly liquidating unfavorable positions which could result in substantial losses. Those losses could significantly exceed the margin initially committed to the trades involved. In addition, even if prices have not moved the daily limit, or if there are no limits for the contracts traded by the Partnership, the Partnership may not be able to execute trades at favorable prices if little trading in the contracts is taking place. It is also possible that an exchange or the CFTC may suspend trading in a particular contract, order immediate settlement of a contract or order that trading to the liquidation of open positions only.
Trading Decisions Based on Technical Analysis May Affect Partnership Performance
The Advisor uses trading programs that use “technical” factors in identifying price moves. The success of technical analysis depends upon the occurrence in the future of price movements. Technical systems will not be profitable and may in fact produce losses if there are no market moves of the kind the system seeks to follow. Any factor that would make it more difficult to execute the trades identified, such as a reduction of liquidity, also would reduce profitability. There is no assurance that the Advisor’s trading systems will generate profits under all or any market conditions.
The Similarity of Commodity Trading Systems May Limit Performance of the Partnership
Commodity trading systems which use signals like the Advisor’s are not new. If many traders follow similar systems, these systems may generate similar buy and sell orders at the same time. Depending on the liquidity of a market, this could cause difficulty in executing orders. The General Partner believes that although there has been an increase in the number of trading systems in recent years, there also has been an increase in the overall trading volume and liquidity in the futures markets.
Reliance on Key Personnel Could Adversely Affect the Advisor and the Partnership
The Advisor has exclusive responsibility for trading Commodity Interests for the Partnership. The Advisor depends on the services of one or two key persons. If they cannot or will not provide those services, it could adversely affect the Advisor’s ability to trade for the Partnership. If this occurs, the General Partner may terminate the contract.
There are No Assurances of the Advisor's Continued Services to the Partnership
Either the Advisor or the Partnership can terminate the advisory contract on written notice.
Any Changes in Trading Strategies May Adversely Affect Partnership Performance
The Advisor can make any changes in its trading strategies if it believes that they will be in the Partnership’s best interests. A change in Commodity Interests traded is not a change in trading strategy.
There are Possible Negative Effects of Speculative Position Limits and Accountability Levels
The CFTC and U.S. exchanges have established speculative position limits and accountability levels. Position limits control the number of net long or net short speculative futures or option (on futures) positions any person may hold or control in futures or option contracts traded on U.S. exchanges. Position accountability levels are position levels established by an exchange that, if reached by a person, cause such person to be subject to instructions by such exchange to reduce or not increase such position. Most trading advisors control the commodity trading of other accounts. All positions and accounts owned or controlled by the Advisor and its principals are combined with the Partnership’s positions established by it for position limit and accountability level purposes. In order to comply with position limits or exchange limitations arising out of having positions subject to accountability levels, it is possible that the Advisor will have to modify its trading instructions, and that positions held by the Partnership will have to be liquidated. That could have a negative effect on the Partnership’s profitability. In addition, all commodity accounts of the General Partner and its affiliates may also be combined with the Partnership for position limit and accountability level purposes.
An Increase in Amount of Funds Managed by the Advisor May Affect Partnership Performance
If the Advisor manages more money in the future, including money raised in this offering, such additional funds could affect its performance or trading strategies. There is no guarantee that the Partnership’s investment results will be similar to the Advisor’s past performance.
Trading in Options May Result in Significant Losses for the Partnership
Part of the Partnership’s trading may be in options and options on futures contracts. Although successful commodity options trading and futures trading require many of the same skills, the risks involved are somewhat different. For example, if the Partnership buys an option (either to sell or purchase a contract), it will pay a “premium” representing the market value of the option. Unless it becomes profitable to exercise or offset the option before it expires, the Partnership will lose the entire amount of the premium. On the other hand, if the Partnership sells an option (either to sell or purchase a futures contract), its broker credits the premium, but the Partnership must deposit margin in case the option is exercised. Traders who sell options are subject to the entire loss that may occur in the underlying futures position (less any premium received). Commodity options trading on exchanges is regulated by both the CFTC and those exchanges.
Changes in the Number of Available Futures Contracts and Related Options May Reduce Partnership Performance
U.S. and foreign exchanges have established new futures and options contracts in the past few years. This trend could continue. The Advisor’s trading strategy might not be successful trading those new contracts.
Competition for Trades with Other Clients of the Advisor May Limit Partnership Performance
The Advisor manages other accounts. This increases the competition for the same trades which the Partnership makes. The Advisor may manage other accounts that pay fees that are different than those the Partnership pays. Therefore, it has a potential conflict of interest. There is no assurance that the Partnership’s trading will generate the same results as any other accounts the Advisor manages.
Failure of Clearing Brokers, Counterparties, Banks, Custodians and other Financial Firms May Subject the Partnership to Significant Losses
Commodity brokers must maintain the Partnership’s assets (other than assets used to trade foreign futures or options on foreign markets) in a segregated account. If Newedge USA goes bankrupt, the Partnership could lose money as it may only be able to recover a pro rata share of the property available for distribution to all of Newedge USA’s customers. In addition, even if Newedge USA adequately segregates the Partnership’s assets, the Partnership may still be subject to risk of loss of funds on deposit with Newedge USA should another customer of Newedge USA fail to satisfy deficiencies in such other customer’s account. Similarly, assets in Partnership accounts at NAST, an unregulated entity, are not held in segregation and are subject to the risk of loss should that institution fail.
Other institutions will have custody of the assets of the Partnership, including the Custodian and various other banks or financial institutions whose services are utilized by the Partnership. Such institutions may encounter financial difficulties that impair the Partnership’s operating capabilities or capital position. The General Partner will attempt to limit the Partnership’s deposits and transactions to only well-capitalized institutions in an effort to mitigate such risks, but there can be no assurance that even a well-capitalized, major institution will not become bankrupt or otherwise fail.
Past Results of the Partnership Are Not Necessarily Indicative of Future Performance
Although some of the Advisor’s client accounts have been profitable in the past, you should take seriously the required CFTC and the NFA warning that past results are not necessarily indicative of future performance, and an investment in the Partnership is speculative and involves a substantial risk of loss.
FOREIGN INSTRUMENTS
Trading on Foreign Exchanges and Currency Exchange Rate Fluctuations May Reduce Partnership Performance
The Partnership trades on foreign exchanges and other non-U.S. markets. Neither existing CFTC regulations nor regulations of any other U.S. governmental agency apply to transactions on foreign markets. The Partnership is at risk for fluctuations in the exchange rate between the currencies in which it trades and U.S. dollars. It also is possible that exchange controls could be imposed in the future. There is no restriction on how much of the Partnership’s trading might be on foreign markets. Although trading on behalf of the Partnership may occur on foreign exchanges or in non-U.S. markets, assets of the Partnership will not be held in custody outside of the U.S.
Forward and Cash Trading May Increase Volatility and Reduce Partnership Performance
The Partnership may trade in spot and forward contracts on currencies. For this purpose, the Partnership will contract with or through Newedge USA to make or take future delivery of a particular currency. Newedge USA or its affiliates may extend the Partnership a credit line to enable it to engage in such trading. The Partnership may also trade options on currencies. Although the currency market is not believed to be necessarily more volatile than the market in other commodities, there is less protection against defaults in the forward trading of currencies because such contracts are not effected on or through an exchange or clearinghouse. Trading in forward currencies and over-the-counter derivatives, including swaps and options, among sophisticated market participants is not generally regulated by any regulatory body. Therefore, with respect to this trading, the Partnership is not afforded the protections provided by trading on regulated exchanges, including segregation of funds. In any principal contract, the Partnership must rely on the creditworthiness of its counterparty.
The trading of over-the-counter instruments, subjects the Partnership to a variety of risks including: 1) counterparty risk; 2) basis risk; 3) interest rate risk; 4) settlement risk; 5) legal risk; and 6) operational risk. Counterparty risk is the risk that the Partnership’s counterparties might default on their obligation to pay or perform generally on their obligations. The over-the-counter markets and some foreign markets are “principals’ markets.” That means that performance of the contract is the responsibility only of the individual firm or member on the other side of the trade and not any exchange or clearing corporation. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Partnership has concentrated its transactions with a single or small group of counterparties. Basis risk is the risk attributable to the movements in the spread between the derivative contract price and the future price of the underlying instrument. Interest rate risk is the general risk associated with movements in interest rates. Settlement risk is the risk that a settlement in a transfer system does not take place as expected. Legal risk is the risk that a transaction proves unenforceable in law or because it has been inadequately documented. Operational risk is the risk of unexpected losses arising from deficiencies in a firm’s management information, support and control systems and procedures. Transactions in over-the-counter derivatives may involve other risks as well, as there is no exchange market on which to close out an open position. It may be impossible to liquidate an existing position, to assess the value of a position or to assess the exposure to risk.
Exchange for Physicals May Increase Counter-Party Credit Risk for the Partnership
The Advisor may exchange a cash, forward or spot market position outside of regular trading hours for a comparable futures position. Such transactions are subject to counterparty creditworthiness risk. The CFTC has permitted the futures exchanges to expand the types of over-the-counter positions that can be part of an exchange for physicals position.
LIMITED PARTNERSHIP ISSUES
Substantial Charges to Partnership May Limit Returns to Limited Partners
The Partnership pays substantial fees and charges. As a result, the Partnership must make substantial profits for your Interest to increase in value. You should carefully review the break-even analysis included in this Offering Memorandum before deciding to invest.
Potential Cross Liability May Increase Exposure to Risks for the Partnership
The Partnership offers Class A, Class B and Institutional Interests. The only difference between the Interests is the investment minimum and fees. Capital contributions by a single subscriber for a Class of Interest upon acceptance of the subscriber as a Limited Partner will represent a single Interest in the Partnership for that subscriber’s respective Class of Interest. An Interest in any Class reflects a Partner’s percentage of the Partnership’s net assets with respect to the Class of Interest owned by the Partner. Interests are not issued in certificate form. Although separate Classes of Interests are offered, the proceeds from the sale of Interests will be pooled by the Partnership and traded as a single account. Although the Classes of Interests differ with respect to investment minimum and fees, all Partnership Interests are equally subject (in proportion to the size of their respective Interest) to the Partnership’s debts, liabilities and obligations as set out in the Partnership Agreement - regardless of Class designation. Class designation does not offer protection against the general creditors of the Partnership or any other Class of Interest.
