Item 1. BUSINESS
(a) General Development of Business. Polaris Futures Fund L.P. (“Polaris” or the “Partnership”), was formed on February 22, 2007, under the Delaware Revised Uniform Limited Partnership Act, as a multi-advisor commodity pool created to profit from the speculative trading of domestic commodities and foreign commodity futures contracts, forward contracts, foreign exchange commitments, options on physical commodities and futures contracts, spot (cash) commodities and currencies, exchange of futures contracts for physicals transactions, exchange of physicals for futures contracts transactions, and any rights pertaining thereto (collectively, “Futures Interests”) through the Partnership’s investments in its affiliated trading companies (each a “Trading Company” or collectively the “Trading Companies”).
The Partnership invests substantially all of its assets to multiple affiliated Trading Companies, each of which allocates substantially all of its assets to the trading program of an unaffiliated commodity trading advisor (each a “Trading Advisor” or collectively the “Trading Advisors”) registered with the Commodity Futures Trading Commission (“CFTC”), which makes investment decisions for each respective Trading Company. The Trading Companies are each Delaware limited liability companies operated by Ceres Managed Futures LLC (“Ceres” or the “General Partner”).
The Partnership commenced trading operations on August 1, 2007, in accordance with the terms of the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).
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Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”), serves as a placement agent (the “Placement Agent”) for the Partnership. Morgan Stanley & Co. LLC (“MS&Co.”) acts as each Trading Company’s primary clearing commodity broker. Morgan Stanley & Co. International plc (“MSIP”) acts as each Trading Company’s commodity broker to the extent it trades on the London Metal Exchange (collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”). Each Trading Company’s over-the-counter foreign exchange spot, options, and forward contract counterparty is either MS&Co. and/or Morgan Stanley Capital Group Inc. (“MSCG”) to the extent a Trading Company trades options on over-the-counter foreign currency forward contracts.
The financial statements of the Partnership have been prepared using the “Fund of Funds” approach and accordingly all revenue and expense information from the Trading Companies is reflected as a total net realized/net change in unrealized appreciation (depreciation) on investments on the Statements of Income and Expenses. The Partnership maintains sufficient cash balances on hand to satisfy ongoing operating expenses for the Partnership. As of December 31, 2012 and 2011, the Partnership’s cash balances were zero.
The Trading Companies and their Trading Advisors for the Partnership at December 31, 2012, are as follows:
Trading Company
Trading Advisor
Morgan Stanley Smith Barney AHL, I, LLC (“AHL I, LLC”)
Man-AHL (USA) Ltd.
Morgan Stanley Smith Barney Altis I, LLC (“Altis I, LLC”)
Altis Partners (Jersey) Limited
Morgan Stanley Smith Barney Aspect I, LLC (“Aspect I, LLC”)
Aspect Capital Limited
Morgan Stanley Smith Barney BHM I, LLC (“BHM I, LLC”)
Blenheim Capital Management, L.L.C.
Morgan Stanley Smith Barney Boronia I, LLC (“Boronia I, LLC”)
Boronia Capital Pty. Ltd.
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The trading system style of each Trading Advisor is as follows:
Commodity Trading Advisor
Trading System Style
Altis Partners (Jersey) Limited
Systematic
Aspect Capital Limited
Systematic
Blenheim Capital Management, L.L.C.
Discretionary
Boronia Capital Pty. Ltd.
Systematic
Man-AHL (USA) Ltd.
Systematic
Ceres, the general partner and commodity pool operator of the Partnership and the trading manager (the “Trading Manager”) of each Trading Company, is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc. Morgan Stanley Wealth Management is the principal subsidiary of MSSBH. MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley.
Ceres may reallocate the Partnership’s assets to different Trading Companies in its sole discretion.
Prior to February 1, 2012, units of limited partnership interest (“Units”) of the Partnership were being offered in four classes in a private placement pursuant to Regulation D under the Securities Act of 1933, as amended. Depending on the aggregate amount invested in the Partnership, limited partners received class A, B, C or D Units in the Partnership (each a “Class” and collectively the “Classes”). Certain limited partners who are not subject to the ongoing placement agent fee are deemed to hold Class Z Units. Ceres received Class Z Units with respect to its investment in the Partnership. Effective February 1, 2012, Class B and Class C Units are no longer being offered to new investors.
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Ceres is not required to maintain any investment in the Partnership, and may withdraw any portion of its interest in the Partnership at any time, as permitted by the Limited Partnership Agreement. In addition, Class Z Units are only being offered to certain individuals affiliated with Morgan Stanley at Ceres’ sole discretion. Class Z Unit holders are not subject to paying the placement agent fee but continue to be offered to existing Class B and Class C investors.
The Partnership began the year at a net asset value per Unit of $1,140.84, $1,166.26, $1,192.24, $1,205.34, and $1,245.91 and returned (9.60)%, (9.14)%, (8.68)%, (8.45)% and (7.76)% to $1,031.36, $1,059.67, $1,088.75, $1,103.49, and $1,149.28 for Class A, Class B, Class C, Class D, and Class Z, respectively, on December 31, 2012.
(b) Financial Information about Segments. The Partnership’s business consists of only one segment, which is the speculative trading of Futures Interest as discussed in Item 1(a). The Partnership does not engage in the sale of goods or services. The Partnership’s net income (loss) from operations for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 is set forth under Item 6. Selected Financial Data.
(c) Narrative Description of Business. See Item 1(a) above for a complete description of the Partnership’s business. The information requested in Section 101(c)(i) through (xiii) of Regulation S-K is not applicable to the Partnership. Additionally, the Partnership does not have any employees.
The directors and officers of the General Partner are listed in Part III. Item 10. Directors, Executive Officers and Corporate Governance.
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(d) Financial Information about Geographic Areas.
Not applicable.
(e) Available Information. Effective with the Form 10 filed on October 2, 2008, the Partnership files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports with the Securities and Exchange Commission (“SEC”). You may read and copy any document filed by the Partnership at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the Public Reference Room. The Partnership does not maintain an internet website; however, the Partnership’s SEC filings are available to the public from the EDGAR database on the SEC’s website at “http://www.sec.gov”. The Partnership’s CIK number is 0001428040.
Item 1A.
Item 1A. RISK FACTORS
This section includes some of the principal risks that investors will face with an investment in the Partnership. All trading activities take place at the Trading Company level, but since the Partnership invests substantially all of its assets in multiple Trading Companies, each of the risks applicable to the Trading Companies flow through to the Partnership.
THE UNITS IN THE PARTNERSHIP ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THEY ARE SUITABLE ONLY FOR PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
Risks Relating to the Partnership and the Offering of Units
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You Should Not Rely on Past Performance of the General Partner or the Trading Advisors In Deciding To Purchase Units. The past investment performance of other entities managed by the General Partner and the Trading Advisors is not necessarily indicative of a Partnership’s or a Trading Company’s future results. No assurance can be given that the General Partner will succeed in meeting the investment objectives of the Partnership. You may lose all or substantially all of your investment in the Partnership.
The Trading Companies and Partnership Incur Substantial Charges. Each Trading Company must pay substantial charges, and must generate profits and interest income which exceed its fixed costs in order to avoid depletion of its assets. Each Trading Company is required to pay brokerage commissions and monthly management fees to the Trading Advisors regardless of its performance. In addition, each Trading Company pays its Trading Advisor an incentive fee of 20% of new trading profits. Each Trading Company pays a fee equal to 1/12 of 0.35% of the beginning of the month net assets to cover its administrative, operating, offering and organizational expenses. As a limited partner in the Partnership, you will be indirectly responsible for the expenses paid by the Trading Companies in which the Partnership invests.
The Partnership pays the General Partner’s Fee, and pays the Placement Agent’s ongoing compensation. In addition, the Partnership pays a fee equal to 1/12 of 0.40% of the beginning of the month net asset value to cover its administrative, operating, offering and organizational expenses.
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Incentive Fees may be Paid by a Trading Company Even Though the Trading Company Sustains Trading Losses. Each Trading Company pays its Trading Advisor an incentive fee based upon the new trading profits it generates for each account in the Trading Company. These new trading profits include unrealized appreciation on open positions. Accordingly, it is possible that a Trading Company will pay an incentive fee on new trading profits that do not become realized. Also, each Trading Advisor will retain all incentive fees paid to it, even if it incurs a subsequent loss after payment of an incentive fee. Due to the fact that incentive fees are paid quarterly, it is possible that an incentive fee may be paid to a Trading Advisor during a year in which the assets allocated to the Trading Advisor suffer a loss for the year. Because each Trading Advisor receives an incentive fee based on the new trading profits earned by the Trading Advisor, the Trading Advisors may have an incentive to make investments that are riskier than would be the case in the absence of such an incentive fee being paid to the Trading Advisors based on new trading profits. In addition, as incentive fees are calculated on a Trading Company-by-Trading Company basis, it is possible that one or more Trading Advisors could receive incentive fees during periods when the Partnership has a negative return as a whole.
Restricted Investment Liquidity in the Units. There is no secondary market for the Units, and you may not redeem your Units other than as of the third to last business day of each month. Your right to receive payment for a redemption of some or all of your Units is dependent upon (a) the Partnership having sufficient assets to pay its liabilities on the redemption date, and (b) the General Partner’s receipt of your request for redemption in such manner as determined by the General Partner no later than 3:00 p.m., New York City time, on the third business day before the end of the month. The General Partner will not permit a transfer, sale, pledge or assignment of Units unless it
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is satisfied that the transfer, sale, pledge or assignment would not be in violation of Delaware law or applicable federal, state, or foreign securities laws and notwithstanding any transfer, sale, pledge or assignment, the Partnership will continue to be classified as a partnership rather than as an association taxable as a corporation under the Internal Revenue Code of 1986, as amended (the “Code”). No transfer, sale, pledge or assignment of Units will be effective or recognized by a Partnership if the transfer, sale, pledge or assignment would result in the termination of the Partnership for U.S. federal income tax purposes. Any attempt to transfer, sell, pledge or assign Units in violation of the Limited Partnership Agreement will be ineffective.
General Partner Redemptions. The General Partner has a right to redeem all or part of its investment in the Partnership at any time without notice to the limited partners. For any such redemption, the General Partner will redeem its Units at the end of the month in the same manner as any limited partner would follow to redeem Units. Additionally, the General Partner has the right to redeem Units it holds in the event redemptions for limited partners are suspended.
The Partnership’s Structure Has Conflicts of Interest
The General Partner, the Placement Agent, MS&Co., MSCG and MSIP are affiliates. As a result, the fees and other compensation received by these parties and other terms relating to the operation of the Partnership and the sale of Units have not been negotiated independently.
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Employees of the Placement Agent receive a portion of the ongoing placement agent fee paid by the Partnership or, for consulting clients, they receive the fees and expenses described in such consulting client’s consulting agreement. Therefore, these employees have a conflict of interest in making recommendations regarding the purchase or redemption of Units.
“Bid-ask” spreads are incorporated in the price of all over-the-counter foreign exchange trades executed by the Trading Companies, and MS&Co. and MSCG may benefit from such spreads as the Trading Advisors execute a substantial portion of over-the-counter foreign exchange trades with MS&Co. and MSCG and bid/ask spreads are charged.
The Trading Advisors, MS&Co., MSCG, MSIP and the General Partner and their affiliates may trade futures, forwards and options for their own accounts, and thereby compete with the Trading Companies for positions. Also, the other commodity pools managed by the General Partner and the Trading Advisors may compete with the Trading Companies for futures, forwards, and options positions. These conflicts can result in less favorable prices on the Partnership’s transactions.
No specific policies regarding conflicts of interest have been adopted by the General Partner, the Placement Agent, the Partnership, or any of their affiliates, and investors will be dependent on the good faith of, and legal and fiduciary obligations imposed on, the parties involved with such conflicts to resolve them equitably.
An Investment in Units may not Diversify an Overall Portfolio. Because futures, forwards and options have historically performed independently of traditional investments in equities and
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bonds, the General Partner believes that managed futures funds like the Partnership can diversify a traditional portfolio of equities and bonds. However, the General Partner cannot assure you that the Partnership will perform with a significant degree of non- or low-correlation to limited partners’ other investments in the future. You may lose your entire investment in the Partnership.
Neither the Partnership nor the Trading Companies are Registered Investment Companies. The Partnership and Trading Companies are not required to register, and are not registered, as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Accordingly, investors will not have the protections afforded by the Investment Company Act (which, among other matters, requires investment companies to have a majority of disinterested directors and regulates the relationship between the advisor and the investment company).
The Federal Reserve Board’s Regulation of Morgan Stanley Could Affect the Activities of the Partnership and the Trading Companies. As a financial holding company (“FHC”) under the Bank Holding Company Act, Morgan Stanley and its affiliates are subject to the comprehensive, consolidated supervision and regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve”). A significant focus of this regulatory framework is the operation of Morgan Stanley and its subsidiaries in a safe and sound manner, with sufficient capital, earnings and liquidity that Morgan Stanley may serve as a source of financial and managerial strength to Morgan Stanley Bank, N.A., and Morgan Stanley Private Bank, National Association (the “Banks”). These Banks must remain well-capitalized and well-managed if Morgan Stanley is to maintain its FHC status and continue to engage in the widest range of permissible financial activities. In addition, the
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general exercise by the Federal Reserve of its regulatory, supervisory and enforcement authority with respect to Morgan Stanley and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or the “Act”) could result in changes to Morgan Stanley’s business practices or the scope of its current lines of business, including certain limited divestitures. Although such changes could have an impact on and consequences for Morgan Stanley, the General Partner, the Partnership and the Trading Companies, any limited divestiture should not directly involve the Partnership or the Trading Companies.
The enactment of the Dodd-Frank Act will result in enhanced regulation by the Federal Reserve and, with respect to the Banks, may result in enhanced regulation by the Office of the Comptroller of the Currency (“OCC”). The Act will require that, in order to maintain FHC status, Morgan Stanley (as well as the Banks) be well-capitalized and well-managed, as those terms are defined by the Federal Reserve. The Dodd-Frank Act also grants the Federal Reserve greater regulatory authority over the subsidiaries of a bank holding company. Additionally, because it is a bank holding company with more than $50 billion in consolidated assets, Morgan Stanley is subject to enhanced supervision by and more stringent prudential standards to be established by the Federal Reserve. The Federal Reserve is required to apply higher capital requirements to bank holding companies with more than $50 billion in consolidated assets than to other bank holding companies.
The Units are not being offered by the Banks, and as such: (1) are not Federal Deposit Insurance Corporation (“FDIC”) insured, (2) are not deposits or other obligations of the Banks, (3) are not guaranteed by the Banks, and (4) involve investment risks, including possible loss of principal.
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Assets Held in Accounts at U.S. Banks May Not Be Fully Insured. The assets of each Trading Company that are deposited with Commodity Brokers or their affiliates may be placed in deposit accounts at U.S. banks. The FDIC insures deposits held at its member banks for up to $250,000 (including principal and accrued interest) for each insurable capacity (e.g., individual accounts, joint accounts, corporate accounts, etc.). If the FDIC were to become receiver of U.S. bank holding deposit accounts that were established by a Commodity Broker or one of its affiliates, then it is uncertain whether the Commodity Broker, the affiliate involved, the Trading Company, the Partnership, or the investor would be able to reclaim cash in the deposit accounts above $250,000.
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THEY ARE SUITABLE ONLY FOR PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
Risks Relating to Futures Interests Trading and the Futures Interests Markets
Futures Interests Trading is Speculative and Volatile. The rapid fluctuations in the market prices of futures, forwards, and options make an investment in the Partnership volatile. Volatility is caused by, among other things, changes in supply and demand relationships; weather; agricultural, trade, fiscal, monetary and exchange control programs; domestic and foreign political and economic events and policies; and changes in interest rates. If a Trading Advisor incorrectly predicts the direction of prices in futures, forwards, and options, large losses may occur. The Partnership’s performance will be volatile on a monthly and an annual basis. The Partnership could lose all or substantially all of its assets. The multi-advisor feature of the Partnership, through the Trading
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Companies, may reduce the return volatility relative to the performance of single-advisor investment funds.
The Trading Companies’ Futures Interests Trading is Highly Leveraged. The Trading Advisors for the Partnership use substantial leverage. Trading futures, forwards, and options involves substantial leverage, which could result in immediate and substantial losses. Due to the low margin deposits normally required in trading futures, forwards, and options (typically between 2% and 15% of the value of the contract purchased or sold), an extremely high degree of leverage is typical of a futures interests trading account. As a result, a relatively small price movement in futures, forwards, and options may result in immediate and substantial losses to the investor. For example, if 10% of the face value of a contract is deposited as margin for that contract, a 10% decrease in the value of the contract would cause a total loss of the margin deposit. A decrease of more than 10% in the value of the contract would cause a loss greater than the amount of the margin deposit.