There Is No Intrinsic Value to the Partnership's Investments
The Partnership must make profits for it to provide beneficial diversification to your portfolio. Trading is a “zero-sum” activity in which for every gain there is an equal and offsetting loss (disregarding transaction costs). This differs from a typical securities investment, in which there is an expectation of consistent yields (in the case of bonds) or participation over time in general economic growth (in the case of stocks). The Partnership could lose money while stock and bond prices rise. Stocks and bonds (except penny stocks) generally have some intrinsic value. You generally can realize some value for your stocks or bonds even if you sell in a down market. In trading Commodity Interests, on the other hand, you risk losing all of your investment if prices move against you. In general, performance statistics do not reflect the different risk profiles or tax treatment of traditional and managed Commodity Interest investments.
Partnership Trading Is Not Transparent
The Advisor makes the Partnership’s trading decisions. While the General Partner receives daily trade confirmations from the commodity broker and foreign exchange dealers, the Partnership’s trading results are reported to Limited Partners monthly. Accordingly, an investment in the Partnership does not offer Limited Partners the same transparency, i.e., an ability to review all investment positions daily, that a personal trading account offers.
A Non-correlated, Not Negatively Correlated, Performance Objective may Result in Losses for the Partnership
Historically, managed futures have been generally non-correlated to the performance of other asset classes such as stocks and bonds. Non-correlation means that there is no statistically valid relationship between the past performance of futures and forward contracts on the one hand and stocks or bonds on the other hand (as opposed to negative correlation, where the performance would be exactly opposite between two asset classes). Because of this non-correlation, the Partnership cannot be expected to be automatically profitable during unfavorable periods for the stock market, or vice versa. The futures and forward markets are fundamentally different from the securities markets in that for every gain in futures and forward trading, there is an equal and offsetting loss for the counterparty. If the Partnership does not perform in a manner non-correlated with the general financial markets or does not perform successfully, you will obtain no diversification benefits by investing in an Interest and the Partnership may have no gains to offset your losses from other investments.
You will Not Participate in Management of the Partnership
Limited Partners do not participate in the management of the Partnership.
Your Indemnification of the Partnership May Increase Your Participation Costs
If the General Partner accepts your subscription, you will become a Limited Partner. Under the Partnership Agreement, you will be required to indemnify the Partnership for any liability that it incurs as a result of your actions.
Partnership Indemnification of Other Parties May Increase Costs for Limited Partners and Adversely Affect Partnership Performance
The Partnership had entered into agreements with various service providers pursuant to which it may be required to indemnify such service providers for losses they incur in providing services to the Partnership.
LIQUIDITY
The Limited Ability to Liquidate Interests May Lead to Unforeseeable Losses for Limited Partners
You may not be able immediately to liquidate your Interest. There is no market for the Interests and none is likely to develop. You may, however, redeem your Interest, without penalty, on the last day of any month, subject to certain limitations. In order to redeem, you are required to give the General Partner at least fifteen (15) days’ written notice. Because of the time delay between your notice to the General Partner and the end of the month when your investment is redeemed, the value of your investment on the date of redemption may be substantially less than at the time you send the General Partner your request to redeem.
Redemptions of Interests May Subject Limited Partners to Possible Adverse Effects and Losses
The Partnership will lose money if it has to sell positions at a loss in order to raise money to pay substantial redemptions. If many redemptions occur simultaneously, the need to liquidate positions could continue even after the redemption date. The Partnership would have fewer assets to trade after a high level of redemptions. This might make it more difficult for the Partnership to recover losses or generate trading profits. Market illiquidity could make it difficult to liquidate positions on favorable terms, and may also result in losses to the Partnership.
No Automatic Trading Suspensions May Lead to Substantial Losses for the Partnership
You should only acquire an Interest if you are looking for a long-term investment. The Partnership does not have an automatic Trading Suspension Level which requires it to suspend or terminate trading as a result of losses. Therefore, Limited Partners will be required to monitor the value of their investment and determine whether the Partnership’s performance warrants continued investment. Because Limited Partners will receive performance reports monthly, it is possible that the Partnership could incur substantial losses before a Limited Partner could redeem his Interest.
Any Mandatory Redemptions Required by the General Partner May Subject Limited Partners to Substantial Losses
The General Partner may require you to redeem your Interest at any time and for any reason. It generally will only require redemptions in order for the Partnership to comply with certain regulations.
ITEM 1B:
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2:
ITEM 2: PROPERTIES
The Partnership does not own or use any physical properties in the conduct of its business. Employees of affiliates of Altegris Funds, perform all administrative services for the Partnership from offices at 1202 Bergen Parkway, Suite 212, Evergreen, Colorado 80439 or at 1200 Prospect St., Suite 400, La Jolla, California 92037.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Partnership is not aware of any pending legal proceedings to which either the Partnership is a party or to which any of its assets are subject. The Partnership is not aware of any material legal proceedings involving Altegris Funds or its principals in an adverse position to the Partnership or in which the Partnership has adverse interests. The Partnership has no subsidiaries.
ITEM 4:
ITEM 4: MINE SAFETY DICLOSURES
Not applicable.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Market information
There is no trading market for the Interests, and none is likely to develop. Interests may be redeemed or transferred subject to the conditions imposed by the Limited Partnership Agreement.
(b)
Holders
As of February 28, 2013 the Partnership had 8,350 holders of Interests.
(c)
Dividends
Altegris Funds has sole discretion in determining what distributions, if any, the Partnership will make to its investors. To date no distributions or dividends have been paid on the Interests, and Altegris Funds has no present intention to make any.
(d)
Securities Authorized for Issuance under Equity Compensation Plans
None.
(e)
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
The Partnership did not sell any unregistered securities within the past three years which have not previously been included in the Partnership’s Quarterly Reports on Form 10-Q or in a Current Report on Form 8-K.
(f)
Issuer Purchases of Equity Securities
Pursuant to the Limited Partnership Agreement, Limited Partners may redeem their Interests in the Partnership as of the end of any calendar month upon fifteen (15) days’ written notice to the General Partner. The redemption of capital from capital accounts by Limited Partners has no impact on the value of the capital accounts of other Limited Partners.
The following table summarizes Limited Partner redemptions during the fourth calendar quarter of 2012:
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Note: This excludes offering expenses, which is included in the Statements of Changes in Partners' Capital
(1) In 2008 and 2007, a portion of the Advisory fee was paid from the GP's portion
(2) Offering expenses were excluded for fiscal years ended December 31, 2009 and 2008, and are included in the Statements of Changes in Partners' Capital for those years.
ITEM 7:
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to “Item 8. Financial Statements and Supplementary Data.” The information contained therein is essential to, and should be read in conjunction with, the following analysis.
(a)
Liquidity
The Partnership’s assets are generally held as cash or cash equivalents, which are used to margin the Partnership’s futures positions and are sold to pay redemptions and expenses as needed. Other than any potential market-imposed limitations on liquidity, the Partnership’s assets are highly liquid and are expected to remain so. Market-imposed limitations, when they occur, can be due to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Partnership’s futures trading. A portion of the Partnership’s assets not used for margin and held with the Custodian are invested in liquid, high quality securities. Through December 31, 2012 the Partnership experienced no meaningful periods of illiquidity in any of the markets traded by the Advisor on behalf of the Partnership.
(b)
Capital Resources
The Partnership raises additional capital only through the sale of Interests and capital is increased through trading profits (if any) and interest income. The Partnership does not engage in borrowing.
The amount of capital raised for the Partnership should not have a significant impact on its operations, as the Partnership has no significant capital expenditure or working capital requirements other than for capital to pay trading losses, brokerage commissions and expenses. Within broad ranges of capitalization, the Partnership’s trading positions should increase or decrease in approximate proportion to the size of the Partnership.
The Partnership participates in the speculative trading of commodity futures contracts, options on futures contracts and forward contracts, substantially all of which are subject to margin requirements. The minimum amount of margin required for each contract is set from time to time in response to various market factors by the respective exchanges. Further, the Partnership’s FCMs and brokers may require margin in excess of minimum exchange requirements.
Contracts currently traded by the Advisor on behalf of the Partnership include exchange-traded futures contracts and over-the-counter forward currency contracts. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with over-the-counter transactions because, in over-the-counter transactions, the Partnership must rely solely on the credit of its trading counterparties, whereas exchange-traded contracts are generally, but not universally, backed by the collective credit of the members of the exchange. The credit risk from counterparty non-performance associated with the Partnership’s over-the-counter forward currency transactions is the net unrealized gain on such contracts plus related collateral held by the counterparty.
The Partnership bears the risk of financial failure by Newedge USA, and bore the risk of financial failure by NAST (which until November 2012 executed spot and other over-the-counter foreign exchange transactions as a counterparty to the Partnership from time to time) and/or other clearing brokers or counterparties with which the Partnership trades.
(c)
Results of Operations
Performance Summary
The Partnership’s success depends primarily upon the Advisor’s ability to recognize and capitalize on market trends in the sectors of the global commodity futures markets in which it trades. The Partnership seeks to produce long-term capital appreciation through growth, and not current income. The past performance of the Partnership is not necessarily indicative of future results.
During 2012, the Partnership achieved net realized and unrealized losses of $32,321,837 from all trading; losses of $32,871,279 from trading of derivatives including brokerage commissions of $12,092,858. The Partnership accrued total expenses of $28,389,416, including $63,607 in incentive fees, $8,720,244 in management fees paid to the General Partner, and $9,771,677 in service and professional fees. The Partnership earned $1,053,344 in interest income during 2012. An analysis of the profits and losses generated from the Partnership’s commodity futures trading activities for each quarter during 2012 is set forth below.
Fourth Quarter 2012. The Partnership experienced a loss in October 2012. Performance was generally flat across the major markets in the portfolio, including futures contracts on the S&P 500, the Euro U.S. Dollar exchange rate, U.S. bonds, Brent Crude and Corn. As a consequence, the Partnership suffered losses which were spread fairly evenly across the portfolio. A short position in futures contracts on aluminum was an exception to this, leading the base metals sector to register positive performance. The Partnership achieved gains in November 2012. Equity markets initially sold off in November but market stability recovered in the last two weeks leaving the indices broadly unchanged on the month. Futures contracts on European bonds continued to trade higher, which made the most significant contribution to our portfolio. A short position in futures contracts on the Yen resulted in strong profits as the Yen traded at its lowest level for over six months. The Partnership achieved gains in December 2012 as economic data indicated further signs of recovery with U.S. employment and Chinese economic activity showing positive signs. Global equity markets traded higher, making a significant contribution to performance. An extension of the recent Yen sell-off helped the currency portfolio put in a strong performance during the month. Gains in futures contracts on stock indices and currencies were partly offset by a small pull back in U.S. fixed income.
Third Quarter 2012. The Partnership achieved gains in July 2012. Attention in the Eurozone focused on Spain during the month, with a number of the Spanish regions asking the central government for bailouts. As the month drew to a close, uncertainty continued over the European Central Bank’s role in supporting the Euro, and the Euro ended the month lower. The U.S. Midwest continued to experience a heat wave which led to worsening reports of the quality of the year’s corn harvest and consequently substantial rises in grain prices which benefitted the Partnership. The Partnership experienced a loss in August 2012. Global stock indices continued their rally during the month and the Euro staged a partial recovery of its July fall. The more indebted European countries’ bond yields fell. Losses in the portfolio were mainly in futures contracts on currencies, as a result of the Euro, and futures contracts on government bonds as a result of rising U.S. and German yields. The Partnership experienced a loss in September 2012 as the Euro rallied against the U.S. dollar during the first half of the month before promptly reversing to give back half of these gains. Profits in futures contracts on stock indices were insufficient to offset the losses elsewhere which were spread between futures contracts on currencies, fixed income and commodities during the month. The losses in the currency sector were a direct result of being short the Euro. The Partnership’s long positions in stock indices benefited from the upward movements during the month, but a short position in Aluminum was hurt by a decent rally in the price of the metal during the month. Losses in the commodity sector were made worse by drops in the prices of Corn and Soybeans.
Second Quarter 2012. The Partnership experienced a loss in April 2012 as yields on German bonds and global equity markets fell from their recent highs. The Partnership suffered losses on its long positions in stock index futures while gains were made on long fixed income futures. Trading in soy bean futures contracts also made a significant contribution to the month’s performance. The Partnership experienced a loss in May 2012. The Partnership suffered losses early in the month as global stock markets fell while German and U.S. government bonds rallied. The last week of the month, however, saw a recovery of most of these losses with gains mainly focused in futures contracts on government bonds. The Partnership’s position on the Euro, which fell against the dollar, also made a meaningful contribution. Losses were focused in trading on futures contracts in energies and stock indices during the month. The Partnership experienced a loss in June 2012. The markets reacted to a decision on Spanish bank debt on the final day of the month, as the Euro and world stock indices rose. The main losses for the Partnership were from futures contracts on bonds, currencies and stock indices, with profits made in futures contracts on short term rates and base metals.
First Quarter 2012. The Partnership achieved a gain in January 2012. Global stock markets began the year with a rally, and the Euro reversed its downward trend of the prior two months. Government bonds rallied in the second half of the month, with US 5-year yields reaching record lows. The Partnership ended the month up, with gains in futures contracts on stock indices, short-term rates, bonds and precious metals being offset by losses in trading in futures contracts on base metals and currencies. The Partnership experienced a loss in February 2012, as the rally in equity markets that started in the middle of December continued with the S&P 500 Index climbing back to the highs that it made last year. The price of crude oil increased by around $10 a barrel during the month. The Partnership’s gains this month were the result of being long stock indices and long energies. These gains were not sufficient to offset losses elsewhere, principally coming from a short position in the Euro and being long the Yen. The Partnership experienced a loss in March 2012 as Government Bonds fell significantly, with US 10-year notes reaching levels not seen since October last year. Concerns over energy prices did not seem to affect US equity markets, where the S&P 500 continued its ascent. European equity markets lagged behind their US counterparts, with the restructuring of Greece’s debt dominating the headlines. The Partnership ended the month down, with gains in trading of futures contracts on equity indices offsetting losses in futures contracts on bonds.
During 2011, the Partnership achieved net realized and unrealized gains of $58,136,563 from all trading; gains of $58,792,665 from trading of derivatives including brokerage commissions of $11,985,887. The Partnership accrued total expenses of $39,827,048, including $11,798,283 in incentive fees, $8,442,954 in management fees paid to the General Partner, and $9,628,667 in service and professional fees. The Partnership earned $1,680,212 in interest income during 2011. An analysis of the profits and losses generated from the Partnership’s commodity futures trading activities for each quarter during 2011 is set forth below.
Fourth Quarter 2011. The Partnership experienced a loss in October 2011 as equity markets had a significant rally, causing short positions to lose money. Currencies were the worst performing sector. The Partnership achieved gains in futures contracts on precious metals, but not enough to offset losses across the rest of the portfolio during the month. The Partnership achieved a gain in November 2011. The Euro fell against the U.S. dollar and has been fluctuating around the middle of its five year trading range. World equity markets were down on the month, with a rally in the final few days of the month regaining some lost ground. The Partnership closed the month with the portfolio concentrated in the fixed income and currency sectors and relatively little exposure to equity indices. The Partnership achieved a gain in December 2011 while the financial markets exhibited less volatility than in recent months. The markets’ attention has been the levels of government debt in Eurozone countries. The Partnership’s gains have been primarily focused in futures contracts on fixed income, with a significant contribution from trading of futures contracts on precious metals.
Third Quarter 2011. The Partnership achieved a gain in July 2011 as long positions in the fixed income markets profited from rising government bond markets. Both gold and silver resumed a profitable upward trend providing the second largest contribution to performance. The Partnership achieved a gain in August 2011. Concerns over sovereign debt and the strength of the economic recovery weighed heavily on investor sentiment during the month. Global stock markets saw some sharp falls, and gold made yet more new highs before slipping back. In August, gains were focused in futures contracts on fixed income and precious metals, with losses mainly coming from currencies, stock index futures, energies and base metals. The Partnership experienced a loss in September 2011 as speculation continued about a Greek sovereign debt default. Government bond futures produced further gains and short positions in stock index futures and base metals also made gains. Losses were focused in futures contracts on currencies, precious metals and cash equities.
Second Quarter 2011. The Partnership achieved a gain in April 2011 as global stock markets experienced mid-month declines. Futures contracts on currencies were the top performing sector this month for the Partnership with long positions in the Euro being the main driver. Bonds were the only losing sector traded by the Partnership, where the net short position was reduced over the course of the month. Gold once again made record highs while silver rose to its highest level in 31 years. The Partnership experienced a loss in May 2011 as stock markets fell and the U.S. dollar rallied in a reversal of the previous month. In the commodity sector, precious metals, base metals and oil also reversed their earlier rise. The Partnership posted modest gains in the fixed income sector, with losses concentrated in futures contracts on currencies, energies and stock indices. The Partnership experienced a loss in June 2011. Equity markets fell for a second month, with U.S. and German bonds rising over the same period. Commodity markets generally fell, with the decline in wheat prices a notable example. The Euro increased volatility, but showed no clear overall direction. The greatest losses for the Partnership were in futures contracts on stock indices, and the best performing sector during the month was currencies
First Quarter 2011. The Partnership experienced a loss in January 2011. The broader equity markets continued to rally on the release of positive GDP numbers in the US. Gold prices fell during the month and Brent Crude oil rallied as social unrest in Tunisia and Egypt continued. Gains in the Partnership were focused in futures contracts on stock indices and agricultural commodities, futures contracts on precious metals and currencies were the worst performing sectors during the month. The Partnership achieved a gain in February 2011. The upward trend in the U.S. equities markets that started in October 2010 was reversed in the last days of the month. Rising tensions in the Middle East pushed up the price of crude oil. The top performing sectors for the Partnership were futures contracts on energies and precious metals as Silver hit twenty-year highs. Losses in the portfolio were focused in futures contracts on bonds. The Partnership experienced a loss in March 2011. Events in the markets were dominated during the month by the natural disaster in Japan. Futures contracts on energies were the top performing sector for the Partnership as oil prices continued to rise on news of political instability in the Middle East. The Partnership also posted gains in currencies and precious metals. Losses during the month were concentrated in futures contracts on stock indices and base metals as the Partnership ended the month down.
During 2010, the Partnership achieved net realized and unrealized gains of $91,161,476 from all trading; $92,150,023 is trading from derivatives including brokerage commissions of $9,080,039. The Partnership accrued total expenses of $34,822,340, including $14,074,548 in incentive fees, $6,240,462 in management fees paid to the General Partner, and $7,946,107 in service and professional fees. The Partnership earned $3,110,927 in interest income during 2010. An analysis of the profits and losses generated from the Partnership’s commodity futures trading activities for each quarter during 2010 is set forth below.
Fourth Quarter 2010. The Partnership experienced a gain in October 2010 as stock markets continued their September rally. Government bonds slowed during the first week of the month before subsequently dropping. The main contributors to the positive performance during the month were futures contracts on stock indices, currencies, precious metals and agricultural markets. The falling US Dollar and buoyant gold price reversed mid-month before recovering a little towards month end as the Japanese yen continued to rise. The Partnership experienced a loss in November 2010. The Euro fell during the month helping the US Dollar to reverse its fall of the last two months. The Partnership established gains during the first week of the month as the US Dollar fell and stocks, bonds and commodity prices rose, although these price moves subsequently reversed. The month’s losses were focused in futures contracts on bonds and currencies, with precious metals showing a small gain. The Partnership experienced a gain in December 2010 as the Euro remained relatively steady after its previous month’s fall. U.S. equity markets rallied in contrast to the European equities, which have fallen this year.
Third Quarter 2010. The Partnership experienced a loss in July of 2010. Currency futures was the worst performing sector for the Partnership where losses were focused on the Euro. Trading in futures contracts on bonds, precious metals and agriculturals also contributed to losses for the month. Short term interest rate futures trading, driven by falls in US LIBOR rates, was the best performing sector during the month. The Partnership achieved a gain in August of 2010. Most of the month’s gains can be attributed to the bonds sector, with positive contributions from futures trading on interest rates, currencies and precious metals. Agricultural futures were the Partnership’s worst performing sector during August of 2010. The Partnership achieved a gain in September of 2010. The Partnership benefited from its long positions in agriculturals and precious metals as cotton futures hit a 15 year high and gold prices again set new highs. Crude oil ended the month close to where it started, while base metals and grains both moved higher. Losses were concentrated in the energy and fixed income futures markets. Gains in the Australian Dollar offset the Partnership’s losses in the Euro.