The leverage employed by each Trading Advisor in its trading can vary substantially from month to month. This leverage, expressed as the underlying value of each Trading Company’s positions compared to the average net assets of such Trading Company, is anticipated to range from two times the Trading Company’s net assets to ten times the Trading Company’s net assets. Under certain conditions, however, a Trading Company’s leverage could exceed (or be less than) such range.
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Options Trading can be More Volatile than Futures Trading. A Trading Company may trade options on futures. Although successful options trading requires many of the same skills as successful futures trading, the risks are different. Successful options trading requires a trader to assess accurately near-term market volatility because that volatility is immediately reflected in the price of outstanding options. Correct assessment of market volatility can therefore be of much greater significance in trading options than it is in many long-term futures strategies where volatility does not have as great an effect on the price of a futures contract.
Market Illiquidity May Cause Less Favorable Trade Prices. Although the Trading Advisors for each Trading Company generally will purchase and sell actively traded contracts where last trade price information and quoted prices are readily available, the prices at which a sale or purchase occurs may differ from the prices expected because there may be a delay between receiving a quote and executing a trade, particularly in circumstances where a market has limited trading volume and prices are often quoted for relatively limited quantities. In addition, most U.S. futures exchanges have established “daily price fluctuation limits” which preclude the execution of trades at prices outside of the limit, and, from time to time, the CFTC or the exchanges may suspend trading in market disruption circumstances. In these cases it is possible that a Trading Company could be required to maintain a losing position, that it otherwise would execute, and incur significant losses or be unable to establish a position and miss a profit opportunity.
Trading on Foreign Exchanges Presents Greater Risks to the Trading Companies than Trading on U.S. Exchanges. Each Trading Company trades on exchanges located outside the United States. Trading on U.S. exchanges is subject to CFTC regulation and oversight, including,
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for example, minimum capital requirements for commodity brokers, segregation of customer funds, regulation of trading practices on the exchanges, prohibitions against trading ahead of customer orders, prohibitions against filling orders off exchanges, prescribed risk disclosure statements, testing and licensing of industry sales personnel and other industry professionals, and recordkeeping requirements. Trading on foreign exchanges is not regulated by the CFTC or any other U.S. governmental agency or instrumentality and may be subject to regulations that are different from those to which U.S. exchange trading is subject, provide less protection to investors than trading on U.S. exchanges, and be less vigorously enforced than regulations in the U.S.
The percentage of each Trading Company’s positions which are traded on foreign exchanges can vary significantly from month to month. The average percentage of each Trading Company’s positions which are expected to be traded on foreign exchanges in any given month is anticipated to range from 30% to 65% of such Trading Company’s positions, but could be greater or less than such expected range during any time period.
Positions on foreign exchanges also are subject to the risk of, among other things, exchange controls, expropriation, excessive taxation or government disruptions.
A Trading Company may incur losses when determining the value of its foreign positions in U.S. dollars because of fluctuations in exchange rates.
The Unregulated Nature of the Over-The-Counter (“OTC”) Markets Creates Counterparty Risks that Do Not Exist in Futures Trading on Exchanges. Unlike futures contracts, over-the-
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counter “spot” and forward contracts are entered into between private parties off of an exchange and are not regulated by the CFTC or by any other U.S. or foreign governmental agency. Due to the fact that such contracts are not traded on an exchange, the performance of those contracts is not guaranteed by an exchange or its clearinghouse, and a Trading Company is at risk with respect to the ability of the counterparty to perform on the contract, including the creditworthiness of the counterparty. Trading in the over-the-counter foreign exchange markets is not regulated; therefore, there are no specific standards or regulatory supervision of trade pricing and other trading activities that occur in those markets. The Trading Companies trade such contracts with MS&Co. and MSCG and are at risk with respect to the creditworthiness and trading practices of each of MS&Co. and MSCG as the counterparty to the contracts. The relative exposure of the Partnership to contracts that are not cleared by a registered clearing firm as of December 31, 2012 is approximately 18.16%, all of which represents OTC foreign exchange forward and/or options on foreign exchange forward transactions.
The Dodd-Frank Act will affect the manner in which OTC swap transactions are traded and the credit risk associated with such trading. Depending upon actions taken by regulatory authorities, these changes may also affect the manner of trading of OTC foreign currency transactions. The general effective date of the derivatives portion of the Dodd-Frank Act is one year following its enactment. Transactions that have been entered into prior to implementation of the provisions of the Dodd-Frank Act will remain in effect. Accordingly, even after the new regulatory framework is fully implemented, the risks of OTC foreign exchange transactions will continue to be considerations with respect to transactions entered into prior to the implementation of the provisions of the Dodd-Frank Act.
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The percentage of each Trading Company’s positions that are expected to constitute forward currency contracts can vary substantially from month to month.
Trading Swaps Creates Distinctive Risks. The Trading Advisors may trade in certain swaps. Unlike futures and options on futures contracts and commodities, swap contracts are currently not generally traded on or cleared by an exchange or clearinghouse. Nevertheless, the Dodd-Frank Act contemplates that certain swaps will be exchange-traded and cleared by a clearinghouse in the future and the CFTC proposed regulations requiring that certain classes of interest rate and credit default swaps be cleared in the future. As with any forward foreign currency or spot contract, until such time as these transactions are cleared or guaranteed by an exchange, the Trading Companies will be subject to the risk of counterparty default on its swaps. Because swaps do not generally involve the delivery of underlying assets or principal, the loss would be calculated by referring to the current market value of the contract. One of the factors in such calculation may be the net present value of future payments required by contract. In addition, some swap counterparties may require the Trading Companies to deposit collateral to support the Trading Companies’ obligations under the swap agreement but may not themselves deposit collateral. If the counterparty to such a swap defaults, a Trading Company would be a general unsecured creditor for any termination amounts owed by the counterparty as well as for any collateral deposits in excess of the amounts owed by a Trading Company to the counterparty, which would result in losses to such Trading Company (and the Partnership).
Swap counterparties may hold collateral in U.S. or non-U.S. depositories. Non-U.S. depositories are not subject to U.S. regulation. The Trading Companies’ assets held in these depositories are
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subject to the risk that events could occur which would hinder or prevent the availability of these funds for distribution to customers including the Trading Companies. Such events may include actions by the government of the jurisdiction in which the depository is located including expropriation, taxation, moratoria and political or diplomatic events.
Deregistration of the Commodity Pool Operator or Commodity Trading Advisors Could Disrupt Operations. The General Partner is a registered commodity pool operator and each Trading Advisor is registered with the CFTC as a commodity trading advisor. If the CFTC were to terminate, suspend, revoke or not renew the registration of the General Partner, the General Partner would withdraw as general partner of the Partnership. The limited partners would then determine whether to select a replacement general partner or to dissolve the Partnership. If the CFTC were to terminate, suspend, revoke or not renew the registration of any Trading Advisor, the General Partner would terminate the Trading Advisor’s advisory agreement(s) with the Partnership. The General Partner could reallocate the Partnership’s assets managed by the relevant Trading Advisor to new Trading Advisor(s), or terminate the Partnership. No action is currently pending or threatened against the General Partner or the Trading Advisors.
The Trading Companies are Subject to Speculative Position Limits. The CFTC and/or U.S. exchanges have established “speculative position limits” on the maximum net long or net short position, which any person or group of persons may hold or control in particular futures, options on futures and swaps that perform a significant price discovery function. Most exchanges also limit the amount of fluctuation in commodity futures contract prices on a single trading day. The trading instructions of the Trading Advisors may have to be modified, and positions held by the Trading
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Companies may have to be liquidated in order to avoid exceeding these limits. Such modification or liquidation could adversely affect the operations and profitability of the Trading Companies by increasing transaction costs to liquidate positions and limiting potential profits on the liquidated positions.
In October 2011, the CFTC adopted new rules governing position limits. In September 2012, these rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC for further consideration. It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling. The vacated rules established position limits on certain futures contracts and any economically equivalent futures, options and swaps. These rules could have an adverse effect on the Trading Advisors and the Trading Companies.
The Trading Companies have Credit Risk to the Commodity Brokers. Each Trading Company has credit risk because the Commodity Brokers act as the futures commission merchants for futures transactions or the counterparties of OTC transactions, with respect to most of each Trading Company’s assets. As such, in the event that the Commodity Brokers are unable to perform, the Trading Companies’ assets are at risk and, in such event, investors may only recover a pro rata share of their investment in the Partnership or nothing at all. Exchange-traded futures and futures-styled option contracts are marked to market on a daily basis, with variations in value credited or charged to each Trading Company’s account on a daily basis. The Commodity Brokers, as futures commission merchants for each Trading Company’s exchange-traded contracts, are required, pursuant to CFTC regulations, to segregate from their own assets, and for the sole benefit
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of their commodity customers, all funds held by them with respect to exchange-traded futures and futures-styled options contracts, including an amount equal to the net unrealized gain on all open futures and futures-styled options contracts. With respect to each Trading Company’s over-the-counter foreign exchange contracts with MS&Co. and MSCG prior to the implementation of the Dodd-Frank Act’s provisions, there were no daily settlements of variations in value, and there was no requirement to segregate funds held with respect to such contracts. In the event of a shortfall in segregated customer funds held by the futures commission merchant, the Trading Companys’ assets on account with the futures commission merchant may be at risk, and in such event, the Trading Company may only recover a pro rata share of the available customer funds.
Risks Relating to the Trading Advisors
You should not rely on the past performance of the Trading Advisors in deciding to purchase Units. Since the future performance of a Trading Advisor is unpredictable, each Trading Advisor’s past performance is not necessarily indicative of future results.
Reliance on the Trading Advisors to Trade Successfully. Each Trading Advisor is responsible for making all futures, forwards, and options trading decisions on behalf of the applicable Trading Company. The General Partner has no control over the specific trades that the Trading Advisors may make, leverage used, risks and/or concentrations assumed, or whether the Trading Advisors will act in accordance with the disclosure documents or descriptive materials furnished by them to the General Partner. The General Partner can provide no assurance that the trading programs employed by the Trading Advisors will be successful.
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Market Factors may Adversely Influence the Trading Programs. Often, the most unprofitable market conditions for the Trading Companies are those in which prices “whipsaw,” that is, such price moves quickly upward (or downward), then reverses, then moves upward (or downward) again, then reverses again. In such conditions, the Trading Advisors may establish positions based on incorrectly identifying both the brief upward or downward price movements as trends, where in fact no trends sufficient to generate profits develop.
Possible Consequences of Using Multiple Trading Advisors. Each Trading Advisor makes trading decisions independent of the other Trading Advisors for the Partnership. Thus, it is possible
that the Partnership could hold opposite positions in the same or similar futures, forwards, and options, thereby offsetting any potential for profit from these positions.
Increasing Assets Managed by a Trading Advisor may Adversely Affect Performance. The rates of return achieved by a Trading Advisor often diminish as the assets under its management increase. This can occur for many reasons, including the inability of the Trading Advisor to execute larger position sizes at desired prices and because of the need to adjust the Trading Advisor’s trading program to avoid exceeding speculative position limits. These are limits established by the CFTC and the exchanges on the number of speculative futures and options contracts in a commodity that one trader may own or control. The Trading Advisors have not agreed to limit the amount of additional assets that they will manage.
You will not be Aware of Changes to Trading Programs. Because of the proprietary nature of each Trading Advisor’s trading programs, you generally will not be advised if adjustments are made
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to a Trading Advisor’s trading program in order to accommodate additional assets under management or for any other reason.
A Trading Advisor may Terminate its Advisory Agreement. Generally, the advisory agreements with the current Trading Advisors had initial one-year terms, which renew for additional one-year terms annually, unless terminated by the Trading Manager or the Trading Advisor. One of the advisory agreements had a shorter initial term and has a three-month renewal term. In the event that an advisory agreement is not renewed, the Trading Manager may not be able
enter into arrangements with that Trading Advisor or another trading advisor on terms substantially similar to the advisory agreements described in the Partnership’s private placement memorandum.
Disadvantages of Replacing or Switching Trading Advisors. A Trading Advisor generally is required to recoup previous trading losses before it can earn performance-based compensation. However, the Trading Manager may elect to replace a Trading Advisor that has a “loss carry-forward.” In that case, the Trading Company would lose the “free ride” of any potential recoupment of the prior losses. In addition, the new Trading Advisor would earn performance-based compensation on the first dollars of investment profits. The effect of the replacement of, or the reallocation of assets away from, Trading Advisors therefore could be significant.
Partnership Performance May Be Hindered by Increased Competition for Positions. Assets in managed futures have grown from an estimated $300 million in 1980 to over 300 billion in 2012. This has resulted in increased trading competition. Since futures are traded in an auction-like market, the more competition there is for some contracts, the more difficult it is for the Partnership’s Trading Advisors to obtain the best prices for the Partnership.
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You Will Not Have Access to the Partnership’s Positions and Must Rely on the General Partner to Monitor the Trading Advisors. As a Limited Partner, you will not have access to the Trading Companies’ trade positions. Consequently, you will not know whether the Trading Advisors are adhering to the Partnership’s trading policies and must rely on the ability of the General Partner to monitor trading and protect your investment.
Taxation Risks
You May Have Tax Liability Attributable To Your Interest in a Partnership Even If You Have Received No Distributions and Redeemed No Units and Even If the Partnership Generated a Loss. If the Partnership has a profit for a taxable year, the profit will be includible in your taxable income, whether or not cash or other property is actually distributed to you by the Partnership. The General Partner presently does not intend to make any distributions from the Partnership. Accordingly, it is anticipated that U.S. federal income taxes on your allocable share of the Partnership’s profits will exceed the amount of distributions to you, if any, for a taxable year, so you must be prepared to fund any tax liability from redemptions of Units or other sources. In addition, the Partnership may have capital losses from trading activities that cannot be deducted against the Partnership’s ordinary income (e.g., interest income, periodic net swap payments) so that you may have to pay taxes on ordinary income even if the Partnership generates a net loss.
The Partnership’s Tax Returns Could be Audited. The Internal Revenue Service (the “IRS”) could audit the Partnership’s U.S. federal income tax returns. If an audit results in an adjustment to the Partnership’s tax return, limited partners in the Partnership could be required to file amended returns and pay additional tax.
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You Will Recognize Short-Term Capital Gain. Profits on futures contracts traded in regulated U.S. and some foreign exchanges, foreign currency contracts traded in the interbank market, and U.S. and some foreign exchange-traded options on commodities are generally taxed as short-term
capital gain to the extent of 40% of gains with respect to Section 1256 contracts and at least 50% of the gain arising from a mixed straddle account and are taxed at ordinary income rates.
The IRS Could Take the Position that Deductions for Certain Partnership Expenses Are Subject To Various Limitations. Non-corporate taxpayers are subject to certain limitations for deductions for “investment advisory expenses” for U.S. federal income tax and alternative minimum tax purposes. The IRS could argue that certain Partnership expenses are investment advisory expenses. Prospective investors should discuss the tax consequences of an investment in the Partnership with their tax advisors.
Tax Laws Are Subject To Change at Any Time, Including Already Enacted Changes Scheduled To Take Effect in 2013. Tax laws and court and IRS interpretations thereof, are subject to change at any time, possibly with retroactive effect. For example, various tax rate reductions for non-corporate taxpayers enacted in 2001 and 2003 are scheduled to expire for taxable years beginning after December 31, 2012. Further, the maximum ordinary income rates for non-corporate taxpayers are scheduled to increase from 35% to 39.6%, and the maximum long-term capital gains rates are scheduled to increase from 15% to 20%. Prospective investors are urged to discuss scheduled and potential tax law changes with their tax advisors.
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Non-U.S. Investors May Face Exchange Rate Risk and Local Tax Consequences. Non-U.S. investors should note that Units are denominated in U.S. dollars and that changes in rates of exchange between currencies may cause the value of their investment to decrease or to increase. Non-U.S. investors should consult their own tax advisors concerning the applicable U.S. and foreign tax implications of this investment.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2.
Item 2. PROPERTIES
The Partnership’s executive and administrative offices are located within the offices of the General Partner. The General Partner’s offices utilized by the Partnership are located at 522 Fifth Avenue 14th Floor, New York, New York 10036.
Item 3.
Item 3. LEGAL PROCEEDINGS
On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named MS&Co. or (the “Company”).
MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the Securities and Exchange Commission as required by the Securities Exchange Act of 1934, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-
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regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2012, 2011, 2010, 2009, and 2008.
In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.
MS&Co. is a Delaware corporation with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.
During the preceding five years, the following administrative, civil, or criminal actions pending, on appeal or concluded against MS&Co. or any of its principals are material within the meaning of CFTC Rule 4.24(l)(2) or 4.34(k)(2):
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On June 2, 2009, Morgan Stanley executed a final settlement with the Office of the New York State Attorney General (“NYAG”) in connection with its investigation relating to the sale of auction-rate securities (“ARS”). Morgan Stanley agreed, among other things to: (1) repurchase at par illiquid ARS that were purchased by certain retail clients prior to February 13, 2008; (2) pay certain retail clients that sold ARS below par the difference between par and the price at which the clients sold the securities; (3) arbitrate, under special procedures, claims for consequential damages by certain retail clients; (4) refund refinancing fees to certain municipal issuers of ARS; and (5) pay a total penalty of $35 million. On August 13, 2008, Morgan Stanley reached an agreement in principle on substantially the same terms with the Office of the Illinois Secretary of State, Securities Department (on behalf of a task force of other states under the auspices of the North American Securities Administrators Association) that would settle their investigations into the same matters. A separate investigation of these matters by the SEC remains ongoing.
On June 5, 2012, the Company consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by the CFTC to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures transactions unless there is an Exchange for Related Position (EFRP). Specifically, the CFTC found that from April 2008 through October 2009, the Company violated Section 4c(a) of the Commodity Exchange Act and Commission Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBOT) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative
- 27 -
position. In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Act and Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, the Company accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. The Company entered into corresponding and related settlements with the CME and CBOT in which the CME found that the Company violated CME Rules 432.Q and 538 and fined the Company $750,000 and CBOT found that the Company violated CBOT Rules 432.Q and 538 and fined the Company $1,000,000.
On August 25, 2008, the Company and two ratings agencies were named as defendants in a purported class action related to securities issued by a structured investment vehicle called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case is styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. and is pending in the United States District Court for the Southern District of New York (“SDNY”). The complaint alleges, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime residential mortgage backed securities held by the Cheyne SIV. The plaintiffs currently assert allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. The plaintiffs’ motion for class certification was denied in June 2010. The court denied the Company’s motion for summary
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judgment on the aiding and abetting fraud claim in August 2012. The Company’s motion for
summary judgment on the negligent misrepresentation claim, filed on November 30, 2012, is pending. The court has set a trial date of May 6, 2013. There are currently 14 named plaintiffs in the action claiming damages of approximately $638 million. Plaintiffs are also seeking punitive damages. Based on currently available information, the Company believes that the defendants could incur a loss up to approximately $638 million, plus pre- and post-judgment interest, fees and costs.
On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al.,
respectively. Amended complaints were filed on June 10, 2010. The amended complaints allege
that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by the Company in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On July 29, 2011 and September 8, 2011, the court presiding over both actions sustained defendants’ demurrers with respect to claims brought under the Securities Act, and overruled defendants’ demurrers with respect to all other claims. At January 25, 2013, the current unpaid balance of the mortgage pass through certificates at issue in these cases was approximately $365 million, and the certificates had
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not yet incurred losses. Based on currently available information, the Company believes it could
incur a loss up to the difference between the $365 million unpaid balance of these certificates and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against the Company and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints assert claims on behalf of certain clients of plaintiff’s affiliates and alleges that defendants made untrue statements and material omissions in
the sale of a number of mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Company or sold to plaintiff’s affiliates’ clients by the Company in the two matters was approximately $344 million. The complaints raise claims under the Massachusetts Uniform Securities Act and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On October 14, 2011, plaintiffs filed an amended complaint in each action. On November 22, 2011, defendants filed a motion to dismiss the amended complaints. On March 12, 2012, the court denied defendants’ motion to dismiss with respect to plaintiff’s standing to bring suit. Defendants sought interlocutory appeal from that decision on April 11, 2012. On April 26, 2012, defendants filed a second motion to dismiss for failure to state a claim upon which relief can be granted, which the court denied, in substantial part, on October 2, 2012. Based on currently available information, the Company believes it could incur
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a loss for these actions of up to the difference between the as yet undetermined unpaid balance of these certificates and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, which is styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al. and is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY, NY County”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint
asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court presiding over this action denied the Company’s motion to dismiss the complaint and on March 21, 2011, the Company appealed that order. On July 7, 2011, the appellate court affirmed the lower court’s decision denying the motion to dismiss. Based on currently available information, the Company believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.
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On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by the Company in this action was approximately $203 million. The complaint raises claims under Illinois law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On March 24, 2011, the court granted plaintiff leave to file an amended complaint. On May 27, 2011, defendants filed a motion to dismiss the amended complaint, which motion was denied on September 19, 2012. The Company filed its answer on December 21, 2012. At January 25, 2013, the current unpaid balance of the mortgage pass through certificates at issue in this case was approximately $105 million, and certain certificates had begun to incur losses. Based on currently available information, the Company believes it could incur a loss up to the difference between the $105 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley
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Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that
defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately $153 million. The amended complaint raises claims under the Ohio Securities Act, federal securities laws, and common law and seeks, among other things, to rescind the plaintiffs’ purchases of such certificates. On May 21, 2012, the Company filed a motion to dismiss the amended complaint, which motion was denied on August 3, 2012. The court has set a trial date of November 2013. At January 25, 2013, the current unpaid balance of the mortgage pass through certificates at
issue in this case was approximately $123 million, and certain certificates had begun to incur losses.
Based on currently available information, the Company believes it could incur a loss up to the difference between the $123 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus post-judgment interest, fees and costs. The Company may be entitled to an offset for interest received by the plaintiff prior to a judgment.
On September 2, 2011, the Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including the Company. A complaint against the Company and other defendants was filed in the Supreme Court of NY, NY County, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material
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omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass through certificates with an original unpaid balance of approximately $11 billion. The complaint raises claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On September 26, 2011, defendants removed the action to the SDNY and on October 26, 2011, the FHFA moved to remand the action back to the Supreme Court of the State of New York. On May 11, 2012, plaintiff withdrew its motion to remand. On July 13, 2012, the Company filed a motion to dismiss the complaint, which motion was denied in large part on November 19, 2012. Trial is currently scheduled to begin in January 2015. At January 25, 2013, the current unpaid balance of the mortgage pass through
certificates at issue in these cases was approximately $2.9 billion, and the certificates had incurred losses in excess of $40 million. Based on currently available information, the Company believes it could incur a loss up to the difference between the $2.9 billion unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information. The Partnership has issued no stock. There is no established public trading market for Units of the Partnership.
(b) Holders. The number of holders of Units at December 31, 2012, was approximately 2,504.
(c) Distributions. No distributions have been made by the Partnership since it commenced trading operations on August 1, 2007. Ceres has sole discretion to decide what distributions, if any, shall be made to investors in the Partnership. Ceres currently does not intend to make any distributions of the Partnership’s profits until termination of the Partnership.
(d) Securities Authorized for Issuance under Equity Compensation Plans. None.
(e) Performance Graph. Not applicable.
(f) Securities Sold; Consideration. The Registrant’s Units of limited partnership interest are being sold only to persons and entities who are accredited investors as the term is defined in Rule 501(a) of Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Units were purchased by accredited investors.
The aggregate proceeds of securities sold in all share Classes to the limited partners through December 31, 2012, was $336,097,206. The Partnership received $2,317,000 in consideration from the sale of Units to Ceres.
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Proceeds of net offering were used for the trading of commodity interests including futures contracts, options, and forward and swap contracts.
(g) Purchases of Equity Securities by the Issuer and Affiliated Purchasers. The following chart sets forth the purchases of redeemable Units by the Partnership.
Period
(a) Total Number
of Redeemable Units
Purchased*
(b) Average
Price Paid
per Redeemable Unit**
(c) Total Number
Of Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
(d) Maximum Number
(or Approximate Dollar Value)
of Redeemable Units that May Yet Be Purchased Under the
Plans or Programs
Class A
$
October 1, 2012 - October 31, 2012
3,024.518
1,040.56
N/A
N/A
November 1, 2012 - November 30, 2012
2,640.239
1,041.75
N/A
N/A
December 1, 2012 - December 31, 2012
5,540,453
1,031.36
N/A
N/A
11,205.210
1,036.29
Period
(a) Total Number
of Redeemable Units
Purchased*
(b) Average
Price Paid per Redeemable Unit**
(c) Total Number
Of Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
(d) Maximum Number
(or Approximate Dollar Value)
of Redeemable Units that May Yet Be Purchased Under the
Plans or Programs
Class B
$
October 1, 2012 - October 31, 2012
492.931
1,068.23
N/A
N/A
November 1, 2012 - November 30, 2012
1,281.430
1,069.89
N/A
N/A
December 1, 2012 - December 31, 2012
200.000
1,059.67
N/A
N/A
1,974.361
1,068.44
Period
(a) Total Number
of Redeemable Units
Purchased*
(b) Average
Price Paid
per Redeemable Unit**
(c) Total Number
Of Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
(d) Maximum Number
(or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
Plans or Programs
Class C
$
October 1, 2012 - October 31, 2012
-
-
N/A
N/A
November 1, 2012 - November 30, 2012
1,672.320
1,098.79
N/A
N/A
December 1, 2012 - December 31, 2012
1,234.318
1,088.75
N/A
N/A
2,906.638
1,094.52
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Period
(a) Total Number
of Redeemable Units
Purchased*
(b) Average
Price Paid
per Redeemable Unit**
(c) Total Number
Of Redeemable Units
Purchased as part
Of Publicly
Announced
Plans or Programs
(d) Maximum Number (or Approximate Dollar Value) of Redeemable Units that May Yet Be Purchased Under the
Plans or Programs
Class Z
$
October 1, 2012 - October 31, 2012
-
-
N/A
N/A
November 1, 2012 - November 30, 2012
266.597
1,158.90
N/A
N/A
December 1, 2012 - December 31, 2012
80.832
1,149.28
N/A
N/A
347.429
1,156.66
*
Generally, limited partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.
**
Redemptions of Redeemable Units are effected as of the last day of each month at the net asset value per Redeemable Unit as of that day.
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Item 6.
Item 6. SELECTED FINANCIAL DATA (in dollars)
For the Years Ended December 31,
$
$
$
$
$
Total Realized/Net Change in Unrealized Appreciation (Depreciation) on Investments
(12,921,925)
(35,519,103)
26,656,997
1,052,422
15,537,985
Net Income (Loss)
(18,594,612)
(42,318,117)
21,036,510
(2,980,528)
13,226,691
Net Income (Loss) per Unit by Share Class
A
(109.48)
(229.43)
129.24
(46.81)
218.76
B
(106.59)
(227.45)
137.70
(40.86)
225.59
C
(103.49)
(225.30)
146.37
(34.79)
232.48
D*
(101.85)
(224.14)
150.77
(21.29)
N/A
Z
(96.63)
(220.48)
164.37
(22.29)
246.41
Total Assets
168,705,774
224,043,186
225,483,235
179,266,528
116,967,239
Total Partners’ Capital
161,383,828
218,419,608
221,010,682
173,799,662
109,725,317
Net asset value per Units by Share Class
A
1,031.36
1,140.84
1,370.27
1,241.03
1,287.84
B
1,059.67
1,166.26
1,393.71
1,256.01
1,296.87
C
1,088.75
1,192.24
1,417.54
1,271.17
1,305.96
D*
1,103.49
1,205.34
1,429.48
1,278.71
N/A
Z
1,149.28
1,245.91
1,466.39
1,302.02
1,324.31
* Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,300.00.
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Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As of December 31, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 24.50%; Currency 20.01%; Equity 15.70%; and Commodity 39.70%.
Liquidity. MS&Co. and its affiliates act as custodians of each Trading Company’s assets pursuant to customer agreements and foreign exchange customer agreements. The Partnership allocates substantially all of its assets to multiple Trading Companies. Such assets are deposited in the Trading Companies’ trading accounts with MS&Co. or its affiliates. The funds in such accounts are available for margin and are used to engage in Futures Interest trading pursuant to instructions provided by the Trading Advisors. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds. Since the Partnership’s sole purpose is to trade Futures Interests indirectly through the investment in the Trading Companies, it is expected that the Trading Companies will continue to own such liquid assets for margin purposes.
The Trading Companies’ investment in Futures Interests may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuations limits” or “daily limits.” Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within
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the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Trading Companies from promptly liquidating their futures or options contracts and result in restrictions on redemptions.
There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Trading Companies from trading in potentially profitable markets or prevent the Trading Companies from promptly liquidating unfavorable positions in such markets, subjecting them to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.
There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.
Capital Resources. The Partnership does not have, nor does it expect to have, any capital assets. Redemptions, exchanges, and sales of Units in the future will affect the amount of funds available for investments in Futures Interests in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future inflows and outflows of Units.
There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.
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Results of Operations
General. The Partnership's results depend on the Trading Advisors and the ability of each Trading Advisor's trading program to take advantage of price movements in the futures, forwards, and options markets. The following presents a summary of the Partnership's operations for each of the three years in the period ended December 31, 2012 and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.
The Partnership’s results of operations set forth in the financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts that the Trading Companies trade are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and fair value is recorded on the Statements of Income and Expenses as “Net change in unrealized appreciation (depreciation) on investments” for open contracts, and recorded as “Realized” when open positions are closed out. The sum of these amounts constitutes the Trading Company’s trading results. The fair value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.) the close of the business day.
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Ceres believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.
Year Ended December 31, 2012
The Partnership recorded total realized/net change in unrealized depreciation on investments of $(12,921,925) and expenses totaling $5,672,687, resulting in a net loss of $18,594,612 for the year ended December 31, 2012. The Partnership’s net asset value per Unit by share Class is provided in the table below.
Share Class
NAV at 12/31/12
NAV at 12/31/11
A
$1,031.36
$1,140.84
B
$1,059.67
$1,166.26
C
$1,088.75
$1,192.24
D*
$1,103.49
$1,205.34
Z
$1,149.28
$1,245.91
*Class D Units were initially offered on March 1, 2009, at a net asset value per Unit of $1,300.00
Total subscriptions and redemptions across all share Classes for the year ended December 31, 2012, were $16,107,308 and $54,548,476, respectively, and the Partnership’s ending capital was $161,383,828 at December 31, 2012, a decrease of $57,035,780 from ending capital at December 31, 2011 of $218,419,608.
The most significant trading losses during the year were incurred within the agricultural complex during September from long futures positions in the soybean complex as prices fell on speculation favorable weather in August limited crop damage caused by the severe drought in June and July.
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Additional agricultural losses were recorded during December from long positions in cocoa futures as prices fell to the lowest level in almost six months on speculation supplies from West Africa were improving. Within the metals markets, losses were experienced during March from long positions in palladium and aluminum futures as prices moved lower on speculation of reduced demand from China, the world’s biggest metals purchaser. Additional losses were recorded within the metals sector during October from long positions in palladium and platinum futures as prices declined on speculation of reduced metals demand from China amid a slowing economy. Within the energy markets, losses were incurred during July from short futures positions in crude oil and its related products as prices advanced on concern that instability in the Middle East will disrupt energy supplies. Additional losses were experienced within this sector during November from short futures positions in crude oil and its related products as prices advanced after the strongest Chinese manufacturing report in seven months signaled an economic recovery from the world’s second-biggest energy consumer. Within the currency markets, losses were experienced during March from long positions in the Australian dollar, South African rand, and New Zealand dollar versus the U.S. dollar as the value of these commodity-linked currencies fell against the U.S. dollar after concern over earnings in China reduced demand for higher-yielding currency assets. Further currency losses were recorded during August from long positions in the Australian dollar versus the euro, British pound, and Canadian dollar as the value of the Australian dollar fell against these currencies amid concern a slowdown in China, Australia’s biggest trading partner, would hamper growth. A portion of the Partnership’s losses during the year was offset by gains recorded within the global stock index markets during February from long positions in U.S., Pacific Rim, and European equity index futures as prices rose amid positive economic news, including a better-than-expected U.S. employment report and an expansion in manufacturing in China, Europe, and the U.S. During December, additional gains were achieved from long positions in Asian equity index
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futures as prices rose after China’s manufacturing survey added to signs of recovery in the world’s second-largest economy.
Year Ended December 31, 2011
The Partnership recorded total realized/net change in unrealized depreciation on investments of ($35,519,103) and expenses totaling $6,799,014, resulting in a net loss of $42,318,117 for the year ended December 31, 2011. The Partnership’s net asset value per Unit by share Class is provided in the table below.