Second Quarter 2010. The Partnership achieved gains for the month of April of 2010 as US stock indices continued their ascent to end the month higher, while European stock indices declined. The Partnership’s best performing sector during the month was currencies, as it capitalized on the Euro’s steady decrease in value. In April, the Partnership introduced a small amount of currency forward trading on the Chinese Renminbi and the Taiwanese Dollar. The Partnership experienced a loss in May of 2010 as European economic concerns and the Euro’s decline continued to dominate the financial news. The Partnership’s currencies trading posted a positive performance during the month with short positions on the Euro and Pound covering the losses from the Partnership’s long positions on the Australian and Canadian Dollar. The Partnership’s worst performing sector was trading futures on equity indices, where long positions were hurt by the strong downward trend in equity indices. The Partnership achieved gains during the month of June of 2010 as yields on Greek, Portuguese and Spanish government bonds continued to rise. Fixed income markets were the Partnership’s strongest contributors during June, with US bonds also continuing to rise. Energies futures were the worst performing sector as the Partnership’s short positions suffered in the face of a rally in crude oil.
First Quarter 2010. January of 2010 started with the Partnership up by mid month, followed by a sharp sell-off in equity markets, which wiped out earlier gains. These losses were centered in the long equity futures positions, with gains in short term interest rate futures providing only a partial cushion. In February of 2010, the euro reacted to concerns over Greek sovereign debt by continuing its fall against the U.S. dollar, while equity markets reversed their initial drop to end the month virtually flat. U.S. and European bonds were volatile during the month. The Partnership’s gains were concentrated in currency and interest rate futures with stock index futures also posting modest gains. March of 2010 saw the euro rally for the first two weeks of the month, before reversing to make new lows for the year. U.S. equity markets put in a strong performance with the majority of the Partnership’s gains coming from equity index futures trading. The bond markets continued their volatility, making the sector the worst performing of the month. Weakness in the euro and British pound meant that strong gains were made in currencies, with crops and base metals also delivering a positive performance.
(d)
Off-Balance Sheet Arrangements
The Partnership does not engage in off-balance sheet arrangements with other entities.
(e)
Contractual Obligations
The Partnership does not enter into any contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company or that would affect its liquidity or capital resources. The Partnership’s sole business is trading futures, related option and forward currency contracts, both long (contracts to buy) and short (contracts to sell). All such contracts are settled by offset, not delivery. Substantially all such contracts are for settlement within four months of the trade date and substantially all such contracts are held by the Partnership for less than four months before being offset or rolled over into new contracts with similar maturities. The Partnership’s financial statements, included in this report, present a Condensed Schedule of Investments setting forth net unrealized appreciation (depreciation) on the Partnership’s open futures contracts and forward currency contracts, both long and short, at December 31, 2012.
(f)
Critical Accounting Estimates
Altegris Funds believes that the Partnership's most critical accounting estimates relate to the valuation of the Partnership's assets. Futures and options on futures contracts are valued using the primary exchange’s closing price. Forward currency contracts are stated at fair value using spot currency rates provided by Newedge USA, LLC and adjusted for interest rates and other typical adjustment factors. U.S. government agency securities are generally valued based on quoted prices in active markets. Corporate notes and repurchase agreements are generally valued at fair value. Security transactions are recorded on the trade date. Realized gains and losses from security transactions are determined using the identified cost method. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in income currently.
The Partnership’s financial statements are presented in accordance with U.S. generally accepted accounting principles, which require the use of certain estimates made by the Partnership’s management. Actual results could differ from those estimates. Based on the nature of the business and operations of the Partnership, Altegris Funds believes that the estimates utilized in preparing the Partnership’s financial statements are appropriate and reasonable, however, actual results could differ from these estimates. The estimates used do not provide a range of possible results that would require the exercise of subjective judgment. Altegris Funds further believes that, based on the nature of the business and operations of the Partnership, no other reasonable assumptions relating to the application of the Partnership’s critical accounting estimates other than those currently used would likely result in materially different amounts from those reported.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
Past Results Not Necessarily Indicative of Future Performance
The Partnership is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes, and all or a substantial amount of the Partnership’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.
Market movements result in frequent changes in the fair value of the Partnership’s open positions and, consequently, in its earnings and cash flow. The Partnership’s market risk is influenced by a wide variety of factors, including the level and volatility of exchange rates, interest 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 it 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.
Standard of Materiality
Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage and multiplier features of the Partnership’s market sensitive instruments.
Quantifying the Partnership’s Trading Value at Risk
Quantitative Forward-Looking Statements
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). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period).
The Partnership’s risk exposure in the various market sectors traded is estimated in terms of Value at Risk (VaR). The Partnership estimates VaR using a model based upon historical simulation (with a confidence level of 99%) which involves constructing a distribution of hypothetical daily changes in the value of a trading portfolio. The VaR model takes into account linear exposures to risks, including equity and commodity prices, interest rates, foreign exchange rates, and correlation among these variables. The hypothetical changes in portfolio value are based on daily percentage changes observed in key market indices or other market factors to which the portfolio is sensitive. This expected daily percentage change is then expanded to four days, providing an expected four day percentage change. The Partnership’s VaR at a four day 99% confidence level of the Partnership’s VaR corresponds to the negative change in portfolio value that, based on observed market risk factors, would have been exceeded once in 100 four day trading periods. VaR typically does not represent the worst case outcome.
The Partnership uses approximately three years of daily market data and revalues its portfolio for each of the historical market moves that occurred over this time period. This generates a probability distribution of daily “simulated profit and loss” outcomes. The VaR is the 1 percentile of this distribution.
The VaR for a sector represents the four day downside risk for the aggregate exposures associated with this sector. The current methodology used to calculate the aggregate VaR represents the VaR of the Partnership’s open positions across all market sectors, and is less than the sum of the VaRs for all such market sectors due to the diversification benefit across asset classes.
The Partnership’s VaR computations are based on the risk representation of the underlying benchmark for each instrument or contract and does not distinguish between exchange and non-exchange dealer-based instruments. It is also not based on exchange and/or dealer-based maintenance margin requirements.
VaR models, including the Partnership’s, are continually evolving as trading portfolios become more diverse and modeling techniques and systems capabilities improve. Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by the Partnership in its daily risk management activities. Please further note that VaR as described above may not be comparable to similarly titled measures used by other entities.
Because the business of the Partnership is the speculative trading of futures, forwards and options, the composition of the Partnership’s trading portfolio can change significantly over any given time period, or even within a single trading day, which could positively or negatively materially impact market risk as measured by VaR.
The Partnership’s Trading Value at Risk in Different Market Sectors
The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of December 31, 2012 and 2011 and the Value at Risk as a percentage of the Partnership’s NAV as of December 31, 2012 and 2011.
*
The VaR for a sector represents the four day downside risk for the aggregate exposures associated with this sector. The aggregate VaR represents the sum of the VaRs for all market sectors, with an assumed correlation among all sectors equal to one.
Material Limitations of Value at Risk as an Assessment of Market Risk
The following limitations of VaR as an assessment of market risk should be noted:
1)
Past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
2)
Changes in portfolio value caused by market movements may differ from those of the VaR model;
3)
VaR results reflect past trading positions while future risk depends on future positions;
4)
VaR using a one day time horizon that is then expanded to four days does not fully capture the market risk of positions that cannot be liquidated or hedged within the time period; and
5)
The historical market risk factor data for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.
VaR is not necessarily representative of historic risk nor should it be used to predict the Partnership’s future financial performance or its ability to manage and monitor risk. There can be no assurance that the Partnership’s actual losses on a particular day will not exceed the VaR amounts indicated or that such losses will not occur more than once in 100 four day trading periods.
Non-Trading Risk
The Partnership has non-trading market risk on fixed income securities held as part of its cash management program. JPMIM will use its best efforts in the management of the assets of the Partnership but provide no guarantee that any profit or interest will accrue to the Partnership as a result of such management.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures as well as the strategies used and to be used by the Trading Advisor for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. There can be no assurance that the Partnership’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as of December 31, 2012, by market sector.
Currencies
Exchange rate risk can be a significant market exposure of the Partnership. The Partnership’s currency exposure is to foreign exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. These fluctuations are influenced by interest rate changes as well as political and general economic conditions.
Interest Rates
Interest rate risk can be a significant market exposure of the Partnership. Interest rate movements directly affect the price of the sovereign bond positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. Changes in the interest rate environment will have the most impact on longer dated fixed income positions.
Stock Indices
The Partnership has equity exposure to equity price risk in the countries in which it invests. The stock index futures traded by the Partnership are by law limited to futures on broadly based indices. The Partnership is exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices.
Energy
The Partnership is exposed to energy market risk in relation to natural gas, crude oil and derivative product price movements, often resulting from international political developments and ongoing conflicts in the Middle East and the perceived outcome. Oil and gas prices can be volatile and substantial profits and losses have been experienced in this market.
Metals
The Partnership’s metals market exposure is subject to fluctuations in the price of each of the metals futures contracts in which the Partnership invests.
Agricultural
The Partnership’s agricultural exposure is subject to the fluctuations of the price of each of the agricultural commodity futures contracts that it holds.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the non-trading risk exposures of the Partnership as of December 31, 2012.
Fixed Income Securities
The Partnership has market exposure in instruments (other than treasury positions) held other than for trading is in its fixed income portfolio. JPMIM, an affiliate of the Custodian, has authority to make certain investments on behalf of the Partnership. All securities purchased by JPMIM on behalf of the Partnership will be held in the Partnership’s custody account at the Custodian. JPMIM will use its best endeavors in the management of the assets of the Partnership but provide no guarantee that any profit or interest will accrue to the Partnership as a result of such management.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
Winton's focus within risk management is on targeting, measuring and managing risk. Owing to the leverage inherent in futures trading, position sizes are set according to Winton’s expectation of the risk that such positions will provide, rather than the amount of capital required to fund such positions, and Winton's Diversified Program strives to maintain a diversified portfolio because holding positions in a variety of unrelated markets has been shown, over time, to decrease system volatility.
Each day, Winton’s trading systems sets volatility parameters (known as the “instantaneous forecast standard deviation”) for each position held in the portfolio. The purpose of these parameters is to estimate the likely size of a market shift (whether up or down), in much the same way as the futures exchanges estimate the likely market shift when deciding how to set the initial margin for a future or the daily price limits for a market. The primary determinant of the daily volatility parameters is the amount of leverage or level of gearing used by the Diversified Program. The derivatives positions’ leverage or gearing may be measured in terms of the Diversified Program’s margin-to-equity ratio in respect of its derivatives positions. This ratio is calculated by dividing the amount of margin posted with the futures commission merchant by the value of the portfolio. The Diversified Program’s long-term annualized volatility target is currently approximately 10% . However, it should be noted that the Diversified Program’s instantaneous forecast standard deviation (defined as the instantaneous risk Winton expects within the 24 hours following that particular instant) may vary outside these limits. In order to target a given level of long-term risk the instantaneous risk is allowed to fluctuate within a range around the long term risk target. In order to achieve the long-term risk target the correlation between different markets is estimated by the Diversified Program, and is employed in the calculation of the overall level of gearing which is regularly reset, typically on a daily basis. Additionally, from time to time, the long-term standard deviation (defined as the long term average risk that Winton expects over a number of months) may also be above or below these limits, thereby having an impact upon the level of gearing used by the Diversified Program. For example, in the event that exceptional market conditions arise, such as the threat of closure of an exchange or other loss of liquidity, it may be determined to operate the Diversified Program at a lower level of gearing.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item are included herewith following the Index to Financial Statements and are incorporated by reference into this Item 8. The following information presented on a quarterly basis is unaudited.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
(a) The General Partner, with the participation of the General Partner’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period covered by this annual report, and, based on their evaluation, has concluded that these disclosure controls and procedures are effective.
(b)
Management’s Annual Report on Internal Control over Financial Reporting
Altegris Funds, the general partner of the Partnership is responsible for the management of the Partnership. Management of Altegris Funds (“Management”) is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Partnership’s internal control over financial reporting includes those 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 transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Partnership’s transactions are being made only in accordance with authorizations of Management and;
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2012. In making this assessment, Management used the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2012, the Partnership’s internal control over financial reporting was effective.
(c)
Changes in Internal Control over Financial Reporting
There were no changes in the Partnership’s internal control over financial reporting during the quarter and year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
Identification of Directors and Executive Officers
(i) The Partnership has no officers, directors, or employees. The Partnership’s affairs are managed by Altegris Funds (although it has delegated trading and investment authority to the Advisor and administrative duties to Altegris. Altegris Funds is owned by Genworth Financial Inc., and its directors and executive officers are Jon C. Sundt, Robert J. Amedeo, Matthew C. Osborne, Richard G. Pfister, Kenneth I. McGuire, and Gurinder S. Ahluwalia.
Jon C. Sundt (age 52) is the President, CEO and a director of Altegris Funds (October 2004 to present), having also served as a Vice President from July 2002 to October 2004. Mr. Sundt has also been (1) the President, CEO and a director of Altegris Investments, Inc. (Altegris) (July 2002 to present), a current broker-dealer affiliate of Altegris Funds, and formerly an IB and CTA; (2) a manager and the President and CEO of Altegris Advisors, L.L.C. (Advisors), an affiliate of Altegris Funds and an SEC-registered investment adviser (February 2010 to present); (3) a manager and the President and CEO of Altegris Futures, L.L.C. (Altegris Futures), an IB and an affiliate of Altegris Funds (September 2010 to present); (4) a manager and the President and CEO of Altegris Clearing Solutions, L.L.C. (formerly known as Altegris Partners, L.L.C.) (Clearing Solutions), an IB and CTA and an affiliate of Altegris Funds (December 2008 to present); (5) a manager and the President and CEO of Altegris Services, L.L.C. (Services), an administrative and operations affiliate of Altegris Funds (May 2010 to present); and (6) the President and CEO of Altegris Holdings, a holding company which directly owns Altegris Funds, Altegris, Advisors, Altegris Futures, Clearing Solutions and Services (October 2012 to present). Mr. Sundt became a principal of Altegris Funds in July 2002. Mr. Sundt attended the University of California, San Diego.
Robert J. Amedeo (age 59) has served as a director of Altegris Funds since July 2002. He has also been a Vice President of Altegris Funds (October 2004 to January 2011), and President of Altegris Funds (July 2002 to October 2004), and he currently serves as Executive Vice President (January 2011 to present). Mr. Amedeo has also been (1) an Executive Vice President and director of Altegris; (2) a manager and Executive Vice President of Advisors (February 2010 to present); (3) a manager and Executive Vice President of Clearing Solutions (December 2008 to present); (4) a manager and Executive Vice President of Services (May 2010 to present); (5) a manager and Executive Vice President of Altegris Futures (September 2010 to present); and (6) Executive Vice President of Altegris Holdings (October 2012 to present). In addition to his responsibilities as an officer and director of Altegris Funds and Altegris, Mr. Amedeo has pursued business development projects for the companies and their affiliates. Mr. Amedeo is a graduate of Northwestern University and received a Juris Doctor degree from DePaul University. Mr. Amedeo is currently Chairman of the NFA’s CPO/CTA Advisory Committee.
Matthew C. Osborne (age 48) has served as a director of Altegris Funds since July 2002. He has also served as a Vice President of Altegris Funds (July 2002 to January 2011), and currently serves as Executive Vice President (January 2011 to present). Mr. Osborne has also been (1) an Executive Vice President, Chief Investment Officer and a director of Altegris (July 2002 to May 2010); (2) a manager and Executive Vice President of Advisors (February 2010 to present); (3) a manager and Executive Vice President of Clearing Solutions (December 2008 to present); (4) a manager and Executive Vice President of Services (February 2010 to present); (5) a manager and Executive Vice President of Altegris Futures (September 2010 to present); and (6) Executive Vice President of Altegris Holdings (October 2012 to present).
Richard G. Pfister (age 41) has served as a director of Altegris Funds since October 2004. He has also served as a Vice President (October 2004 to January 2011) and currently serves as Executive Vice President (January 2011 to present). Mr. Pfister has also served as (1) an Executive Vice President and director of Altegris (October 2004 to present); (2) a manager and Executive Vice President of Clearing Solutions (December 2008 to present); (3) a manager and Executive Vice President of Altegris Futures (September 2010 to present); and (4) Executive Vice President of Altegris Holdings (October 2012 to present). Mr. Pfister graduated from the University of San Diego and holds the Chartered Alternative Investments Analyst (CAIA) designation.
Kenneth I. McGuire (age 54) became the Chief Operating Officer of Altegris Funds in May 2010 and is a principal of Altegris Funds (June 2010 to present). Mr. McGuire also serves as Chief Operating Officer for Advisors (February 2010 to present), and Services (May 2010 to present). Mr. McGuire also serves as Chief Operating Officer of Altegris Holdings (October 2012 to present). His duties within the Altegris Companies include supervision of personnel in the software development, information technology, fund operations and futures operations businesses of the Altegris Companies. During the past five years, Mr. McGuire was employed by The Bank of New York Mellon, an asset management and securities services company, as a Managing Director (April 2006 to October 2009). Mr. McGuire was employed within BNY Mellon Alternative Investment Services, serving as Product Manager for that unit’s Single Manager Hedge Fund services. Mr. McGuire was a Strategic Advisor with Harvest Technology, a boutique investment technology consultancy (May 2005 to April 2006). Mr. McGuire graduated Magna Cum Laude from Hofstra University with a degree in Computer Science/Mathematics and received his MBA with a concentration in Management from Adelphi University.
Gurinder S. Ahluwalia (age 47) became a Director and principal of Altegris Funds in January 2011. Mr. Ahluwalia also serves as a director of Altegris Holdings (October 2012 to present). Mr. Ahluwalia has also served as a manager of Clearing Solutions, Altegris Futures and Advisors (January 2011 to present). Mr. Ahluwalia has served as President and CEO of Genworth Financial Wealth Management (GFWM), an investment advisory firm (June 2009 to present), as Co-Chairman of GFWM (July 2008 to June 2009), and as Vice Chairman of AssetMark Investment Services, Inc. (“AssetMark Services”) (August 2006 to July 2008). GFWM was created by the 2008 combination of two affiliated investment advisory firms: AssetMark Services and Genworth Financial Asset Management, Inc. (“GFAM”). Mr. Ahluwalia has also served in the capacities as: (i) President, Chairman and a Trustee of Genworth Financial Asset Management Funds, a mutual fund complex (February 2004 to present); (ii) a Trustee of the Genworth Variable Insurance Trust, a mutual fund offered through variable insurance products (July 2008 to present); and (iii) as a Director on the Boards of GFWM (August 2008 to present), GFAM (January 2004 to August 2008), Genworth Financial Trust Company (“GFTC”), an Arizona chartered trust company and custodian (January 2004 to present), Centurion Financial Advisors, Inc. (“CFA”), an investment advisory firm (January 2004 to present), and Centurion Capital Group, Inc., an intermediate holding company for CFA, GFWM and GFTC (January 2004 to present). In addition, Mr. Ahluwalia has since July 2006 served as a Vice President of Genworth, the publicly traded global financial security company and parent company of Altegris Funds and its direct affiliates, as well as the ultimate parent holding company for all other Genworth affiliated companies. Mr. Ahluwalia holds a B.S. in Computer Science from New York University, a B.E. in Electrical Engineering from Cooper Union, and an M.S. in Electrical Engineering from the New Jersey Institute of Technology.
None of the individuals listed above currently serves as a director of a public company.
(ii)
Identification of Certain Significant Employees
None.
(iii)
Family Relationships
None.
(iv)
Business Experience
See above.
(v)
Involvement in Certain Legal Proceedings.
None.
(vi)
Promoters and Control Persons
Not Applicable.
(b)
Section 16(a) Beneficial Ownership Reporting Compliance
Gurinder Ahluwalia filed an initial report on Form 3 after being appointed a director of Altegris Funds in January 2011. Mr Ahluwalia owns no interest in the Partnership and the number of transactions not reported timely is 0.