Share Class
NAV at 12/31/11
NAV at 12/31/10
A
$1,140.84
$1,370.27
B
$1,166.26
$1,393.71
C
$1,192.24
$1,417.54
D
$1,205.34
$1,429.48
Z
$1,245.91
$1,466.39
Total subscriptions and redemptions across all share Classes for the year ended December 31, 2011, were $76,384,741 and $36,657,698, respectively, and the Partnership’s ending capital was $218,419,608 at December 31, 2011, a decrease of $2,591,074 from ending capital at December 31, 2010 of $221,010,682.
The most significant trading losses during the year were incurred in the metals markets during May and June from long positions in aluminum futures as prices fell after China restricted bank lending, spurring speculation anti-inflation policies may slow growth in the world’s second-biggest economy and biggest purchaser of base metals. During August and September, long futures positions in aluminum, copper, and zinc resulted in additional losses as prices declined after a report revealed U.S. manufacturing slowed more than estimated, as well as a result of inflationary pressures in China.
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Additional losses in this sector were experienced during November from long futures positions in aluminum, palladium, and copper as prices fell on concern that U.S. lawmakers may fail to agree on budget cuts and European leaders may struggle to contain the region’s sovereign debt crisis, thereby eroding prospects for metal demand. Within the global stock index markets, losses were incurred during March from long positions in Japanese and European equity index futures as prices reversed lower amid concern that the natural disaster and subsequent nuclear crisis in Japan was going to threaten the global economic recovery. Additional losses were experienced in this sector during May and June from long positions in U.S., European, and Pacific Rim equity index futures. Within the agricultural complex, losses were incurred during March due to long positions in cocoa futures as prices fell on signs the political turmoil that hampered exports may be easing in the Ivory Coast, the world’s biggest producer of cocoa. In June, long positions in wheat futures resulted in losses as prices fell throughout the month. During September, long futures positions in corn and soybeans also resulted in losses as prices declined on speculation that Europe’s sovereign debt crisis may hinder the global economy, reducing demand for the grains. Losses were also recorded within the currency markets during January due to long positions in the Australian dollar, Japanese yen, and South African rand versus the U.S. dollar as the value of these currencies declined against the U.S. dollar following the release of minutes from the previous month’s U.S. Federal Reserve meeting that showed optimism about the U.S. economy. Additional currency losses were incurred during August due to long positions in the South African rand, Canadian dollar, and Australian dollar versus the U.S. dollar as the value of the U.S. dollar was boosted higher against these “commodity currencies” by “safe haven” demand following central bank intervention in the Japanese yen. Within the energy markets, losses were incurred primarily during May due to long futures positions in crude oil and its related
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products as prices moved lower after signs the global economic recovery is slowing spurred concern that energy demand may weaken. Additional losses were recorded in this sector during October from short futures positions in crude oil and its related products as prices advanced higher after optimism about the containment of the European sovereign debt crisis spurred speculation energy demand may rise. A portion of the Partnership’s losses during the year was offset by gains recorded within the global interest rate sector from long positions in European, U.S., and Australian fixed income futures as prices advanced higher throughout the majority of the third quarter due to concern about the European sovereign debt crisis and a faltering global economy.
Year Ended December 31, 2010
The Partnership recorded total realized/net change in unrealized appreciation on investments of $26,656,997 and expenses totaling $5,620,487, resulting in net income of $21,036,510 for the year ended December 31, 2010. The Partnership’s net asset value per Unit by share Class is provided in the table below.
Share Class
NAV at 12/31/10
NAV at 12/31/09
A
$1,370.27
$1,241.03
B
$1,393.71
$1,256.01
C
$1,417.54
$1,271.17
D
$1,429.48
$1,278.71
Z
$1,466.39
$1,302.02
Total subscriptions and redemptions across all share Classes for the year ended December 31, 2010, were $52,479,089 and $26,304,579, respectively, and the Partnership’s ending capital was $221,010,682 at December 31, 2010, an increase of $47,211,020 from ending capital at December 31, 2009 of $173,799,662.
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The most significant trading gains were recorded within the global interest rate sector throughout the majority of the first nine months of 2010 from long positions in U.S., European, and Japanese fixed-income futures. Prices in this sector increased during the first quarter on concerns that lending restrictions in China, possible reductions in U.S. stimulus measures, and Greece’s fiscal struggles might stifle the global economic rebound. Prices were then pressured higher during the second quarter amid an unexpected drop in U.S. consumer confidence, increased regulatory scrutiny of the financial industry, and the growing European debt crisis. During the third quarter, prices continued to climb higher due to concern that European governments may struggle to repay their debt and Chinese economic growth may be slowing. Within the metals complex, gains were recorded primarily during March from long futures positions in nickel, copper, aluminum, and zinc as prices rose after China indicated it might boost state reserves of base metals. During September and October, long positions in gold and silver futures resulted in gains as prices rose amid increased demand for the precious metals due to a drop in the value of the U.S. dollar. Meanwhile, additional gains in metals were experienced during December due to long positions in copper futures as prices reached an all-time high following strong Chinese import data and news of supply interruptions at a major Chilean copper mine. Within the agricultural complex, gains were achieved primarily during September and October from long futures positions in corn and the soybean complex after corn prices advanced to the highest level in almost two years as freezing weather threatened crops in China and Canada and a prolonged drought slowed planting in Russia. Furthermore, prices of soybean futures reached a 16-month high after U.S. exporters boosted sales to China, the world’s largest consumer and importer of soybeans. Additional gains were experienced in this sector during December from long futures positions in corn and soybeans as prices reached a 29-month high and 28-month high, respectively,
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amid supply concerns due to drought-like conditions in Argentina, the world’s second-biggest exporter of corn and third-biggest exporter of soybeans. Within the currency markets, gains were experienced primarily during February from short positions in the British pound, euro, and Swiss franc versus the U.S. dollar as the value of these currencies declined against the U.S. dollar amid concerns that Greece’s fiscal struggles might begin to spread throughout Europe. In May, short positions in the euro, British pound, and Swiss franc versus the U.S. dollar resulted in gains as the value of these currencies fell relative to the U.S. currency after reports of political discord in Europe reignited worries about the stability of the region’s economy. During September, gains were achieved from long positions in the Australian dollar versus the U.S. dollar as the value of the Australian dollar appreciated to a 26-month high against the U.S. dollar amid speculation that the Reserve Bank of Australia may raise interest rates in October. Lastly, gains in the currency sector were recorded in December due to long positions in the Australian dollar, Canadian dollar, South African rand, and New Zealand dollar versus the U.S. dollar as the value of these “commodity currencies” moved higher against the U.S. dollar in tandem with rising commodity prices. A portion of the Partnership’s gains for the year was offset by losses incurred within the energy markets, primarily during January and May, from long futures positions in crude oil and its related products as prices declined on continued worries that a slow down in the global economic recovery may weaken energy demand. During June, newly established short futures positions in crude oil and its related products resulted in losses as prices reversed higher following news that crude inventories dropped the most in six months. Additional losses in the energies were incurred during September from short futures positions in crude oil and its related products as prices rose after positive economic indicators from the U.S., Asia, and Europe restored confidence that the economic recovery might stimulate energy demand. Furthermore, oil prices increased after a pipeline that carries Canadian crude oil to refineries in the U.S. Midwest was closed due to a leak.
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Within the global stock index markets, losses were experienced primarily during January, May, June, and August. During January, long positions in U.S., European, and Pacific Rim equity index futures incurred losses as prices reversed sharply lower amid disappointing U.S. corporate earnings reports, concerns regarding U.S. President Barack Obama’s proposed limits on risk-taking by banks, and speculation that China might raise interest rates. Losses were also experienced during May and June from long positions in U.S., European, and Pacific Rim equity index futures as prices moved lower on growing concerns that Greece’s sovereign debt crisis might spread throughout Europe. Meanwhile, losses were recorded in August due to newly established long positions in European, U.S., and Pacific Rim equity index futures as prices fell after the U.S. Federal Reserve said the pace of economic recovery is likely to be “more modest” than forecast and a report revealed U.S. productivity unexpectedly fell in the second quarter.
For further sector trading information, please refer to the Partnership’s Financial Statements for the year ended December 31, 2012, which are included in Item 8 of this Form 10-K.
The Partnership's income and losses are allocated among its partners for income tax purposes.
Off-Balance Sheet Arrangements and Contractual Obligations.
Not applicable.
Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.
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GAAP and International Financial Reporting Standards (“IFRS”)”. The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This new guidance did not have a material impact on the Partnership’s financial statements.
Financial instruments are carried at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified and disclosed in the following three levels: Level 1 -unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 - inputs other than unadjusted quoted market prices that are observable for the asset or liability, either directly or indirectly (including quoted market prices for similar investments, interest rates, and credit risk); and Level 3 - unobservable inputs for the asset or liability (including the Partnership’s own assumptions used in determining the fair value of investments).
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of the factors specific to the investment.
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The Partnership’s assets and liabilities measured at fair value on a recurring basis are summarized in the following tables by the type of inputs applicable to the fair value measurements.
The Partnership’s assets identified as “Investments in Affiliated Trading Companies” reflected on the Statements of Financial Condition represent the net asset value of the Partnership’s pro rata share of each Trading Company. The net assets of each Trading Company are equal to the total assets of the Trading Company (including, but not limited to all cash and cash equivalents, accrued interest and amortization of original issue discount, and the fair value of all open Futures Interests contract positions and other assets) less all liabilities of the Trading Company (including, but not limited to, brokerage commissions that would be payable upon the closing of open Futures Interest positions, management fees, incentive fees, and extraordinary expenses), determined in accordance with U.S. GAAP.
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Summarized information for the Partnership’s pro rata investment in affiliated Trading Companies for the years ended December 31, 2012 and 2011 is as follows:
December 31, 2012
December 31, 2011
As of December 31, 2012 and September 30, 2012, the allocations between the Trading Companies were as follows:
Trading Company
Allocation as of 12/31/2012
Allocation as of 9/30/2012
Altis I, LLC
20.20%
19.80%
Aspect I, LLC
17.40%
16.35%
BHM I, LLC
35.85%
35.10%
Boronia I, LLC
7.65%
9.60%
AHL I, LLC
18.90%
19.15%
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For all Trading Companies, contributions and withdrawals are permitted on a monthly basis. As of December 31, 2012 and 2011, there have been no suspended redemptions, “lock up” periods or gate provisions imposed before a withdrawal can be made by the Partnership.
Other Pronouncements
On October 1, 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements”, which makes minor technical corrections and clarifications to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. When the FASB issued Statement 157 (codified in ASC 820), it conformed the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. The ASU also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820. The amendments are effective for fiscal periods beginning after December 15, 2012. The adoption of this ASU will not have a significant impact on the Partnership’s financial statements.
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments.
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Subsequently in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership would also provide the disclosures retrospectively for all comparative periods presented. The Partnership is currently evaluating the impact that these pronouncements would have on the financial statements.
In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company would be required to consolidate another investment company if it holds a controlling financial interest in the entity. In August 2012, the FASB updated the proposed ASU to state that entities regulated under Investment Company Act of 1940 should qualify to be investment companies
- 54 -
within the proposed investment company guide. The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.
Subsequent Events
Management of Ceres (“Management”) performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements other than disclosed below.
Effective January 1, 2013, Kaiser Trading Group Pty. Ltd. was added as a trading advisor to the Partnership.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
All of the Partnership’s assets are subject to the risk of trading loss through its investments in the Trading Companies, each of which invests substantially all of its assets in the trading program of an
unaffiliated Trading Advisor. The market-sensitive instruments held by the Trading Companies are acquired for speculative trading purposes, and substantially all of the respective Trading Companies’
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 Trading Companies’ main line of business.
The futures, forwards and options traded by the Trading Companies involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest
rates, exchange rates and prices of financial instruments and commodities. These factors result in frequent
- 55 -
changes in the fair value of the Trading Companies’ open positions, and consequently in their earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are settled daily through variation margin. Gains and losses on off-exchange-traded forward currency contracts and forward currency options contracts are settled upon termination of the contract.
The total market risk of the respective Trading Companies may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Trading Companies’ open positions, the volatility present within the markets, and the liquidity of the markets.
The face value of the market sector instruments held by the Trading Companies is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Trading Companies typically to be many times the total capitalization of the Trading Companies.
The Partnership’s and the Trading Companies’ past performance is no guarantee of their future results. Any attempt to numerically quantify the Trading Companies’ market risk is limited by the uncertainty of their speculative trading. The Trading Companies’ speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Trading Companies’ experiences to date disclosed under the “Trading Companies’ Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed below.
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Limited partners will not be liable for losses exceeding the current net asset value of their investment.
Quantifying the Trading Companies’ Trading Value at Risk
The following quantitative disclosures regarding the Trading Companies’ 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.
The Trading Companies account for open positions on the basis of fair value accounting principles. Any loss in the market value of the Trading Companies’ open positions is directly reflected in the Trading Companies’ earnings and cash flow.
VaR is a measure of the maximum amount which each Trading Company could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of each Trading Company’s speculative
trading and the recurrence in the markets traded by the Trading Companies of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR of each Trading Company’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Trading Companies’ losses in any market sector will be limited to VaR or by the Trading Companies’ attempts to manage its market risk.
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Exchange maintenance margin requirements have been used by the Trading Companies as the measure of its VaR. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to Var.
The Trading Companies’ Value at Risk in Different Market Sectors
As of December 31, 2012, Altis I, LLC’s total capitalization was $38,434,878. The Partnership owned approximately 89% of Altis I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$992,856
2.58%
Interest Rate
1,365,410
3.55%
Equity
1,274,537
3.32%
Commodity
1,903,385
4.95%
Total
$5,536,188
14.40%
Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,077,225
$349,925
$929,590
Interest Rate
$2,353,079
$1,007,877
$1,599,447
Equity
$1,274,537
$222,343
$611,707
Commodity
$3,585,044
$1,679,294
$2,444,140
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As of December 31, 2012, Aspect I, LLC’s total capitalization was $31,833,661. The Partnership owned approximately 92% of Aspect I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$2,193,535
6.89%
Interest Rate
754,804
2.37%
Equity
1,238,616
3.89%
Commodity
900,415
2.83%
Total
$5,087,370
15.98%
Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,503,702
$595,850
$1,849,965
Interest Rate
$2,239,108
$571,826
$1,216,933
Equity
$1,258,252
$358,290
$780,810
Commodity
$1,689,731
$789,145
$1,346,887
As of December 31, 2012, BHM I, LLC’s total capitalization was $400,129,363. The Partnership owned approximately 15% of BHM I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$2,353,158
0.59%
Interest Rate
340,639
0.09%
Commodity
18,985,549
4.74%
Total
$21,679,346
5.42%
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Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$12,680,962
$259,639
$7,283,125
Interest Rate
$6,703,240
$182,760
$2,834,140
Equity
$4,200,350
-
$1,260,633
Commodity
$37,860,223
$15,628,562
$26,432,348
As of December 31, 2012, Boronia I, LLC’s total capitalization was $14,155,117. The Partnership owned approximately 92% of Boronia I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$251,044
1.77%
Interest Rate
258,654
1.83%
Equity
443,259
3.13%
Commodity
557,636
3.94%
Total
$1,510,593
10.67%
Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$1,581,065
$178,935
$701,779
Interest Rate
$1,458,139
$117,908
$474,250
Equity
$1,495,820
$194,485
$549,594
Commodity
$1,417,780
$270,960
$706,600
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As of December 31, 2012, AHL I, LLC’s total capitalization was $34,717,173. The Partnership owned approximately 92% of AHL I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$3,812,072
10.98%
Interest Rate
1,570,321
4.52%
Equity
1,881,179
5.42%
Commodity
623,273
1.80%
Total
$7,886,845
22.72%
Twelve Months Ended December 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$4,684,324
$1,177,741
$2,835,886
Interest Rate
$1,778,562
$607,098
$1,326,426
Equity
$1,913,269
$333,281
$951,747
Commodity
$1,744,246
$506,474
$1,006,776
* Average of month-end VaR
As of December 31, 2011, Altis I, LLC’s total capitalization was $44,933,798. The Partnership owned approximately 92% of Altis I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$1,875,342
4.17%
Interest Rate
1,105,452
2.46%
Equity
615,687
1.37%
Commodity
2,558,812
5.69%
Total
$6,155,293
13.69%
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Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$2,792,197
$646,419
$1,225,379
Interest Rate
$1,406,044
$264,672
$672,790
Equity
$1,442,388
$239,597
$567,305
Commodity
$3,702,594
$397,539
$1,780,544
As of December 31, 2011, Aspect I, LLC’s total capitalization was $43,105,632. The Partnership owned approximately 92% of Aspect I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$692,921
1.61%
Interest Rate
1,945,302
4.51%
Equity
592,182
1.37%
Commodity
1,442,422
3.35%
Total
$4,672,827
10.84%
Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$1,759,872
$318,386
$713,414
Interest Rate
$2,534,049
$375,025
$1,295,950
Equity
$734,213
$91,192
$393,469
Commodity
$1,442,422
$202,412
$960,825
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As of December 31, 2011, BHM I, LLC’s total capitalization was $455,454,128. The Partnership owned approximately 17% of BHM I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$11,805,110
2.59%
Interest Rate
354,263
0.08%
Equity
135,000
0.03%
Commodity
21,344,468
4.69%
Total
$33,638,841
7.39%
Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$11,968,638
$37,598
$2,182,917
Interest Rate
$6,674,377
$77,306
$2,662,385
Equity
$3,312,598
-
$337,667
Commodity
$35,677,615
$10,694,579
$23,741,783
As of December 31, 2011, Boronia I, LLC’s total capitalization was $35,661,551. The Partnership owned approximately 82% of Boronia I, LLC.