(c)
Code of Ethics
The Partnership has no employees, officers or directors and is managed by Altegris Funds. Effective April 1, 2013, Altegris Funds has adopted a Code of Ethics that applies to all its employees, associated persons, and principal executive officers. A copy of this Code of Ethics may be obtained at no charge by written request to Altegris Funds, 1202 Bergen Parkway, Suite 212, Evergreen, Colorado 80439. Previously, Altegris Funds adopted all or substantially all of the code of ethics of Genworth Financial, Inc on March 22, 2012. Richard G. Pfister previously filed a Form 5 in April, 2011, a late filing. No subsequent filings on Form 4 or Form 5 have been required as there have been no changes in beneficial ownership of the Partnership that would trigger Form 4 or Form 5 filing requirements during the period.
(d)
Corporate Governance
Not applicable.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The Partnership has no officers, directors, or employees. None of the principals, officers, or employees of Altegris Funds or Altegris receives compensation from the Partnership. All persons serving in the capacity of officers or executives of Altegris Funds, the General Partner of the Partnership, are compensated by Altegris and/or an affiliate in respect of their respective positions with such entities. Altegris Funds receives a monthly management fee equal to 1/12 of 1.25% of the management fee net asset value of the month-end capital account balances attributable to Class A and Class B Interests and equal to 1/12 of 0.75% of the management fee net asset value of the month-end capital account balances attributable to Institutional Interests. Altegris Funds also receives a monthly administrative fee equal to 1/12 of 0.333% of the management fee net asset value of the month-end capital account balances attributable to Class A and Class B Interests.
Altegris receives continuing monthly compensation from the Partnership equal to 1/12 of 2% of the month-end net asset value of Class A Interests sold by Altegris.
During 2012, Altegris received, and from January 1, 2013, Altegris Futures, in its capacity as Introducing Broker to the Partnership, receives compensation for brokerage-related services. The Partnership will pay monthly brokerage charges equal to the greater of (A) actual commissions of $9.75 per round-turn (higher for certain exchanges or commodities) multiplied by number of round-turn trades, which amount includes other transaction costs; or (B) an amount equal to 0.125% of the management fee net asset value of all Interest holders’ month-end capital account balances (1.50% annually). If actual monthly commissions and transaction costs in (A) above are less than the amount in (B) above, the Partnership will pay the difference to the Introducing Broker as payment for brokerage-related services. In any month when the amount in (A) is greater than the amount in (B) above, the Partnership will pay only the amount described in (A) above.
The Partnership has no other compensation arrangements. There are no compensation plans or arrangements relating to a change in control of the Partnership or Altegris Funds. On December 31, 2010 Altegris Funds was acquired by Genworth Financial, Inc. in a transaction reported on Form 8-K on January 6, 2011.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a)
Security ownership of certain beneficial owners
Not applicable.
(b) Security Ownership of Management
The Partnership has no officers or directors. Under the terms of the Limited Partnership Agreement, the Partnership’s affairs are managed by Altegris Funds, which has delegated discretionary authority over the Partnership’s trading to the Advisor. As of February 28, 2013, Altegris Funds’ general partner interest in the Partnership was valued at $3,464 which constituted less than 0.001% of the Partnership’s total assets. As of February 28, 2013, the following directors and executive officers of Altegris Funds owned Interests in the Partnership: Jon C. Sundt, Robert J. Amedeo, Richard G. Pfister, and Matthew Osborne. The direct and indirect holding of Interests of each director and executive officer and the total aggregate ownership of Interests is less than 1% of the Partnership’s total assets.
(c)
Changes in Control
None.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Partnership does not engage in any transactions with Altegris Funds or its affiliates other than in respect of the services and payment of fees therefor described above in Item 1.
The Partnership paid to Altegris Funds monthly management fees totaling $8,720,244 for the year ended December 31, 2012. The Partnership paid to Altegris Funds administrative fees totaling $1,817,057 for the year ended December 31, 2012.
The Partnership paid to Altegris monthly continuing compensation of $1,149,600 for the year ended December 31, 2012. Altegris Futures, in its capacity as the Introducing Broker for the Partnership, received from the Partnership’s clearing broker (i.e., Newedge USA) the following compensation: (i) a portion of the brokerage commissions paid by the Partnership to Newedge USA, and of the interest income earned on Partnership’s assets held at Newedge USA, equal to $1,512,380 for the year ended December 31, 2012. In addition, Altegris Futures, in its capacity as Introducing Broker, receives from the Partnership, monthly brokerage charges as described in Item 11. For the year ended December 31, 2012 the Partnership paid monthly brokerage charges of $9,807,801.
The Partnership has not and does not make any loans to the General Partner, its affiliates, their respective officers, directors or employees or the immediate family members of any of the foregoing, or to any entity, trust or other estate in which any of the foregoing has any interest, or to any other person.
None of the General Partner, its affiliates, their respective officers, directors and employees or the immediate family members of any of the foregoing, or any entity trust or other estate in which any of the foregoing has any interest has, to date, sold any asset, directly or indirectly, to the Partnership.
The Partnership has no directors, officers or employees and is managed by the General Partner. The General Partner is managed by certain of its principals, none of whom is independent of the General Partner.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth (a) the fees billed to the Partnership for professional audit services provided by Ernst & Young, LLP, the Partnership’s independent registered public accountant, for the audit of the Partnership’s annual financial statements for the years ended December 31, 2011 and December 31, 2012. The audit fees for the year ended December 31, 2011 include fees paid to the predecessor auditor for professional audit services provided for the first quarter of 2011.
Audit Fees consist of fees paid to Ernst & Young LLP for (i) the audit of Altegris Winton Futures Fund, L.P.’s annual financial statements included in the annual report on Form 10-K, and review of financial statements included in the quarterly reports on Form 10-Q; and (ii) services that are normally provided by the Independent Registered Public Accountants in connection with statutory and regulatory filings of registration statements.
Tax Fees consist of fees paid to Ernst & Young LLP for professional services rendered in connection with tax compliance and Partnership income tax return filings.
The board of directors of Altegris Funds pre-approves the engagement of the Partnership’s auditor for all services to be provided by the auditor.
PART IV
ITEM 15:
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements
The financial statements and balance sheets required by this Item are included herewith, beginning after the signature page hereof, and are incorporated into this Item 15.
Exhibits
The following documents (unless otherwise indicated) are filed herewith and made part of this registration statement.
___________________
*
This exhibit is incorporated by reference to the exhibit of the same number and description filed with the Partnership’s Registration Statement (File No. 000-53348) filed on July 30, 2008 on Form 10-12G under the Securities Exchange Act of 1934.
**
Rockwell Futures Management, Inc. is now Altegris Portfolio Management, Inc.
***
Fimat USA, LLC is now Newedge USA, LLC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the General Partner of the Registrant and in the capacities and on the date indicated.
Dated: April 1, 2013
By:
/s/ Jon C. Sundt
Name:
Jon C. Sundt
Title:
Executive Officer, Principal Financial Officer and majority of the board of directors, or equivalent thereof, of Altegris Portfolio Management, Inc.
ALTEGRIS WINTON FUTURES FUND, L.P.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
ALTEGRIS WINTON FUTURES FUND, L.P.
ALTEGRIS WINTON FUTURES FUND, L.P.
AFFIRMATION OF THE COMMODITY POOL OPERATOR
_______________
To the Partners of
Altegris Winton Futures Fund, L.P.
To the best of the knowledge and belief of the undersigned, the information contained in this Annual Report for the years ended December 31, 2012, 2011 and 2010 is accurate and complete.
By:
/s/ Robert J. Amedeo
Altegris Portfolio Management, Inc.
Commodity Pool Operator for
Altegris Winton Futures Fund, L.P.
By: Robert J. Amedeo, Executive Vice President
Report of Independent Registered Public Accounting Firm
The General Partner and Partners of Altegris Winton Futures Fund, L.P.
We have audited the accompanying statements of financial condition of Altegris Winton Futures Fund, L.P. (the “Partnership”), including the condensed schedules of investments, as of December 31, 2012 and 2011, and the related statements of operations, statements of changes in partners’ capital and financial highlights for each of the two years in the periods then ended. These financial statements and financial highlights are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial statements and financial highlights of Altegris Winton Futures Fund, L.P. for the year ended December 31, 2010, were audited by other auditors whose report dated March 25, 2011, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Partnership’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position, including the condensed schedules of investments, of Altegris Winton Futures Fund, L.P. at December 31, 2012 and 2011, and the results of its operations, the changes in its partners’ capital and the financial highlights for each of the two years in the periods then ended, in conformity with U.S. generally accepted accounting principles. The financial statements and financial highlights of Altegris Winton Futures Fund, L.P. for the year ended December 31, 2010, were audited by other auditors whose report dated March 25, 2011, expressed an unqualified opinion on those statements.
March 22, 2013
A member firm of Ernst & Young Global Limited
See accompanying notes.
See accompanying notes.
See accompanying notes.
(1) Represents the December 31, 2012 U.S. dollar equivalent of the notional amount bought or sold
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS
_______________
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
A.
General Description of the Partnership
Altegris Winton Futures Fund, L.P. (f/k/a Winton Futures Fund, L.P. (US)) (the “Partnership”) was organized as a limited partnership in Colorado in March 1999, and will continue until December 31, 2035, unless sooner terminated as provided for in the Agreement of Limited Partnership, as amended and restated from time to time (“Agreement”). The Partnership's general partner is Altegris Portfolio Management, Inc. (d/b/a Altegris Funds) (the “General Partner”). The Partnership speculatively trades commodity futures contracts, options on futures contracts, forward contracts and other commodity interests. The objective of the Partnership’s business is appreciation of its assets. The Partnership is subject to the regulations of the Commodity Futures Trading Commission (the “CFTC”), an agency of the United States (“U.S.”) government that regulates most aspects of the commodity futures industry; rules of the National Futures Association, an industry self-regulatory organization; and the requirements of commodity exchanges and futures commission merchants (brokers) through which the Partnership trades.
B.
Method of Reporting
The Partnership’s financial statements are presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported fair value of assets and liabilities, disclosures of contingent assets and liabilities as of December 31, 2012 and 2011, and reported amounts of income and expenses for the years ended December 31, 2012, 2011 and 2010. Management believes that the estimates utilized in preparing the Partnership’s financial statements are reasonable; however, actual results could differ from these estimates and it is reasonably possible that differences could be material.
C.