% of Total
Market Sector
VaR
Capitalization
Currency
$1,247,428
3.50%
Interest Rate
816,557
2.29%
Equity
544,308
1.53%
Commodity
1,310,591
3.68%
Total
$3,918,884
11.00%
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Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$1,744,634
$239,349
$598,361
Interest Rate
$1,290,916
$212,487
$460,040
Equity
$1,195,287
$181,959
$615,749
Commodity
$1,754,554
$326,346
$868,819
As of December 31, 2011, AHL I, LLC’s total capitalization was $40,404,870. The Partnership owned approximately 91% of AHL I, LLC. Effective June 1, 2011, AHL I, LLC was added as a Trading Company.
% of Total
Market Sector
VaR
Capitalization
Currency
$1,576,689
3.90%
Interest Rate
918,934
2.27%
Equity
616,527
1.53%
Commodity
888,869
2.20%
Total
$4,001,019
9.90%
Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$3,691,865
$747,027
$1,408,406
Interest Rate
$1,366,666
$291,291
$715,416
Equity
$899,058
$161,311
$412,818
Commodity
$888,869
$205,912
$476,472
* Average of month-end VaR
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Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
·
past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
·
changes in portfolio value caused by market movements may differ from those of the VaR model;
·
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
·
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
·
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.
Non-Trading Risk
The Trading Companies have non-trading market risk on their foreign cash balances. These balances and any market risk they may represent are immaterial.
A decline in short-term interest rates would result in a decline in the Trading Companies’ cash management income. This cash flow risk is not considered to be material.
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Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Trading Companies’ market-sensitive instruments, in relation to the Trading Companies’ net assets.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) 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 of 1933 and Section 21E of the Securities Exchange Act of 1934. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisors 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.
The Trading Advisor for each Trading Company, in general, tends to utilize its trading system(s) to take positions when market opportunities develop, and Ceres anticipates that the Trading Advisors will continue to do so.
Investors must be prepared to lose all or substantially all of their investment in the Partnership.
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The following were the primary trading risk exposures of the Partnership at December 31, 2012 by market sector. It may be anticipated, however, that these market exposures will vary materially over time.
Currencies. The Partnership’s currency exposure is to exchange rate fluctuations, primarily fluctuations 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. The General Partner does not anticipate that the risk profile of the Partnership’s currency sector will change significantly in the future.
Equities. The Partnership’s primary equity exposure is to equity price risk in the G-8 countries. The stock index futures traded by the Partnership are limited to futures on broadly based indices. As of December 31, 2012 the Partnership’s primary exposures were in the Topix (Japan), DAX (Germany), SPI 200 (Australia), Nikkei 225 (Japan), FTSE 100 (U.K.), Hang Seng (Hong Kong), and S&P 500 (U.S.) stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major European, U.S., and Pacific Rim indices. (Static markets would not cause major market changes but would make it difficult for the Partnership to avoid being “whipsawed” into numerous small losses.)
Interest Rates. Interest rate movements directly affect the price of the futures positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership’s profitability. The Partnership’s primary interest rate exposure is to interest rate
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fluctuations in the United States and the other G-8 countries. However, the Partnership also take futures positions on the government debt of smaller nations - e.g., Australia and New Zealand.
Commodities.
Energy. The Partnership’s primary energy market exposure is to oil and natural gas price movements, often resulting from political developments in the Middle East and weather conditions. Energy prices can be volatile and substantial profits and losses, which have been experienced in the past, are expected to continue to be experienced in these markets in the future.
Metals. The Partnership’s primary metal market exposure as of December 31, 2012 was to fluctuations in the price of platinum, palladium, copper, and gold.
Grains. The Partnership’s trading risk exposure in the grains is primarily to agricultural price movements which are often directly affected by severe or unexpected weather conditions. Corn and the soybean complex accounted for the majority of the Partnership’s grain exposure as of December 31, 2012.
Softs. The Partnership’s trading risk exposure in the soft commodities is to agricultural-related price movements which are often directly affected by severe or unexpected weather conditions. Cocoa and coffee accounted for the majority of the Partnership’s soft commodities exposure as of December 31, 2012.
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Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and related items of the Partnership are filed under this Item 8: Report of Deloitte & Touche LLP, independent registered public accounting firm, for the years ended December 31, 2012, 2011, and 2010; Statements of Financial Condition as of December 31, 2012 and 2011; Statements of Income and Expenses for the years ended December 31, 2012, 2011, and 2010; Statements of Changes in Partners’ Capital for the years ended December 2012, 2011, and 2010; and Notes to Financial Statements. Additional financial information has been filed as Exhibit 99.1 and 99.2 to this Form 10-K.
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To the Limited Partners of:
Polaris Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information contained herein is accurate and complete.
/s/ Walter Davis
Walter Davis
President and Director
Ceres Managed Futures LLC,
General Partner of
Polaris Futures Fund L.P.
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Polaris Futures Fund L.P.
Management’s Report on Internal Control Over Financial Reporting
Ceres Managed Futures LLC (“Ceres”), the general partner of Polaris Futures Fund L.P. (the “Partnership”), is responsible for the management of the Partnership.
Management of the Partnership, Ceres (“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 directors of Ceres; and
·
Provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.
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.
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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 by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control - Integrated Framework. Based on its assessment and those criteria, Management believes that the Partnership maintained effective internal control over financial reporting as of December 31, 2012.
/s/ Walter Davis
Walter Davis
President and Director
Ceres Managed Futures LLC
General Partners of
Polaris Futures Fund L.P.
/s/ Damian George
Damian George
Chief Financial Officer and Director
Ceres Managed Futures LLC
General Partners of
Polaris Futures Fund L.P.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Limited Partners and the General Partner of Polaris Futures Fund L.P.:
We have audited the accompanying statements of financial condition of Polaris Futures Fund L.P. (the "Partnership") as of December 31, 2012 and 2011, and the related statements of income and expenses and changes in partners’ capital for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our 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, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Polaris Futures Fund L.P. as of December 31, 2012 and 2011, and the results of its operations and its changes in partners’ capital for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 25, 2013
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POLARIS FUTURES FUND L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31,
ASSETS
$
$
Investments in Affiliated Trading Companies:
Investment in BHM I, LLC
60,469,759
76,958,099
Investment in Altis I, LLC
34,093,815
41,215,261
Investment in AHL I, LLC
31,866,973
36,925,484
Investment in Aspect I, LLC
29,322,751
39,678,211
Investment in Boronia I, LLC
12,952,476
29,266,131
Total Investments in Affiliated Trading Companies, at fair value (cost $188,455,666 and $229,373,574, respectively)
168,705,774
224,043,186
Total Assets
168,705,774
224,043,186
LIABILITIES
Redemptions payable
7,321,946
5,623,578
Total Liabilities
7,321,946
5,623,578
PARTNERS’ CAPITAL
Class A (100,367.279 and 117,989.188 Units, respectively)
103,514,417
134,606,952
Class B (18,803.813 ad 25,377.597 Units, respectively)
19,925,811
29,596,967
Class C (21,629.171 and 32,198.395 Units, respectively)
23,548,722
38,388,320
Class D (8,745.602 and 8,745.602 Units, respectively)
9,650,670
10,541,476
Class Z (4,127.999 and 4,242.591 Units, respectively)
4,744,208
5,285,893
Total Partners’ Capital
161,383,828
218,419,608
Total Liabilities and Partners’ Capital
168,705,774
224,043,186
NET ASSET VALUE PER UNIT
Class A
1,031.36
1,140.84
Class B
1,059.67
1,166.26
Class C
1,088.75
1,192.24
Class D
1,103.49
1,205.34
Class Z
1,149.28
1,245.91
The accompanying notes are an integral part of these financial statements.
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POLARIS FUTURES FUND L.P.
STATEMENTS OF INCOME AND EXPENSES
For the Years Ended December 31,
$
$
$
EXPENSES
Ongoing Placement Agent fees
3,323,075
3,829,692
3,008,359
General Partner fees
1,995,110
2,358,981
1,865,806
Administrative fees
354,502
610,341
746,322
Total Expenses
5,672,687
6,799,014
5,620,487
NET INVESTMENT LOSS
(5,672,687)
(6,799,014)
(5,620,487)
REALIZED/NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Realized
1,497,579
8,966,984
1,094,459
Net change in unrealized appreciation
(depreciation) on investments
(14,419,504)
(44,486,087)
25,562,538
Total Realized/Net Change in
Unrealized Appreciation
(Depreciation) on Investments
(12,921,925)
(35,519,103)
26,656,997
NET INCOME (LOSS)
(18,594,612)
(42,318,117)
21,036,510
NET INCOME (LOSS) ALLOCATION
Class A
(12,489,712)
(25,841,914)
11,860,714
Class B
(2,267,079)
(5,463,936)
2,688,027
Class C
(2,539,968)
(8,263,219)
5,465,146
Class D
(897,553)
(1,833,359)
463,317
Class Z
(400,300)
(915,689)
559,306
NET INCOME (LOSS) PER UNIT *
Class A
(109.48)
(229.43)
129.24
Class B
(106.59)
(227.45)
137.70
Class C
(103.49)
(225.30)
146.37
Class D
(101.85)
(224.14)
150.77
Class Z
(96.63)
(220.48)
164.37
Units
Units
Units
WEIGHTED AVERAGE NUMBER
OF UNITS OUTSTANDING
Class A
115,263.786
110,215.005
85,921.708
Class B
22,324.092
23,547.978
19,442.790
Class C
26,371.454
36,439.134
36,471.309
Class D
8,841.770
8,263.814
3,072.942
Class Z
4,209.510
4,088.083
3,143.983
* Based on the change in Net Asset Value per Unit.
The accompanying notes are an integral part of these financial statements.
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POLARIS FUTURES FUND L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Years ended December 31, 2012, 2011, and 2010
The accompanying notes are an integral part of these financial statements.
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1. Organization
Polaris Futures Fund L.P. (“Polaris” or the “Partnership”) was formed on February 22, 2007, under the Delaware Revised Uniform Limited Partnership Act, as a multi-advisor commodity pool created to profit from the speculative trading of domestic commodities and foreign commodity futures contracts, forward contracts, foreign exchange commitments, options on physical commodities and futures contracts, spot (cash) commodities and currencies, exchange of futures contracts for physicals transactions, exchange of physicals for futures contracts transactions, and any rights pertaining thereto (collectively, “Futures Interests”) (refer to Note 6. Financial Instruments of the trading companies). The Partnership invests substantially all of its assets in multiple affiliated trading companies (each a “Trading Company” or collectively, the “Trading Companies”), each of which invests substantially all of its assets in the trading program of an unaffiliated commodity trading advisor (each a “Trading Advisor” or collectively, the “Trading Advisors”) registered with the Commodity Futures Trading Commission, and which makes investment decisions for each respective Trading Company. Prior to May 1, 2011, the Partnership was one of the partnerships in the Managed Futures Multi-Strategy Profile Series, (“Profile Series”) comprised of Polaris, LV Futures Fund L.P. and Meritage Futures Fund L.P.
The Partnership commenced trading operations on August 1, 2007, in accordance with the terms of the limited partnership agreement of the Partnership (the “Limited Partnership Agreement”).
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Ceres Managed Futures LLC, a Delaware limited liability company, serves as the Partnership’s general partner and commodity pool operator and as each Trading Company’s trading manager and commodity pool operator (the “General Partner,” “Ceres” or the “Trading Manager” as the context requires). Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). Morgan Stanley is the indirect majority owner of MSSBH and Citigroup Inc. (“Citigroup”) is the indirect minority owner of MSSBH. Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) serves as the placement agent (the “Placement Agent”) to the Partnership. Morgan Stanley & Co. LLC (“MS&Co.”) acts as each Trading Company’s primary clearing commodity broker. Morgan Stanley & Co. International plc (“MSIP”) acts as each Trading Company’s commodity broker to the extent it trades on the London Metal Exchange (collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”). Each Trading Company’s over-the-counter foreign exchange spot, options, and forward contract counterparty is either MS&Co. and/or Morgan Stanley Capital Group Inc. (“MSCG”) to the extent a Trading Company trades options on over-the-counter foreign currency forward contracts.
Prior to February 1, 2012, units of limited partnership interest (“Units”) of the Partnership were offered in four classes in a private placement pursuant to Regulation D under the Securities Act of 1933, as amended. Depending on the aggregate amount invested in the Partnership, limited
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partners received class A, B, C or D Units in the Partnership (each a “Class” and collectively the “Classes”). Certain limited partners who are not subject to the ongoing placement agent fee are deemed to hold Class Z Units. Ceres receives Class Z Units with respect to its investment in the Partnership. Effective February 1, 2012, Class B and Class C Units are no longer being offered to new investors but continue to be offered to existing Class B and Class C investors.
Effective October 31, 2011, State Street Bank and Trust Company (“State Street”) ceased to serve as the administrator to the Partnership and each Trading Company. Effective November 1, 2011, the administrative services previously provided by State Street are provided by Morgan Stanley Wealth Management.
Effective June 1, 2011, the Partnership through its investment in Morgan Stanley Smith Barney AHL I, LLC (“AHL I, LLC”) added Man-AHL (USA) Ltd. as a Trading Advisor to the Partnership.
Effective at the close of business on May 31, 2011, Winton Capital Management Limited was terminated as a Trading Advisor to the Partnership and consequently Morgan Stanley Smith Barney WNT I, LLC (“WNT I, LLC”) ceased all Futures Interest trading on behalf of the Partnership.
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Effective May 31, 2011, Morgan Stanley & Co. Incorporated changed its name to Morgan Stanley & Co. LLC.
Effective April 18, 2011, Ceres changed the name of Managed Futures Profile HV, L.P. to Polaris Futures Fund L.P. The name change did not have any impact on the operation of the Partnership or its limited partners. In addition, as of May 1, 2011, the Partnership ceased to be in the Profile Series and became a stand-alone fund.
The financial statements of the Partnership have been prepared using the “Fund of Funds” approach and accordingly all revenue and expense information from the Trading Companies is reflected as a total realized/net change in unrealized appreciation (depreciation) on investments on the Statements of Income and Expenses. The Partnership maintains sufficient cash balances on hand to satisfy ongoing operating expenses for the Partnership. As of December 31, 2012 and 2011, the Partnership’s cash balances were zero.
Ceres is not required to maintain any investment in the Partnership, and may withdraw any portion of its interest in the Partnership at any time, as permitted by the Limited Partnership Agreement. In addition, Class Z shares are only being offered to certain individuals affiliated with Morgan Stanley at Ceres’ sole discretion. Class Z Unit holders are not subject to paying the placement agent fee (as defined in Note 2. Summary of Significant Accounting Policies).
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2. Summary of Significant Accounting Policies
Use of Estimates - The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require management to make estimates and assumptions that affect the reported amounts in the financial statements and related disclosures. Management believes that the estimates utilized in the preparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates and the differences could be material.
Revenue Recognition - Net change in appreciation (depreciation) on investments in the Trading Companies is recorded based upon the proportionate share of the Partnership’s aggregate amount of the net performance recorded by each Trading Company.
Valuation of Investments in Affiliated Trading Companies - The Partnership’s investments in affiliated Trading Companies are stated at fair value which is based on (1) the Partnership’s net contribution to the Trading Companies and (2) its allocated share of the undistributed profits and losses, including realized and the net change in unrealized gains/losses of the Trading Company.
Net Income (Loss) per Unit - Net income (loss) per Unit is computed in accordance with the specialized accounting for Investment Companies as illustrated in the Financial Highlights Footnote (refer to Note 9. Financial Highlights) and is allocated to all partners at the end of each month in proportion to their respective opening capital accounts.
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General Partner Fee - The Partnership pays Ceres a monthly administration fee equal to 1/12 of 1.0% (a 1.0% annual rate) of the net asset value of each Class in the Partnership at the beginning of each month for services in operating and managing the Partnership.
Placement Agent Fee - Morgan Stanley Wealth Management currently serves as the Placement Agent and may appoint affiliates or third parties as additional Placement Agents. The Partnership pays the Placement Agent an ongoing compensation on a monthly basis equal to a percentage of the net asset value of a limited partner’s Units as of the beginning of each month.
The applicable rate payable by each limited partner is determined by the Class of Units each limited partner may hold. The Partnership pays the Placement Agent the following percentage based on the aggregate amount invested in the Partnership (as adjusted) by each limited partner in accordance with the following schedule:
Class of Units
Aggregate Investment
Monthly/Annualized Rate (%)
A
Up to $4,999,999
0.167%/2.0%
D
$5,000,000 and above
0.063%/0.75%
Z
All
0%
The limited partners still holding Class B and Class C Units pay the Placement Agent fee in accordance with the following schedule:
Class of Units
Aggregate Investment
Monthly/Annualized Rate (%)
B
$250,000 - $499,999
0.125%/1.5%
C
$500,000 - $4,999,999
0.083%/1.0%
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Certain limited partners who are not subject to the ongoing Placement Agent fee (as described herein) are deemed to hold Class Z Units. The Placement Agent pays a portion of the ongoing placement agent fee it receives from the Partnership to the Morgan Stanley Financial Advisor or Private Wealth Advisor responsible for selling the Units to the limited partners.
Administrative Fee - The Partnership and the Trading Companies pay Ceres or its affiliates a monthly fee to cover all of the administrative, operating, offering, and organizational expenses (the “Administrative Fee”). Prior to May 1, 2011, the Administrative Fee was equal to 1/12th
of 0.40% (0.40% on an annual basis) of the beginning of the month net asset value of the Partnership and 1/12th of 0.35% (0.35% on an annual basis) of the beginning of the month net assets of each Trading Company. As of May 1, 2011, the monthly Administrative Fee is capped at 1/12th of 0.25% (a 0.25% annual rate) of the beginning of the month net asset value of the Partnership.
Continuing Offering - Units of the Partnership are offered in two Classes, identical in all material respects except for the ongoing Placement Agent fees charged. Depending on the aggregate amount invested in the Partnership, a limited partner will receive Class A or D Units in the Partnership. Prior to February 1, 2012, Units were offered in four Classes. Units within each Partnership Class were initially offered at $1,000 per Unit, except for Class D shares which were initially offered on March 1, 2009 at $1,300. Thereafter, Units are offered on a continuous basis as of the first day of each month (a “Subscription Date”) at the net asset value per Unit for each Class as of the last day of the immediately preceding month. The minimum subscription
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amount in the Partnership is $25,000, subject to the discretion of Ceres to accept a lower amount. Prior to May 2009, the minimum subscription amount in the Partnership was $50,000. The minimum subscription amount for ERISA/IRA investors is $10,000. Additional subscriptions can be made in increments of $10,000 if a limited partner has already met the minimum subscription amount, subject to the discretion of Ceres to accept a lower amount. The request for the subscriptions must be delivered to the limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor at Morgan Stanley Wealth Management branch
office in time for it to be forwarded to and received by Ceres, no later than 3:00 p.m., New York City time, on the third business day before the end of the month.
Redemptions - Limited partners may redeem some or all of their Units at 100% of the net asset value per Unit as of the last day of any month (a “Redemption Date”). The request for redemption must be delivered to a limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor at limited partner’s Morgan Stanley Wealth Management branch office in time for it to be forwarded to and received by Ceres, no later than 3:00 p.m. New York City time, on the third business day before the end of the month in which the redemption is to be effective. Investors must maintain a minimum investment in the Partnership of three Units unless an investor is withdrawing his or her entire investment. Ceres may cause a limited partner to withdraw (in whole or in part) from the Partnership at any time and for any reason. Ceres will not cause a limited partner to withdraw if the value of his or her investment falls below the minimum described above due to the performance of the Partnership.
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Ceres may also, in its sole discretion, permit redemptions by limited partners in any amount at any time. There are no redemption charges. Ceres endeavors to pay all redemptions within 10 business days after the applicable Redemption Date. Ceres may suspend redemptions in certain circumstances.
Exchanges - Limited partners may redeem some or all of their Units in the Partnership on the Redemption Date and use the proceeds to purchase Units in any other commodity pools operated by the General Partner that are accepting subscriptions on the following Subscription Date; provided the limited partner meets the suitability criteria for the other commodity pool and has redeemed its Partnership Units according to the Limited Partnership Agreement. Investors also may redeem their Units in any other commodity pool operated by the General Partner and use the proceeds to purchase Units in the Partnership on the following Subscription Date; provided the potential limited partner meets the suitability criteria for the Partnership and has redeemed its Partnership Units in the other commodity pool(s) according to the applicable operating agreement. In order to effect an exchange, the limited partner must send a subscription and exchange agreement and power of attorney to the limited partner’s Morgan Stanley Financial Advisor or Private Wealth Advisor, and that agreement must be forwarded by the Morgan Stanley Wealth Management branch office in time for it to be received by Ceres no later than 3:00 p.m., New York City time, on the third business day before the end of the month.
Units Outstanding by Share Class - The table below shows the Units outstanding by share Class for the Partnership for the three years in the period ended December 31, 2012.
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Share Class
A
B
C
D
Z
Ending Units
December 31, 2009
78,373.994
18,794.498
35,719.371
3,072.942
2,760.791
Subscriptions
25,346.324
4,297.066
10,547.610
-
1,034.647
Redemptions
(9,993.538)
(3,589.048)
(7,006.865)
-
(144.358)
Ending Units
December 31, 2010
93,726.780
19,502.516
39,260.116
3,072.942
3,651.080
Subscriptions
36,732.134
11,333.448
3,779.565
5,672.660
766.961
Redemptions
(12,469.726)
(5,458.367)
(10,841.286)
-
(175.450)
Ending Units
December 31, 2011
117,989.188
25,377.597
32,198.395
8,745.602
4,242.591
Subscriptions
12,028.805
701.229
831.469
128.458
498.826
Redemptions
(29,650.714)
(7,275.013)
(11,400.693)
(128.458)
(613.418)
Ending Units
December 31, 2012
100,367.279
18,803.813
21,629.171
8,745.602
4,127.999
Distributions - Distributions, other than redemptions of Units, are made on a pro rata basis at the sole discretion of Ceres. No distributions have been made to date. Ceres does not intend to make any distributions of the Partnership’s profits.
Income Taxes - No provision for income taxes has been made in the accompanying financial statements, as limited partners are individually responsible for reporting income or loss based upon their respective share of the Partnership’s revenues and expenses for income tax purposes. The Partnership files U.S. federal and state tax returns.
The guidance issued by the Financial Accounting Standards Board (“FASB”) on income taxes clarifies the accounting for uncertainty in income taxes recognized in the Partnership’s financial
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statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. The Partnership has concluded that there were no significant uncertain tax positions that would require recognition in the financial statements as of December 31, 2012 and 2011. If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses. Generally, the 2009 through 2012 tax years remain subject to examination by U.S. federal and most state tax authorities. No income tax returns are currently under examination.
Dissolution of the Partnership - The Partnership may be terminated upon any of the circumstances first to occur: (i) receipt by Ceres of a notice setting forth an election to terminate and dissolve the Partnership by limited partners holding not less than a Majority of Units (as defined in the Limited Partnership Agreement), with or without cause, (ii) the withdrawal, insolvency, bankruptcy, dissolution, or liquidation of Ceres, (iii) the occurrence of an event which shall make it unlawful for the existence of the Partnership to be continued, or (iv) a determination by Ceres upon 60 days notice to the limited partners to terminate the Partnership.
Other Pronouncements
On October 1, 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-04 “Technical Corrections and Improvements”, which makes minor technical corrections and clarifications to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”. When the FASB issued Statement 157 (codified in ASC 820), it conformed
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the use of the term “fair value” in certain pre-Codification standards but not others. ASU 2012-04 conforms the term’s use throughout the ASC “to fully reflect the fair value measurement and disclosure requirements” of ASC 820. The ASU also amends the requirements that must be met for an investment company to qualify for the exemption from presenting a statement of cash flows. Specifically, it eliminates the requirements that substantially all of an entity’s investments be carried at “market value” and that the investments be highly liquid. Instead, it requires substantially all of the entity’s investments to be carried at “fair value” and classified as Level 1 or Level 2 measurements under ASC 820. The amendments are effective for fiscal periods beginning after December 15, 2012. The adoption of this ASU will not have a significant impact on the Partnership’s financial statements.
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Subsequently in January 2013, the FASB issued ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, which clarifies the types of instruments and transactions that are subject to the offsetting disclosure requirements established by ASU 2011-11. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of these disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their
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financial statements on the basis of International Financial Reporting Standards (“IFRS”). The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership would also provide the disclosures retrospectively for all comparative periods presented. The Partnership is currently evaluating the impact that these pronouncements would have on the financial statements.
In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company. Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company. The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements. In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company would be required to consolidate another investment company if it holds a controlling financial interest in the entity. In August 2012, the FASB updated the proposed ASU to state that entities regulated under Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guide. The
Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.
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3. Trading Companies
Investments in Affiliated Trading Companies - The Partnership’s assets identified as “Investments in Affiliated Trading Companies” reflected on the Statements of Financial Condition represent the Partnership’s pro rata share of each Trading Company’s net asset value. The net assets of each Trading Company are equal to the total assets of the Trading Company (including, but not limited to all cash and cash equivalents, accrued interest, and the fair value of all open Futures Interests contract positions and other assets) less all liabilities of the Trading Company (including, but not limited to brokerage commissions that would be payable upon the closing of open Futures Interests positions, management fees, incentive fees, and extraordinary expenses), determined in accordance with U.S. GAAP.
The clearing commodity brokers for the Trading Companies are currently MS&Co. and MSIP. Collectively, MS&Co. and MSIP are referred to as the “Commodity Brokers”. MSIP serves as the commodity broker for trades on the London Metal Exchange. Each Trading Company’s over-the-counter foreign exchange spot, options, and forward contract counterparties are MS&Co. and/or MSCG to the extent a Trading Company trades options on over-the-counter
foreign currency forward contracts. MS&Co. and its affiliates act as custodians of the Trading Companies’ assets. MS&Co., MSIP, and MSCG are wholly-owned subsidiaries of Morgan Stanley.
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Each Trading Company pays a brokerage fee to MS&Co. as described below. Each Trading Company’s cash is on deposit in commodity brokerage accounts with Morgan Stanley.
The following tables summarize the Partnership’s investments in affiliated Trading Companies as of December 31, 2012 and 2011. Each Trading Company pays each Trading Advisor a monthly management fee and a quarterly incentive fee equal to 20% of the trading profits earned (refer to Note 5. Trading Advisors to the Trading Companies) for further information.
December 31, 2012
December 31, 2011
The strategy for each Trading Company is disclosed in Note 5. Trading Advisors to the Trading Companies.
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For all Trading Companies, contributions and withdrawals are permitted on a monthly basis. As of December 31, 2012 and 2011, there have been no suspended redemptions, “lock up” periods or gate provisions imposed before a withdrawal can be made by the Partnership.
Valuation - Futures Interests are open commitments until the settlement date, at which time they are realized. They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as net unrealized gain or loss on open contracts. The resulting net change in unrealized gains and losses is reflected in the net change in unrealized trading profit (loss) from one period to the next on the Statements of Income and Expenses. The fair value of exchange-traded futures, options and forwards contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as input, the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.
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The Trading Companies may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest on the underlying asset at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the fair value of a Futures Interest on the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.
Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Trading Companies’ Statements of Financial Condition and are subsequently adjusted to fair values. The difference between the fair value of an option and the premiums received/premiums paid is treated as an unrealized gain or loss.
Revenue Recognition - Monthly, MS&Co. pays each Trading Company interest income on 100% of its average daily equity maintained in cash in the Trading Companies’ accounts during each month at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of such interest payments, daily funds do not include monies due to each Trading Company on Futures Interests that have not been received. MS&Co. and Ceres will retain any excess interest not paid to each Trading Company in permitted investments.
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Fair Value of Financial Instruments - The fair value of each Trading Company’s assets and liabilities that qualify as financial instruments under the FASB ASC guidance relating to Financial Instruments approximates the carrying amount presented in the Trading Company’s Statements of Financial Condition.
Foreign Currency Transactions and Translation - The Trading Companies’ functional currency is the U.S. dollar; however, the Trading Companies 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 rate in effect at the date of the Statements of Financial Condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rate in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in net change in unrealized appreciation (depreciation) on investments in the Statements of Income and Expenses.
Brokerage, Clearing and Transaction Fees - Each Trading Company accrues and pays brokerage, clearing and transaction fees to MS&Co. Brokerage fees and transaction costs are paid as they are incurred on a half-turn basis at 100% of the rates that MS&Co. charges retail commodity customers and parties that are not clearinghouse members. In addition, the Trading Companies pay transactional and clearing fees as they are incurred.
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4. Related Party Transactions
The Partnership pays monthly administrative fees and General Partner fees to Ceres as described in Note 2. Summary of Significant Accounting Policies. The Partnership pays monthly Placement Agent fees to Morgan Stanley Wealth Management as described in Note 2. Summary of Significant Accounting Policies.
The cash held by each Trading Company is on deposit in commodity brokerage accounts with Morgan Stanley. MS&Co. pays each Trading Company interest income at each month end as described in Note 3. Trading Companies. Each Trading Company pays MS&Co. brokerage fees and transactions fees as described in Note 3. Trading Companies. Each Trading Company pays Ceres a monthly Trading Company Administrative Fee as described in Note 3. Trading Companies.
5. Trading Advisors to the Trading Companies
Ceres retains certain commodity Trading Advisors to make all trading decisions for the Trading Companies. The Trading Advisors and their strategies for each Trading Company as of December 31, 2012 are as follows:
Trading Company
Trading Advisor
Strategy
AHL I, LLC
Man-AHL (USA) Ltd.
AHL Diversified Program
Morgan Stanley Smith Barney Altis I, LLC
(“Altis I, LLC”)
Altis Partners (Jersey) Limited
Global Futures Program
Morgan Stanley Smith Barney Aspect I, LLC
(“Aspect I, LLC”)
Aspect Capital Limited
Aspect Diversified Program
Morgan Stanley Smith Barney BHM I, LLC
(“BHM I, LLC”)
Blenheim Capital Management, L.L.C.
Global Markets Strategy Program (Futures/FX)
Morgan Stanley Smith Barney Boronia I, LLC
(“Boronia I, LLC”)
Boronia Capital Pty. Ltd.
Boronia Diversified Program
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Compensation to the Trading Advisors by the Trading Companies consists of a management fee and an incentive fee as follows:
Management Fee - Each Trading Company pays its Trading Advisor a monthly management fee based on a percentage of net assets as described in the advisory agreement among each Trading Company, Ceres, and each Trading Advisor.
Incentive Fee - Each Trading Company pays each Trading Advisor a quarterly incentive fee equal to 20% of the trading profits earned by the applicable Trading Company. Such fee is accrued on a monthly basis.
Trading profits represent the amount by which profits from Futures Interests trading exceed losses after management fees and administrative fees are deducted. When a Trading Advisor experiences losses with respect to net assets as of the end of a calendar quarter, the Trading Advisor must recover such losses before that Trading Advisor is eligible for an incentive fee in the future.
6. Financial Instruments of the Trading Companies
The Trading Advisors trade Futures Interests on behalf of the Trading Companies. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Risk arises from changes in the value of these contracts and the potential inability of
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counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.
The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined. If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated. The fair value of off-exchange-traded contracts is based on the fair value quoted by the counterparty.
The Trading Companies’ contracts are accounted for on a trade-date basis. A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:
(1)
a) One or more “underlyings” and b) one or more “notional amounts” or payment provisions or both;
(2)
Requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response relative to changes in market factors; and
(3) Terms that require or permit net settlement.
Generally, derivatives include futures, forward, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.