Fair Value
In accordance with the authoritative guidance under U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Partnership uses various valuation approaches. The authoritative guidance under U.S. GAAP establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Partnership.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Fair Value (continued)
Unobservable inputs reflect the Partnership’s assumption about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Partnership has the ability to access.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable.
The availability of valuation techniques and observable inputs can vary from assets and liabilities and is affected by a wide variety of factors, including the type of asset or liability, whether the asset or liability is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the asset or liability existed. Accordingly, the degree of judgment exercised by the Partnership in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Partnership’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Partnership uses prices and inputs that are current as of the measurement date, including prices and inputs during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many assets and liabilities. This condition could cause an asset or liability to be reclassified to a lower level within the fair value hierarchy.
The Partnership values futures and options on futures contracts at the closing price of the contract’s primary exchange. The Partnership generally includes futures and options on futures contracts in Level 1 of the fair value hierarchy.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C.
Fair Value (continued)
Forward currency contracts are valued at fair value using spot currency rates and adjusted for interest rates and other typical adjustment factors. The Partnership generally includes forward currency contracts in Level 2 of the fair value hierarchy.
The fair value of U.S. government agency bonds and notes is generally based on quoted prices in active markets. When quoted prices are not available, fair value is determined based on a valuation model that uses inputs that include interest-rate yield curves, cross-currency-basis index spreads, and country credit spreads similar to the bond in terms of issue, maturity and seniority. U.S. government bonds are generally categorized in Levels 1 or 2 of the fair value hierarchy. No U.S. government agency bonds and notes were fair valued using valuation models as of December 31, 2012 and 2011.
The fair value of U.S. treasury obligations is generally based on quoted prices in active markets. U.S. treasury obligations are generally categorized in Level 1 of the fair value hierarchy.
The fair value of corporate notes is determined using recently executed transactions, market price quotations (where observable), notes spreads or credit default swap spreads. The spread data used are for the same maturity as that of the notes. If the spread data does not reference the issuer, data that references a comparable issuer is used. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond, or single-name credit default swap spreads and recovery rates based on collateral values as key inputs. These valuation methods represent both a market and income approach to fair value measurement. Corporate notes are generally categorized in Level 2 of the fair value hierarchy; however, in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy. No corporate notes were fair valued using valuation models as of December 31, 2012 and 2011.
The industry classifications included in the condensed schedule of investments represent the General Partner’s belief as to the most meaningful presentation of the classification of the Partnership’s investments.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. There were no changes to the Partnership’s valuation methodology during the years ended December 31, 2012 and 2011.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C.
Fair Value (continued)
The following table presents information about the Partnership’s assets and liabilities measured at fair value as of December 31, 2012 and 2011:
(1) See Note 7. "Financial Derivative Instruments" for the fair value in each type of contracts within this category.
For the years ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 assets and liabilities. For the years ended December 31, 2012 and 2011, there were no Level 3 securities.
D.
Investment Transactions and Investment Income
Security transactions are recorded on the trade date for financial reporting purposes. Realized gains and losses from security transactions are determined using the identified cost method. Change in net unrealized gain or loss from the preceding period is reported in the statements of operations. Brokerage commissions and other trading fees are reflected as an adjustment to cost or proceeds at the time of the transaction. Interest income is recorded on an accrual basis.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D.
Investment Transactions and Investment Income (continued)
Gains or losses on futures contracts and options on futures contracts are realized when contracts are closed. Net unrealized gains or losses on open contracts (the difference between contract trade price and quoted market price) are reflected in the statements of financial condition. Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. Brokerage commissions on futures and options on futures contracts include other trading fees and are incurred as an expense when contracts are opened.
Net realized gains and losses from foreign currency related transactions represent gains and losses from sales of foreign currencies, sales and maturities of foreign currency forward contracts, currency gains and losses realized between trade and settlement dates on securities transactions, and the difference between the amounts of interest and foreign withholding taxes recorded on the Partnership’s books and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized appreciation (depreciation) on foreign currency denominated other assets and liabilities arise from changes in the value of assets, other than investments in securities, and liabilities at fiscal year end, resulting from changes in the exchange rates.
E.
Option Contracts
Generally, an option is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security, currency or other instrument (an ‘‘underlying instrument’’) from the writer of the option (in the case of a call option), or to sell a specified security, currency, or other instrument to the writer of the option (in the case of put option) at a designated price. Put and call options that the Partnership may purchase or write may be traded on a national securities exchange or in the over-the-counter (OTC) market. All option positions entered into on a national securities exchange are cleared and guaranteed by the Options Clearing Corporation, thereby reducing the risk of counterparty default. There can be no assurance that a liquid secondary market will exist for any option purchased or sold.
As the buyer of an option, the Partnership has a right to buy (call option) or sell (put option) the underlying instrument at the exercise price. The Partnership may enter into closing sale transactions with respect to options, exercise them, or permit them to expire unexercised. When buying options, the potential loss is limited to the cost (premium plus transaction costs) of the option.
As the writer of a put option, the Partnership has the obligation to buy (call option) or sell (put option) the underlying instrument at the exercise price. When the Partnership writes an option, an amount equal to the premium received by the Partnership is recorded as a liability and subsequently marked to market to reflect the current value of the option written. If the written option expires unexercised, the Partnership realizes a gain in the amount of the premium received. If the Partnership enters into a closing transaction, it recognizes a gain or loss, depending on whether the cost of the purchase is less than or greater than the premium received. If the option is exercised, the Partnership will incur a loss to the extent the difference between the current market value of the underlying instrument and the exercise price exceeds the premium received.
As the writer of a call option, the Partnership retains the risk of loss should the underlying instrument increase in value. If the option is exercised, the Partnership will be required to buy or sell the instrument at the exercise price. Accordingly, these transactions result in off-balance sheet risk, as the Partnership’s ultimate obligation may exceed the amount indicated in the Statements of Financial Condition.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F.
Futures Contracts
The Partnership may engage in futures contracts as part of its investment strategy. Upon entering into a futures contract, the Partnership is required to deposit with the broker an amount of cash or cash equivalents equal to a certain percentage of the contract amount. This is known as the “initial margin.” Subsequent payments (“variation margin”) are made or received by the Partnership each day, depending on the daily fluctuations in the value of the contract, and are included in unrealized gain/loss on futures contracts. The Partnership recognizes a realized gain or loss when the contract is closed.
There are several risks in connection with the use of futures contracts as an investment option. The change in value of futures contracts primarily corresponds with the value of their underlying instruments. In addition, there is the risk that the Partnership may not be able to enter into a closing transaction because of an illiquid secondary market. Open positions in futures contracts at December 31, 2012 and 2011 are reflected within the Condensed Schedules of Investments.
G.
Forward currency contracts
Forward currency contracts may be entered into as an economic hedge against foreign currency exchange rate risk related to portfolio positions. A forward currency contract is an obligation to purchase or sell a currency against another currency at a future date at an agreed upon price and quantity. Forward currency contracts are traded over-the-counter and not on an organized exchange. Forward currency contracts help to manage the overall exposure to the foreign currency backing some of the investments held by the Partnership. Each contract is marked-to-market daily and the change in market value is recorded by the Partnership as an unrealized appreciation or depreciation. When the contract is closed, the Partnership records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of forward currency contracts involves the risk that counterparties may not meet the terms of the agreement or unfavorable movements in the value of a foreign currency relative to the U.S. dollar. Open forward currency contracts at December 31, 2012 and 2011 are reflected within the Condensed Schedules of Investments.
H.
Foreign Currency Transactions
The Partnership’s functional currency is the U.S. dollar; however, it may transact business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the date of the statement of financial condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in income.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I.
Cash
Restricted cash is held as margin collateral for futures transactions.
The Partnership maintains a custody account with a major financial institution. At times, the Partnership’s cash balance could exceed the insured amount under the Federal Deposit Insurance Corporation (“FDIC”). The FDIC temporarily increased its limit to $250,000 until December 31, 2013. The Partnership has not experienced any losses in such accounts and believes it is not subject to any significant counterparty risk related to its cash account.
J.
Offering Costs
Offering costs incurred in connection with the ongoing offering of the Partnership’s interests are borne by the Partnership. These costs include, but are not limited to, legal fees pertaining to updating the Partnership’s offering documents and materials, accounting and printing costs. These costs are charged as an expense when incurred.
K.
Income Taxes
As an entity taxable as a partnership for the U.S. Federal Income tax purposes; the Partnership itself is not subject to federal income tax. The Partnership prepares and files calendar year U.S. and applicable state information tax returns and reports to the partners their allocable shares of the Partnership’s income and expenses.
The Partnership is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Partnership recording a tax liability that reduces ending partners’ capital. Based on its analysis, the Partnership has determined that it has not incurred any liability for unrecognized tax benefits as of December 31, 2012 and 2011. However, the Partnership’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.
The Partnership recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of and for the years ended December 31, 2012, 2011 and 2010.
The Partnership is subject to income tax examinations by major taxing authorities for all tax years since 2009.
L. Reclassifications
Certain amounts in the 2011 and 2010 financial statements were reclassified to conform to the 2012 presentation.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 2 - PARTNERS’ CAPITAL
A.
Capital Accounts and Allocation of Income and Losses
The Partnership accounts for subscriptions and redemptions on a per partner capital account basis.
The Partnership consists of the General Partner’s Interest, Original Class A Interests, Original Class B Interests, Special Interests, Class A Interests, Class B Interests and Institutional Interests. Original Class A Interests and Original Class B Interests were issued prior to July 1, 2008 and are no longer issued to limited partners in the Partnership (each a “Limited Partner” and collectively the “Limited Partners”). Class A Interests, Class B Interests and Institutional Interests were first issued by the Partnership on July 1, 2008. Income or loss (prior to management fees, administrative fees, service fees and incentive fees) are allocated pro rata among the Limited Partners based on their respective capital accounts as of the end of each month, in which the items accrue pursuant to the terms of the Partnership’s Agreement. Original Class A Interests, Original Class B Interests, Special Interests, Class A Interests, Class B Interests and Institutional Interests are then charged with their applicable management fee, administrative fee, service fee and incentive fee in accordance with the Agreement.
The partners may withdraw their interests on a monthly basis upon at least 15 days’ prior written notice, subject to the discretion of the General Partner.