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7. Investment Risks
The Partnership’s investments in the affiliated Trading Companies expose the Partnership to various types of risks that are associated with Futures Interests trading and the markets in which the Trading Companies invest. The significant types of financial risks to which the Trading Companies are exposed are market risk, liquidity risk, and counterparty credit risk.
The rapid fluctuations in the market prices of Futures Interests in which the Trading Companies invest make an investment in the Partnership volatile. If a Trading Advisor incorrectly predicts the direction of prices in the Futures Interests in which it invests, large losses may occur.
Illiquidity in the markets in which the Trading Companies invest may cause less favorable trade prices. Although the Trading Advisors for each Trading Company generally will purchase and sell actively traded contracts where last trade price information and quoted prices are readily available, the prices at which a sale or purchase occur may differ from the prices expected because there may be a delay between receiving a quote and executing a trade, particularly in circumstances where a market has limited trading volume and prices are often quoted for relatively limited quantities.
The credit risk on Futures Interests arises from the potential inability of counterparties to perform under the terms of the contracts. Each Trading Company has credit risk because the commodity brokers will act as the futures commission merchants or the counterparties with respect to most
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of each Trading Company’s assets. Each Trading Company’s exposure to credit risk associated
with counterparty nonperformance is typically limited to the cash deposits with, or other form of collateral held by, the counterparty.
8. Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS. However, some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. This new guidance did not have a material impact on the Partnership’s financial statements.
Financial instruments are carried at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified and disclosed in the following three levels: Level 1 - unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 - inputs other than unadjusted quoted market prices that are observable for the asset or liability,
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either directly or indirectly (including unadjusted quoted market prices for similar investments,
interest rates, and credit risk); and Level 3 - unobservable inputs for the asset or liability (including the Partnership’s own assumptions used in determining the fair value of investments).
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of the factors specific to the investment.
The Partnership’s assets and liabilities measured at fair value on a recurring basis are summarized in the following tables by the type of inputs applicable to the fair value measurements.
Assets
Unadjusted
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
December 31, 2012
$
$
$
$
Investment in BHM I, LLC
-
60,469,759
-
60,469,759
Investment in Altis I, LLC
-
34,093,815
-
34,093,815
Investment in AHL I, LLC
-
31,866,973
-
31,866,973
Investment in Aspect I, LLC
-
29,322,751
-
29,322,751
Investment in Boronia I, LLC
-
12,952,476
-
12,952,476
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December 31, 2011
Investment in BHM I, LLC
-
76,958,099
-
76,958,099
Investment in Altis I, LLC
-
41,215,261
-
41,215,261
Investment in Aspect I, LLC
-
39,678,211
-
39,678,211
Investment in AHL I, LLC
-
36,925,484
-
36,925,484
Investment in Boronia I, LLC
-
29,266,131
-
29,266,131
At December 31, 2012, Polaris’ investment in the Trading Companies represented approximately: Aspect I, LLC 17.40%; AHL I, LLC 18.90%; Altis I, LLC 20.20%; BHM I, LLC 35.85%; and Boronia I, LLC 7.65% of the total investments of Polaris, respectively.
At December 31, 2011, Polaris’ investment in the Trading Companies represented approximately: Aspect I, LLC 17.70%; AHL I, LLC 16.50%; Altis I, LLC 18.40%; BHM I, LLC 34.35%; and Boronia I, LLC 13.05% of the total investments of Polaris, respectively.
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9. Financial Highlights
Class A
Class B
Class C
ClassD
Class Z
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE,
JANUARY 1, 2012:
$ 1,140.84
$1,166.26
$ 1,192.24
$ 1,205.34
$ 1,245.91
NET OPERATING RESULTS:
Net investment loss
(35.24)
(30.47)
(25.37)
(22.69)
(14.38)
Net realized/unrealized loss
(74.24)
(76.12)
(78.12)
(79.16)
(82.25)
Net loss
(109.48)
(106.59)
(103.49)
(101.85)
(96.63)
NET ASSET VALUE,
DECEMBER 31, 2012:
$ 1,031.36
$1,059.67
$ 1,088.75
$ 1,103.49
$ 1,149.28
RATIOS TO AVERAGE NET ASSETS:
Net investment loss
-3.18%
-2.68%
-2.18%
-1.93%
-1.18%
Partnership expenses (1)
3.18%
2.68%
2.18%
1.93%
1.18%
TOTAL RETURN:
-9.60%
-9.14%
-8.68%
-8.45%
-7.76%
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE,
JANUARY 1, 2011:
$1,370.27
$1,393.71
$ 1,417.54
$ 1,429.48
$ 1,466.39
NET OPERATING RESULTS:
Net investment loss
(41.43)
(35.69)
(30.19)
(26.85)
(17.36)
Net realized/unrealized loss
(188.00)
(191.76)
(195.11)
(197.29)
(203.12)
Net loss
(229.43)
(227.45)
(225.30)
(224.14)
(220.48)
NET ASSET VALUE,
DECEMBER 31, 2011:
$1,140.84
$1,166.26
$ 1,192.24
$ 1,205.34
$ 1,245.91
RATIOS TO AVERAGE NET ASSETS:
Net investment loss
-3.25%
-2.75%
-2.27%
-2.01%
-1.26%
Partnership expenses (1)
3.25%
2.75%
2.27%
2.01%
1.26%
TOTAL RETURN:
-16.74%
-16.32%
-15.89%
-15.68%
-15.04%
PER UNIT OPERATING PERFORMANCE:
NET ASSET VALUE,
JANUARY 1, 2010
$ 1,241.03
$1,256.01
$ 1,271.17
$ 1,278.71
$ 1,302.02
NET OPERATING RESULTS:
Net investment loss
(42.39)
(36.65)
(30.78)
(27.77)
(18.49)
Net realized/unrealized gain
171.63
174.35
177.15
178.54
182.86
Net gain
129.24
137.70
146.37
150.77
164.37
NET ASSET VALUE,
DECEMBER 31, 2010:
$1,370.27
$1,393.71
$ 1,417.54
$ 1,429.48
$ 1,466.39
RATIOS TO AVERAGE NET ASSETS:
Net investment loss
-3.40%
-2.90%
-2.40%
-2.15%
-1.40%
Partnership expenses (1)
3.40%
2.90%
2.40%
2.15%
1.40%
TOTAL RETURN:
10.41%
10.96%
11.51%
11.79%
12.62%
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RATIOS TO AVERAGE NET ASSETS FOR TRADING COMPANIES AS OF
DECEMBER 31, 2012:
Polaris
Interest Income
-0.01%
Management Fees
-1.80%
Incentive Fees
-0.04%
Trading Company Administrative Fees
- (2)
(1) Does not include the expenses of the Trading Companies in which the Partnership invests.
(2) Amounts less than 0.005%.
10. Subsequent Events
Management performed its evaluation of subsequent events through the date of filing and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements other than disclosed below.
Effective January 1, 2013, Kaiser Trading Group Pty. Ltd. was added as a trading advisor to the Partnership.
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Supplementary data specified by Item 302 of Regulation S-K:
Summary of Quarterly Results (Unaudited)
Quarter Ended
Total Trading Results
Net Income/(Loss)
March 31
$996,138
$(554,324)
June 30
(8,591,017)
(10,064,318)
September 30
1,682,858
302,979
December 31
(7,009,904)
(8,278,949)
Total
$(12,921,925)
$(18,594,612)
Net Income/(Loss) Per Unit
Share Class
Class A
Class B
Class C
Class D
Class Z
March 31
$(4.45)
$(3.10)
$(1.68)
$(0.94)
$1.36
June 30
(55.77)
(55.67)
(55.55)
(55.46)
(55.17)
September 30
0.27
1.66
3.13
3.88
6.27
December 31
(49.53)
(49.48)
(49.39)
(49.33)
(49.09)
Total
$(109.48)
$(106.59)
$(103.49)
$(101.85)
$(96.63)
Quarter Ended
Total Trading Results
Net Loss
March 31
$(6,572,875)
$(8,271,016)
June 30
(12,758,539)
(14,521,294)
September 30
(5,981,245)
(7,755,827)
December 31
(10,206,444)
(11,769,980)
Total
$(35,519,103)
$(42,318,117)
Net Loss Per Unit
Share Class
Class A
Class B
Class C
Class D
Class Z
March 31
$(50.59)
$(49.75)
$(48.87)
$(48.40)
$(46.96)
June 30
(78.35)
(78.19)
(77.98)
(77.86)
(77.46)
September 30
(39.88)
(39.11)
(38.30)
(37.87)
(36.52)
December 31
(60.61)
(60.40)
(60.15)
(60.01)
(59.54)
Total
$(229.43)
$(227.45)
$(225.30)
$(224.14)
$(220.48)
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Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, at the time this annual report was filed, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms. Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at December 31, 2012.
Management’s Report on Internal Control Over Financial Reporting
Ceres is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Ceres has assessed the effectiveness of the Partnership’s internal control over financial reporting as of
- 105 -
December 31, 2012. In making this assessment, Ceres used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in Internal Control-Integrated Framework. Ceres has concluded that, as of December 31, 2012, the Partnership’s internal control over financial reporting is effective based on these criteria. This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. This annual report does not include an attestation report of the Partnership’s independent registered public accounting firm regarding
internal control over financial reporting pursuant to SEC rules that permit the Partnership, as a non-accelerated filer, to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There have been no changes during the period covered by this annual report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Item 9B.
Item 9B. OTHER INFORMATION
None.
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PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Partnership has no officers or directors and its affairs are managed by its General Partner. Investment decisions are made by the Advisors.
The officers and directors of the General Partner are Walter Davis (President and Chairman of the Board of Directors), Damian George (Chief Financial Officer and Director), Colbert Narcisse (Director), Douglas J. Ketterer (Director), Harry Handler (Director), Patrick T. Egan (Director), Alper Daglioglu (Director) and Craig Abruzzo (Director). Each director holds office until the earlier of his or her death, resignation or removal. Vacancies on the board of directors may be filled by either (i) the majority vote of the remaining directors or (ii) MSSBH, as the sole member of the General Partner. The officers of the General Partner are designated by the General Partner’s board of directors. Each officer will hold office until his or her successor is designated and qualified or until his or her death, resignation or removal.
Directors of the General Partner are responsible for overall corporate governance of the General Partner and meet periodically to consider strategic decisions regarding the General Partner’s activities. Under CFTC rules, each Director of the General Partner is deemed to be a principal of the General Partner and, as a result, is listed as such with the NFA. Walter Davis, Damian George, Patrick T. Egan and Alper Daglioglu serve on the General Partner’s Investment Committee and are the trading principals responsible for allocation decisions.
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Walter Davis, age 48, has been President and Chairman of the Board of Directors of the General Partner since June 2010, where his responsibilities include oversight of the General Partner’s funds and accounts. Since June 2010, Mr. Davis has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA. Since December 2012, Mr. Davis has been registered as a swap associated person of General Partner. Since June 2009, Mr. Davis has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as a Managing Director and the Director of the Managed Futures Department. Since June 2009, Mr. Davis has been registered as an associated person of Morgan Stanley Wealth Management. From May 2006 through June 2010, Mr. Davis served as President and Chairman of the Board of Directors of Demeter Management LLC (“Demeter”), a registered commodity pool operator, where his responsibilities included oversight of Demeter’s funds and accounts. From May 2006 through December 2010, Mr. Davis was listed as a principal of Demeter, and from July 2006 through December 2010, Mr. Davis was registered as an associated person of Demeter. From April 2007 through June 2009, Mr. Davis was employed by MS&Co., a financial services firm, where his responsibilities included serving as the Managing Director and the Director of the Managed Futures Department. From April 2007 through June 2009, Mr. Davis was registered as an associated person of MS&Co. From August 2006 through April 2007, Mr. Davis was employed by Morgan Stanley DW Inc., a financial services firm, where his responsibilities included serving as a Managing Director and the Director of the Managed Futures Department. From August 2006 through April 2007, Mr. Davis was registered as an associated person of Morgan Stanley DW Inc. From September 1999 through August 2006, Mr. Davis was employed by MS&Co., a financial
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services firm, where his responsibilities included oversight of the sales and marketing of MS&Co.’s managed futures funds to high net worth and institutional investors on a global basis. From January 1992 through September 1999, Mr. Davis was employed by Chase Manhattan Bank’s Alternative Investment Group, an alternative investment group, where his responsibilities included marketing managed futures funds to high net worth investors, as well as developing and structuring managed futures funds. Mr. Davis earned his Bachelor of Arts degree in Economics in May 1987 from the University of the South and his Master of Business Administration in Finance and International Business in May 1992 from Columbia University Graduate School of Business.
Damian George, age 45, has been a Director of the General Partner since November 2012. Since June 2012, Mr. George has been the Chief Financial Officer and a principal of the General Partner and is an associate member of the NFA. Mr. George has been Vice President and listed as a principal since December 2012, and registered as an associated person since January 2013, of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous hedge fund feeder funds. Since January 2013, each such entity has been registered as a commodity pool operator with CFTC. Mr. George is responsible for overseeing the implementation of certain CFTC and NFA regulatory requirements applicable to such entities. Since August 2009, Mr. George has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities
include oversight of futures funds, budgeting, finance and Sarbanes-Oxley testing for the
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Alternative Investments-Managed Futures group. Since August 2009, Mr. George has been
registered as an associated person of Morgan Stanley Wealth Management. From November 2005 through July 2009, Mr. George was employed by Citi Alternative Investments, a division of Citigroup Inc., a financial services firm, which administered Citigroup Inc.’s hedge fund and fund of funds business, where he served as Director and was responsible for futures funds budgeting, finance and Sarbanes-Oxley testing for the Hedge Fund Management group. From November 2004 through July 2009, Mr. George was registered as an associated person of Citigroup Global Markets. Mr. George earned his Bachelor of Science degree in Accounting in May 1989 from Fordham University and his Master of Business Administration degree in International Finance in February 1998 from Fordham University. Mr. George is a Certified Public Accountant.
Colbert Narcisse, age 47, has been a Director of the General Partner since December 2011 and listed as a principal of the General Partner since February 2012. Since December 2012, Mr. Narcisse has been a Director on the Board of Directors and listed as a principal of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous hedge fund feeder funds. Since January 2013, each such entity has been registered as a commodity pool operator with CFTC. Since February 2011, Mr. Narcisse has been a Managing Director at Morgan Stanley Wealth Management, a financial services firm, where his responsibilities have included serving as Head of the Alternative Investment Group, Head of the Corporate Equity Solutions Group, and Chief Operating Officer
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of the Investment Strategy and Client Solutions Division. From July 2009 until February 2011,
Mr. Narcisse served as Chief Executive Officer of Gold Bullion International, a business services company that enables retail investors to acquire, manage and store physical precious metals through their financial advisor. From March 2009 until July 2009, Mr. Narcisse took personal leave. From August 1990 until March 2009, Mr. Narcisse was employed by Merrill Lynch & Co., Inc., a financial services firm, where his responsibilities included serving as Chief Operating Officer of Americas Investment Banking, Chief Operating Officer of the Global Wealth Management Division, and as an investment banker in both the Financial Institutions and Public Finance Groups. From July 1987 until August 1990, Mr. Narcisse was employed by the Federal Reserve Bank of New York, where his responsibilities included serving as a Bank Examiner. Additionally, Mr. Narcisse serves on the Board of Harlem RBI, as the Vice Chair of Finance for the Montclair Cooperative School Board of Trustees, as an Audit Committee Member of the New York City Housing Authority, and as a Member of the Executive Leadership Council. Mr. Narcisse received his Bachelor of Science degree in Finance in June 1987 from New York University. He received his Master of Business Administration degree in July 1992 from Harvard Business School.
Douglas J. Ketterer, age 47, has been a Director and a principal of the General Partner since December 2010. Since December 2012, Mr. Ketterer has been a Director on the Board of Directors and listed as a principal of Morgan Stanley GWM Feeder Strategies LLC, which acts as a general partner to multiple alternative investment entities, and Morgan Stanley HedgePremier GP LLC, which acts as a general partner and administrative agent to numerous
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hedge fund feeder funds. Since January 2013, each such entity has been registered as a commodity pool operator with CFTC. From October 2003 through December 2010, Mr. Ketterer was listed as a principal of Demeter, a commodity pool operator, until Demeter’s combination with the General Partner. From July 2010 through the present, Mr. Ketterer has been employed by Morgan Stanley Wealth Management, a financial services firm, as Managing Director and as Head of the U.S. Field Management and U.S. Private Wealth Management Group, where his responsibilities include overseeing the U.S. Private Wealth Management Group and, as of June 2012, Head of U.S. Field Management. From March 1990 through July 2010, Mr. Ketterer was employed by MS&Co., a financial services firm, where his responsibilities included serving as Chief Operating Officer of the Wealth Management Group and Head of the Products Group. During Mr. Ketterer’s employment at MS&Co. his responsibilities included oversight over a number of departments including the Alternative Investments Group, the Consulting Services Group, the Annuities & Insurance Department, and the Retirement & Equity Solutions Group, which offered products and services through MS&Co.’s Global Wealth Management Group. Mr. Ketterer received his Master of Business Administration degree from New York University’s Leonard N. Stern School of Business in January 1994 and his Bachelor of Science degree in Finance from the University at Albany’s School of Business in May 1987.
Harry Handler, age 54, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Handler has been registered as an associated person and listed as a principal of the General Partner, and is an associate member of the NFA. Mr. Handler was listed as a principal of Demeter from May 2005, and was registered as an associated person of Demeter
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from April 2006, until Demeter’s combination with the General Partner in December 2010. Mr. Handler was registered as an associated person of Morgan Stanley DW Inc., a financial services firm, from February 1984 until on or about April 2007, when, because of the merger of Morgan Stanley DW Inc. into MS&Co., he became registered as an associated person of MS&Co. due to the transfer of his original registration as an associated person of Morgan Stanley DW Inc. Mr. Handler withdrew as an associated person of MS&Co. in June 2009. Mr. Handler has been registered as an associated person of Morgan Stanley Wealth Management since June 2009 and as a branch office manager since February 2013. Mr. Handler serves as an Executive Director at Morgan Stanley Wealth Management in the Global Wealth Management Group. Mr. Handler works in the Capital Markets Division and is responsible for Electronic Equity and Securities Lending. Additionally, Mr. Handler serves as Chairman of the Global Wealth Management Group’s Best Execution Committee. In his prior position, Mr. Handler was a Systems Director in Information Technology, in charge of Equity and Fixed Income Trading Systems along with the Special Products, such as Unit Trusts, Managed Futures, and Annuities. Prior to his transfer to the Information Technology Area, Mr. Handler managed the Foreign Currency and Precious Metals Trading Desk of Dean Witter, a financial services firm and predecessor company to Morgan Stanley, from July 1982 until January 1984. He also held various positions in the Futures Division where he helped to build the Precious Metals Trading Operation at Dean Witter. Before joining Dean Witter, Mr. Handler worked at Mocatta Metals, a precious metals trading firm and futures broker that was sold to Standard Charted Bank in the 1980’s, as an Assistant to the Chairman from March 1980 until June 1982. His roles at Mocatta Metals included positions on the Futures Order Entry Desk and the Commodities Exchange Trading
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Floor. Additional work included building a computerized Futures Trading System and writing a
history of the company. Mr. Handler graduated on the Dean’s List from the University of Wisconsin-Madison with a Bachelor of Arts degree in History and Political Science.
Patrick T. Egan, age 43, has been a Director of the General Partner since December 2010. Since December 2010, Mr. Egan has been a principal and registered as an associated person of the General Partner, and is an associate member of the NFA. Since June 2011, Mr. Egan has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as Executive Director and as Chief Risk Officer for Morgan Stanley Wealth Management Managed Futures. From June 2009 through June 2011, Mr. Egan was employed by Morgan Stanley Wealth Management, where his responsibilities included serving as Co-Chief Investment Officer for Morgan Stanley Wealth Management Managed Futures. Since November 2010, Mr. Egan has been registered as an associated person of Morgan Stanley Wealth Management. From April 2007 through June 2009, Mr. Egan was employed by MS&Co., a financial services firm, where his responsibilities included serving as Head of Due Diligence and Manager Research for Morgan Stanley’s Managed Futures Department. From April 2007 through November 2010, Mr. Egan was registered as an associated person of MS&Co. From March 1993 through April 2007, Mr. Egan was employed by Morgan Stanley DW Inc., a financial services firm, where his initial responsibilities included serving as an analyst and manager within the Managed Futures Department (with primary responsibilities for product development, due diligence, investment analysis and risk management of the firm’s commodity pools) and later included serving as Head of Due Diligence and Manager Research
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for Morgan Stanley’s Managed Futures Department. From February 1998 through April 2007, Mr. Egan was registered as an associated person of Morgan Stanley DW Inc. From August 1991 through March 1993, Mr. Egan was employed by Dean Witter Intercapital, the asset management arm of Dean Witter Reynolds, Inc., where his responsibilities included serving as a mutual fund administration associate. Mr. Egan also served as a Director from November 2004 through October 2006, and from November 2006 through October 2008 of the Managed Funds Association’s Board of Directors, a position he was elected to by industry peers for two consecutive two-year terms. Mr. Egan earned his Bachelor of Business Administration degree with a concentration in Finance in May 1991 from the University of Notre Dame.
Alper Daglioglu, age 36, has been a Director and listed as a principal of the General Partner since December 2010. Since December 2010, Mr. Daglioglu has been employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities include serving as Executive Director and Chief Investment Officer for Morgan Stanley Wealth Management Managed Futures and serving on the Alternative Investments Product Review Committee of Morgan Stanley Wealth Management’s Alternative Investments Group. From June 2009 through December 2010, Mr. Daglioglu was employed by Morgan Stanley Wealth Management, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group. From December 2003 through June 2009, Mr. Daglioglu was employed by Morgan Stanley, a financial services firm, where his responsibilities included serving as a Senior Analyst in the Product Origination Group, and serving as the lead investment analyst for Global Macro and Managed Futures strategies within Morgan Stanley Graystone
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Research Group from February 2007 through June 2009. Mr. Daglioglu earned his
Bachelor of Science degree in Industrial Engineering in June 2000 from Galatasaray University and his Master of Business Administration degree in Finance in May 2003 from the University of Massachusetts-Amherst’s Isenberg School of Management. Mr. Daglioglu was awarded a full merit scholarship and research assistantship at the Center for International Securities and Derivatives Markets during his graduate studies. In this capacity, he worked with various major financial institutions in performance monitoring, asset allocation and statistical analysis projects and specialized on alternative approaches to risk assessment for hedge funds and managed futures. Mr. Daglioglu wrote and published numerous research papers on alternative investments. Mr. Daglioglu is a Chartered Alternative Investment Analyst charterholder.
Craig Abruzzo, age 44, has been a Director and a principal of the General Partner since March 2013 and is an associate member of the NFA. Since October 2007, Mr. Abruzzo has been the U.S. Head of Listed Derivatives for a financial services firm, where his responsibilities include overseeing the institutional futures commission merchant business. Since May 2012, Mr. Abruzzo has also served as the Global Head of OTC Clearing for MS&Co., where his responsibilities include oversight of the institutional OTC swap clearing business. Mr. Abruzzo has been listed as a principal of MS&Co. since October 2010, and has been registered as an associated person of MS&Co. since July 2007 and as a swap associated person since November 2012. Mr. Abruzzo earned his Bachelor of Arts degree in Political Science and Economics in May 1990 from Drew University and his juris doctor degree in May 1994 from the New York University School of Law.
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Section 16(a) Beneficial Ownership Reporting Compliance
To the Partnership’s knowledge, all required Section 16(a) filings during the fiscal year ended December 31, 2012 were timely and correctly made.
Code of Ethics
The Partnership has not adopted a code of ethics that applies to the Partnership’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Partnership is operated by its general partner, Ceres. The President, Chief Financial Officer, and each member of the Board of Directors of Ceres are employees of Morgan Stanley and are subject to the code of ethics adopted by Morgan Stanley, the text of which can be
viewed on Morgan Stanley’s website at http://www. morganstanley.com/ individual/ our commitment/codeofconduct.html.
The Audit Committee
The Partnership is operated by its general partner, Ceres, and has no audit committee.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The Partnership has no directors and executive officers. As a limited partnership, the business of the Partnership is managed by Ceres, which is responsible for the General Partner of the business affairs of the Partnership. The Partnership pays Ceres a monthly administration fee equal to 1/12th of 1.0% (a 1.0% annual rate) and a monthly administrative fee equal to 1/12th of 0.40% (a 0.40% annual rate) of the net asset value of each Class of Units at the beginning of each month.
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Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a) Security Ownership of Certain Beneficial Owners - At December 31, 2012, there were no persons known to be beneficial owners of more than 5 percent of the outstanding Units of the Partnership.
(b) Security Ownership of Management - At December 31, 2012, the following officers and directors of Ceres owned Class A Units of the Partnership: Walter Davis; 8.209 Units and Patrick Egan; 8.677 Units.
(c) Changes in Control - None.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
For a description of the relationships between Ceres, Commodity Brokers, counterparties, and Trading Advisors refer to Note 3. Trading Companies of "Notes to Financial Statements" and
Note 4. Related Party Transactions of “Notes to Financial Statements,” in the Financial Statements of the Partnership, which are included in Item 8 of this Form 10-K.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
MS&Co., on behalf of the Partnership, pays all accounting fees. The Partnership reimburses MS&Co. through the Partnership administrative fee it pays, as discussed in the Notes to Financial Statements which are included in Item 8 of this Form 10-K.
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(1) Audit Fees. The aggregate fees for professional services rendered by Deloitte & Touche LLP (“D&T”) in connection with their audit of the Partnership’s financial statements and review of the financial statements included in the Quarterly Reports on Form 10-Q, and in connection with statutory and regulatory filings were approximately $287,388 for the year ended December 31, 2012, and $168,443 for the year ended December 31, 2011.
(2) Audit-Related Fees. None.
(3) Tax Fees. The Partnership did not pay D&T any amounts in 2012 and 2011 for professional services in connection with tax compliance, tax advice, and tax planning. The Partnership engaged another unaffiliated professional firm to provide services in connection with tax compliance, tax advice, and tax planning.
(4) All Other Fees. None.
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PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
1. Listing of Financial Statements
The following financial statements and report of independent registered public accounting firm are filed in Item 8 of this Form 10-K:
-
Report of Deloitte & Touche LLP, independent registered public accounting firm.
-
Statements of Financial Condition as of December 31, 2012 and December 31, 2011.
-
Statements of Income and Expenses for the years ended December 31, 2012, 2011, and 2010.
-
Statements of Changes in Partners’ Capital for the years ended December 31, 2012, 2011, and 2010.
- Notes to Financial Statements.
Additionally, financial statements of the Trading Companies required by Regulation S-X are filed as Exhibit 99.1 and 99.2 to this Form 10-K.
2. Listing of Financial Statement Schedules
None.
3. Exhibits
For the exhibits incorporated by reference or filed herewith to this report, refer to Exhibit Index on Pages E-1 to E-3.
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SIGNATURE
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 registrant and in the capacities and on the dates indicated.
Ceres Managed Futures LLC
BY:
/s/
Walter Davis
March 27, 2013
Walter Davis, President, Director
/s/
Damian George
March 27, 2013
Damian George, Chief Financial Officer, Principal Accounting
Officer, Director
/s/
Craig Abruzzo
March 27, 2013
Craig Abruzzo, Director
/s/
Alper Daglioglu
March 27, 2013
Alper Daglioglu, Director
/s/
Patrick T. Egan
March 27, 2013
Patrick T. Egan, Director
/s/
Harry Handler
March 27, 2013
Harry Handler, Director
/s/
Douglas J. Ketterer
March 27, 2013
Douglas J. Ketterer, Director
/s/
Colbert Narcisse
March 27, 2013
Colbert Narcisse, Director
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EXHIBIT INDEX
ITEM
1.1!
Placement Agent Agreement dated June 1, 2007 by and among Morgan Stanley Managed Futures LV, L.P., Morgan Stanley Managed Futures MV, L.P., Morgan Stanley Managed Futures HV, L.P., the General Partner and Morgan Stanley & Co. Incorporated.
3.1!
Certificate of Limited Partnership of Morgan Stanley Managed Futures HV, L.P., dated February 22, 2007.
3.2+
Certificate of Amendment of Certificate of Limited Partnership of the Registrant, dated as of June 1, 2009.
3.3†
Certificate of Amendment of Certificate of Limited Partnership of the Registrant, dated as of October 1, 2009.
3.4!!
Third Amended and Restated Limited Partnership Agreement of the Registrant, dated as of December 1, 2010.
3.5††
Fourth Amended and Restated Limited Partnership Agreement of the Registrant, dated as of May 1, 2011.
10.1!
Form of Operating Agreement for the Trading Companies.
10.2
Advisory Agreement among Morgan Stanley Managed Futures Altis I, LLC, the General Partner and Altis Partners (Jersey) Limited, dated April 30, 2007.
10.3
Advisory Agreement among Morgan Stanley Managed Futures Aspect I, LLC, the General Partner and Aspect Capital Limited, dated April 30, 2007.
10.4
Advisory Agreement among Morgan Stanley Managed Futures BHM I, LLC, the General Partner and Blenheim Capital Management, L.L.C., dated May 15, 2007.
10.5!
Form of Subscription and Exchange Agreement and Power of Attorney.
10.6!
Foreign Exchange and Options Master Agreement by and among Morgan Stanley & Co. Incorporated, the Trading Companies listed on Exhibit I thereto, and the General Partner, dated as of November 28, 2007.
10.7!
Customer Agreement among Morgan Stanley & Co. International plc and the Trading Companies listed on Schedule A thereto, dated July 24, 2007.
E-1
10.8!
Customer Agreement among Morgan Stanley & Co. International Limited, Morgan Stanley Securities Limited, and the Trading Companies listed on Schedule A thereto, dated as of July 26, 2007.
10.9!
Escrow Agreement by and among The Bank of New York, Demeter Management Corporation and the entities listed on Annex A thereto, dated July 25, 2007.
10.10!
Customer Futures Customer Agreement between Morgan Stanley & Co. Incorporated and the Trading Companies listed on Schedule A thereto dated July 23, 2007.
10.11!
Rider to Customer Agreement between Morgan Stanley & Co. Incorporated and the Trading Companies listed on Schedule A thereto dated March 26, 2008.
10.12!
Amendment to Foreign Exchange and Options Master Agreement by and among Morgan Stanley & Co. Incorporated, the Trading Companies listed on Exhibit I thereto and the General Partner, dated March 26, 2008.
10.13!
Rider to Customer Agreement among Morgan Stanley & Co. International PLC and the Trading companies listed on Schedule A thereto dated March 26, 2008.
10.14!
Rider to Customer Agreement among Morgan Stanley & Co. International Limited, Morgan Stanley Securities Limited, and the Trading Companies listed on Schedule A thereto, dated March 26, 2008.
10.15
Advisory Agreement among Morgan Stanley Managed Futures GMF I, LLC, Demeter Management Corporation and Grinham Managed Funds Pty. Ltd, dated April 1, 2008.
10.16
Amendment No. 1 to Advisory Agreement, dated as of January 1, 2013, by and among the General Partner, Morgan Stanley Smith Barney Boronia I, LLC, and Boronia Capital Pty. Ltd.
10.17*•
Advisory Agreement among Morgan Stanley Smith Barney AHL I, LLC, Ceres Managed Futures LLC and Man-AHL (USA) Ltd., dated May 4, 2011..
31.01
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01
Certification of President of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the general partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
E-2
99.1
Morgan Stanley Smith Barney Altis I, LLC Financial Statements.
99.2
Morgan Stanley Smith Barney BHM I, LLC Financial Statements.
101.INS^
XBRL Instance Document
101.SCH^
XBRL Taxonomy Extension Schema
101.CAL^
XBRL Taxonomy Extension Calculation Linkbase
101.DEF^
XBRL Taxonomy Extension Definition Linkbase
101.LAB^
XBRL Taxonomy Extension Label Linkbase
101.PRE^
XBRL Taxonomy Extension Presentation Linkbase
_____________________________
!
Incorporated herein by reference from the Registrant’s Form 10, filed on August 8, 2008.
+
Incorporated herein by reference from the Registrant’s Form 8-K, filed on June 4, 2009.
†
Incorporated herein by reference from the Registrant’s Form 8-K, filed on October 1, 2009.
††
Incorporated herein by reference from the Registrant’s Form 10-Q, filed on May 16, 2011.
•
Incorporated herein by reference from the Registrant’s Form 10-Q, filed on August 15, 2011.
!!
Incorporated herein by reference from the Registrant’s Form 10-K, filed on March 30, 2012.
*
Confidential treatment has been granted with respect to the omitted portions of this exhibit.
^ Submitted electronically herewith.
Pursuant to applicable securities laws and regulations, the Partnership is deemed to have complied with the reporting obligation relating to the submission of interactive data files in Exhibit 101 to this report and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Partnership has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
E-3