No Limited Partner shall be liable for any debts or liabilities of the Partnership or any losses thereof in excess of such Limited Partner’s capital contributions, except as may be required by law.
B.
Subscriptions, Distributions and Redemptions
Investments in the Partnership are made by subscription agreement, subject to acceptance by the General Partner.
The Partnership is not required to make distributions, but may do so at the sole discretion of the General Partner. A Limited Partner may request and receive redemption of capital, subject to restrictions set forth in the Agreement. The General Partner may request and receive redemption of capital, subject to the same terms as any Limited Partner.
NOTE 3 - RELATED PARTY TRANSACTIONS
A.
General Partner Management Fee
The General Partner receives a monthly management fee from the Partnership equal to 0.0625% (0.75% annually) for Original Class A, 0.146% (1.75% annually) for Original Class B, and currently 0.0417% to 0.125% (0.50% to 1.5% annually) for Special Interests of the Partnership's management fee net asset value. The General Partner receives a monthly management fee from the Partnership equal to 0.104% (1.25% annually) for Class A and Class B, and 0.0625% (0.75% annually) for Institutional Interests of the Partnership's management fee net asset value. The General Partner may declare any Limited Partner a “Special Limited Partner” and the management fees or incentive fees charged to any such partner may be different than those charged to other Limited Partners.
Total management fees earned by the General Partner, for the years ended December 31, 2012, 2011 and 2010 are shown on the Statements of Operations as Management Fee.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 3 - RELATED PARTY TRANSACTIONS (CONTINUED)
B.
Administrative Fee
The General Partner receives a monthly administrative fee from the Partnership equal to 0.0275% (0.33% annually) of the Partnership's management fee net asset value attributable to Class A and Class B Interests. Total administrative fees for the years ended December 31, 2012, 2011 and 2010 are shown on the Statements of Operations as Administrative Fee.
C.
Altegris Investments, Inc. and Altegris Futures, L.L.C.
Altegris Investments, Inc. (“Altegris Investments”), an affiliate of the General Partner, is registered as a broker-dealer with the SEC. Beginning January 1, 2011, Altegris Futures, L.L.C. (“Altegris Futures”), an affiliate of the General Partner and an introducing broker registered with the CFTC, became the Partnership’s introducing broker. Prior to January 1, 2011, Altegris Investments served as the Partnership’s introducing broker. Altegris Investments has entered into a selling agreement with the Partnership whereby it receives 2% per annum as continuing compensation for Class A Interests sold by Altegris Investments that are outstanding at month end. Altegris Futures, as the Partnership’s introducing broker, receives a portion of the commodity brokerage commissions paid by the Partnership to the Newedge USA, LLC, the Partnership’s commodity broker (the “Clearing Broker”) and interest income retained by the Clearing Broker. Additionally, the Partnership pays to its clearing brokers and Altegris Futures, at a minimum, brokerage charges at a flat rate of 0.125% (1.5% annually) of the Partnership’s management fee net asset value. Brokerage charges may exceed the flat rate described above, depending on commission and trading volume levels, which may vary. At December 31, 2012 and 2011, respectively, the Partnership had commissions and brokerage fees payable to Altegris Futures of $848,875 and $941,255, and service fees payable to Altegris Investments of $77,290 and $115,124, respectively. The following tables show the fees paid to Altegris Investments and Altegris Futures for the years ended December 31, 2012, 2011 and 2010:
The amounts above are included in Brokerage Commissions and Service Fees on the Statement of Operations, respectively. The amounts shown on the Statement of Operations include fees paid to nonrelated parties.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 4 - ADVISORY CONTRACT
The Partnership's trading activities are conducted pursuant to an advisory contract with Winton Capital Management, Limited (“Advisor”). The Partnership pays the Advisor a quarterly incentive fee of 20% of the trading profits (as defined in the Agreement). However, the quarterly incentive fee is payable only on cumulative profits achieved from commodity trading (as defined in the Agreement). Total incentive fees earned by the Advisor for the years ended December 31, 2012, 2011 and 2010 are shown on the Statements of Operations as Incentive Fee.
The Advisor receives a monthly management fee from the Partnership equal to 0.083% (1.00% annually) for Class A, Class B, and Institutional Interests of the Partnership's management fee net asset value. In addition, the General Partner has assigned a portion of its management fees earned to the Advisor. Total management fees earned by the Advisor for the years ended December 31, 2012, 2011 and 2010 and are shown on the Statements of Operations as Advisory Fee.
NOTE 5 - SERVICE FEES
Original Class A Interests and Class A Interests pay selling agents an ongoing monthly payment of 0.166% of the month-end net asset value (2% annually) of the value of interests sold by them which are outstanding at month-end as compensation for their continuing services to the Limited Partners. Selling agents may, at their option, elect to receive the service fee for the sale of Institutional Interests. Total service fees for the years ended December 31, 2012, 2011 and 2010 are shown on the Statement of Operations as Service Fees.
Institutional Interests may pay selling agents, if the selling agent so elects, an ongoing monthly payment of 0.0417% (0.50% annually) of the value of Institutional Interests sold by them which are outstanding at month-end as compensation for their continuing services to the Limited Partners holding Institutional Interests.
NOTE 6 - BROKERAGE AGREEMENT
The Partnership pays brokerage commissions to the Clearing Broker for clearing trades on its behalf, which are reflected on the Statements of Operations as Brokerage Commissions.
NOTE 7 - FINANCIAL DERIVATIVE INSTRUMENTS
The Partnership engages in the speculative trading of futures, options on futures, and forward contracts for the purpose of achieving capital appreciation. None of the Partnership’s derivative instruments are designated as hedging instruments, as defined in the Derivatives and Hedging Topic of the Accounting Standards Codification (“ASC”), nor are they used for other risk management purposes. The Advisor and General Partner actively assess, manage and monitor risk exposure on derivatives on a contract basis, a sector basis (e.g., interest rate derivatives, agricultural derivatives, etc.), and on an overall basis in accordance with established risk parameters. Due to the speculative nature of the Partnership’s derivative trading activity, the Partnership is subject to the risk of substantial losses from derivatives trading.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 7 - FINANCIAL DERIVATIVE INSTRUMENTS (CONTINUED)
The following presents the fair value of derivative contracts at December 31, 2012 and 2011. The fair value of derivative contracts is presented as an asset if in a gain position and a liability if in a loss position. Fair value is presented on a gross basis in the table below even though the futures and forward contracts qualify for net presentation in the Statement of Financial Condition.
The following presents the trading results of the Partnership’s derivative trading and information related to the volume of the Partnership’s derivative activity for the years ended December 31, 2012, 2011 and 2010.
The below captions of “Realized” and “Change in Unrealized” correspond to the captions in the Statements of Operations.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 7 - FINANCIAL DERIVATIVE INSTRUMENTS (CONTINUED)
(1) Represents the U.S. dollar equivalent of the notional amount bought or sold during the years ended December 31, 2012, 2011 and 2010. The number of contracts closed using average cost for long contracts of 1,276,262, 568,198 and 745,307 and short contracts of (1,659,259), (936,689) and (898,834) for the years ended December 31, 2012, 2011 and 2010.
NOTE 8 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND UNCERTAINTIES
The Partnership participates in the speculative trading of commodity futures contracts, options on futures contracts and forward currency contracts, substantially all of which are subject to margin requirements. The minimum amount of margin required for each contract is set from time to time in response to various market factors by the respective exchanges and interbank market makers. Further for futures contracts and options on futures contracts, the Clearing Broker has the right to require margin in excess of the minimum exchange requirement. Risk arises from changes in the value of these contracts (market risk) and the potential inability of brokers or interbank market makers to perform under the terms of their contracts (credit risk).
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 8 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND UNCERTAINTIES (CONTINUED)
The risks associated with exchange-traded contracts are generally perceived to be less than those associated with over the counter transactions because, in over-the-counter transactions, the Partnership must rely solely on the credit of its respective individual counterparties. For forward currency contracts, the Partnership is subject to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain on forward currency contracts.
The Partnership also has credit risk since the sole counterparty to all domestic futures contracts is the exchange clearing corporation. In addition, the Partnership bears the risk of financial failure by the Clearing Broker. The Partnership's policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting and control procedures. In addition, the Partnership has a policy of reviewing the credit standing of each clearing broker or counterparty with which it conducts business.
JPMorgan Chase Bank, N.A. (“Custodian”) is the Partnership’s custodian. The Partnership has cash deposited with the Custodian. For cash not held with the Clearing Broker, the Partnership receives cash management services from an affiliate of the Custodian, J.P. Morgan Investment Management Inc. (“JPMIM”). The Partnership has a substantial portion of its assets on deposit with the Custodian in U.S. government agency bonds and notes and corporate notes. Risks arise from investments in bonds and notes due to possible illiquidity and the potential for default by the issuer or counterparty. Such instruments are also sensitive to changes in interest rates and economic conditions.
NOTE 9 - INDEMNIFICATIONS
In the normal course of business, the Partnership enters into contracts and agreements that contain a variety of representations and warranties and which provide general indemnifications. The Partnership’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Partnership that have not yet occurred. The Partnership expects the risk of any future obligation under these indemnifications to be remote.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 10 - FINANCIAL HIGHLIGHTS
The following information presents the financial highlights of the Partnership for the years ended December 31, 2012, 2011 and 2010. This information has been derived from information presented in the financial statements.
Total return and the ratios to average net asset value are calculated for each class of Limited Partners’ capital taken as a whole. An individual Limited Partner’s total return and ratios may vary from the above returns and ratios due to the timing of their contributions and withdrawals and differing fee structures.
(1)
Excludes incentive fee.
ALTEGRIS WINTON FUTURES FUND, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_______________
NOTE 10 - FINANCIAL HIGHLIGHTS (CONTINUED)
Total return and the ratios to average net asset value are calculated for each class of Limited Partners’ capital taken as a whole. An individual Limited Partner’s total return and ratios may vary from the above returns and ratios due to the timing of their contributions and withdrawals and differing fee structures.
(1)
Excludes incentive fee.
NOTE 11 - SUBSEQUENT EVENTS
Management of the Partnership evaluated subsequent events through the date these financial statements were issued. There are no subsequent events to disclose.
From January 1, 2013 through March 22, 2013, the Partnership had subscriptions of $8,450,165 and redemptions of $40,092,892.